[Federal Register Volume 65, Number 193 (Wednesday, October 4, 2000)]
[Notices]
[Pages 59240-59242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25441]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43370; File No. SR-NASD-00-38]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to the Application of 
NASD Rules and Interpretive Materials to Certain Exempted Securities

September 27, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 16, 2000, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly owned subsidiary, 
NASD Regulation, filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by NASD 
Regulation.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On September 11, 2000, NASD Regulation filed Amendment No. 1 
to the proposal. See letter from Alden S. Adkins, Senior Vice 
President and General Counsel, NASD Regulation, to Katherine A. 
England, Assistant Director, Division of Market Regulation, 
Commission, dated September 11, 2000 (``Amendment No. 1''). In 
Amendment No. 1, NASD Regulation amended proposed NASD Rule 0116 to: 
(1) delete a reference to NASD Rule 2300; (2) replace a reference in 
proposed NASD Rule 0116 to IM-2520 with a reference to IM-2522; and 
(3) add references to NASD Rules 8110, 8120, 8210, 8221, 8222, 8223, 
8224, 8225, 8226, 8227, 8310, IM-8310-1, IM-8310-2, 8230. In 
addition, Amendment No. 1 clarifies that the non-cash compensation 
provisions in NASD Rule 2820 will appear in NASD Rule 2820(g) rather 
than NASD Rule 2820(h) as a result of a rule change approved in 
October 1999 that deleted paragraph (c) of NASD Rule 2820. See 
Securities Exchange Act Release No. 4204 (October 20, 1999), 64 FR 
58112 (October 28, 1999) (order approving File No. SR-NASD-98-14).
    \4\ In its proposal, NASD Regulation asked the Commission to 
approve the proposal on an accelerated basis. The Commission 
received two comment letters asking the Commission not to approve 
the proposal on an accelerated basis. See letter from Carl B. 
Wilkerson, Chief Counsel, Securities, American Council of Life 
Insurers, to Jonathan G. Katz, Secretary, Commission, dated August 
4, 2000; and letter from David A. Winston, Vice President, 
Government Affairs, National Association of Insurance and Financial 
Advisors, dated August 30, 2000. The Commission is publishing the 
proposal for comment with a 15-day comment period.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD proposes to amend its rules to: (1) Codify an NASD staff 
interpretation that the non-cash compensation provisions set forth in 
paragraph (g) of NASD Rule 2820, ``Variable Contracts of an Insurance 
Company,'' apply to group variable contracts that are exempted 
securities; and (2) adopt new NASD Rule 0116, ``Application of Rules of 
the Association to Exempted Securities,'' to enumerate the NASD rules 
and interpretive materials that apply to exempted securities, including 
government securities, other than municipal securities. The text of the 
proposed rule

[[Page 59241]]

change appears below. Proposed new language is in italics.
* * * * *

0100. GENERAL PROVISIONS

0110. Adoption and Application of Rules

0116. Application of Rules of the Association to Exempted 
Securities

    (a) For purposes of this Rule, the terms ``exempted securities'' 
and ``municipal securities'' shall have the meanings specified in 
Sections 3(a)(12) and 3(a)(29) of the Act, respectively.
    (b) Unless otherwise indicated within a particular provision, 
the following Rules of the Association and Interpretative Materials 
thereunder are applicable to transactions and business activities 
relating to exempted securities, except municipal securities, 
conducted by members and associated persons: 2110, 2120, 2210, IM-
2210-1, IM-2210-2, IM-2210-3, 2250, 2270, 2300, 2310, IM-2310-2, IM-
2310-3, 2320, 2330, IM-2330, 2340, 2430, 2450, 2510, 2520, IM-2520, 
2770, 2780, 2820(g), 2910, 3010, 3020, 3030, 3040, 3050, 3060, 3070, 
3110, IM-3110, 3120, 3130, IM-3130, 3131, 3140, 3230, 3310, IM-3310, 
3320, IM-3320, 3330, 8110, 8120, 8210, 8221, 8222, 8223, 8224, 8225, 
8226, 8227, 8310, IM-8310, IM-8310-1, IM-8310-2, 8320, and 8330.\5\
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    \5\ See Amendment No. 1, supra note 30.
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* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation included 
statements concerning the purpose of, and basis for, the proposed rule 
change, and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. NASD Regulation has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    The Government Securities Act Amendments of 1993 (``GSAA'') \6\ 
eliminated the statutory limitations on the NASD's authority to apply 
sales-practice rules to members' transactions in exempted securities, 
including government securities, other than municipal securities.\7\ To 
implement the expanded sales practice authority granted to it pursuant 
to the GSAA, the NASD in 1995 submitted a proposal to the Commission to 
apply various NASD rules to exempted securities, including government 
securities, other than municipal securities. The Commission approved 
the NASD's proposal.\8\ The 1996 Order and NASD Notice to Members 96-66 
(October 1996) list the NASD rules that apply to members' transactions 
in exempted securities other than municipal securities.\9\ However, 
this list was not incorporated into a specific NASD rule and does not 
currently appear in the NASD Manual. The proposal will codify in 
proposed NASD Rule 0116 the list of NASD rules and interpretative 
materials applicable to exempted securities, including government 
securities, other than municipal securities, and, as discussed more 
fully below, will add NASD Rule 2820(g) to the list. NASD Regulation 
believes that codifying this information in an NASD rule will enable 
members and other interested parties to identify the rules applicable 
to exempted securities, other than municipal securities, in a more 
efficient manner.
    In Amendment No. 1, NASD Regulation proposes to add NASD Rules 
8110, 8120, 8210, 8221, 8222, 8223, 8224, 8225, 8226, 8227, 8310, IM-
8310, IM-8310-1, IM-8310-2, 8320, and 8330 to proposed NASD Rule 0116. 
According to NASD Regulation, the 8000 Series rules were excluded 
inadvertently from the original proposal and should be included in 
proposed NASD Rule 0116 because they are applicable to transactions and 
business activities relating to exempted securities.\10\
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    \6\ Government Securities Act Amendments of 1993, Pub. L. No. 
103-202, Sec. 1(a), 107 Stat. 2344 (1993).
    \7\ The terms exempted securities, government securities, and 
municipal securities are defined in Sections 3(a)(12), 3(a)(42), and 
3(a)(29) of the Act, respectively. Rules for municipal securities 
are promulgated by the Municipal Securities Rulemaking Board.
    \8\ See Securities Exchange Act Release No. 37588 (August 20, 
1996), 61 FR 44100 (August 27, 1996) (order approving File No. SR-
NASD-95-39) (``1996 Order'').
    \9\ Specifically, NASD Regulation notes that the 1996 Order and 
Notice to Members 96-66 indicate that the following NASD rules and 
interpretative materials are applicable to transactions and business 
activities relating to exempted securities (other than municipal 
securities) conducted by NASD members and associated persons: 2110, 
2120, 2210, IM-2210-1, IM-2210-2, IM-2210--3, 2250, 2270, 2300, 
2310, IM-2310-2, IM-2310-3, 2320, 2330, IM-2330, 2340, 2430, 2450, 
2510, 2520, IM-2520, 2770, 2780, 2910, 3010, 3020, 3030, 3040, 3050, 
3060, 3070, 3110, IM-3110, 3120, 3130, IM-3130, 3131, 3140, 3230, 
3310, IM-3310, 3320, IM-3320 and 3330.
    \10\ See Amendment No. 1, supra note 3. The 1996 Order indicated 
that various NASD rules in the 8000 Series applied to exempted 
securities, including government securities, other than municipal 
securities. The Commission subsequently approved amendments to the 
8000 Series that adopted NASD Rules 8221 through 8227. See 
Securities Exchange Act Release No. 38908 (August 7, 1997), 62 FR 
43385 (August 13, 1997) (order approving File No. SR-NASD-97-28) 
(``1997 Order''). As indicated above, proposed NASD Rule 0116 
includes NASD Rules 8221 through 8227 in its list of NASD rules that 
are applicable to exempted securities, including government 
securities, other than municipal securities.
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    NASD Regulation notes that at the time the NASD identified the NASD 
rules that would apply to exempted securities other than municipal 
securities, the NASD had not adopted NASD Rule 2820(g).\11\ 
Accordingly, NASD Rule 2820(g) was not listed as one of the provisions 
applicable to exempted securities. NASD Rule 2820(g), the non-cash 
compensation rule, limits the manner in which members may pay or accept 
non-cash compensation in connection with the sale or distribution of 
variable contracts.
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    \11\ See Amendment No. 1, supra note 3.
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    NASD Regulations states that because certain group variable 
contracts are exempted securities under the Act, questions have arisen 
regarding whether NASD Rule 2820(g) applies to group variable 
contracts.\12\ According to NASD Regulation, NASD Regulation staff have 
interpreted NASD Rule 2820(g) to apply to group variable contracts that 
are exempted securities since the adoption of NASD Rule 2820(g). To 
clarify the application of NASD Rule 2820(g) to group variable 
contracts that are exempted securities, NASD Regulation proposes to 
codify the current staff interpretation by including NASD Rule 2820(g) 
in proposed NASD Rule 0116.\13\
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    \12\ Section 3(a)(12)(A)(iv) of the Act includes as an exempted 
security ``* * * any security arising out of a contract issued by an 
insurance company, which * * * security is issued in connection with 
a qualified plan as defined in subparagraph (C) of this paragraph.''
    \13\ Because Rule 2820(g) applies only to transactions in 
variable products, the proposed rule change would result in Rule 
2820(g) expressly applying to all variable products, including 
variable products that are exempted securities, such as group 
variable or similar products. NASD Regulation is not at this time 
recommending that other provisions of Rule NASD Rule 2820 apply to 
exempted securities.
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(2) Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act, which 
requires, among other things, that the Association's rules must be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. NASD Regulation believes 
that the proposed rule change will assist members and associated 
persons in more easily identifying those NASD rules applicable to 
transactions and business activities relating to exempted securities 
(other than municipal securities).

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
result in any burden on competition that is not

[[Page 59242]]

necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were not solicited. However, NASD Regulation 
received a letter from the National Association for Variable Annuities 
(``NAVA''), which argues that the non-cash compensation rules do not 
apply to sales of group variable annuities for several reasons.\14\ 
First, NAVA contends that the specific language of NASD Rule 2820 
limits its application to activities of members in connection with 
variable contracts, to the extent such activities are subject to 
regulation under the federal securities laws.\15\ However, although 
certain provisions of the federal securities laws do not apply to 
exempted securities, other provisions of the federal securities laws do 
apply, including the anti-fraud provisions. Therefore, NASD Rule 
2820(a) does not restrict the application of NASD Rule 2820(g) to group 
variable activities.
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    \14\ See letter from Mark J. Mackey, President and Chief 
Executive Officer, NAVA, to John M. Ramsay, Vice President and 
Deputy General Counsel, Office of General Counsel, NASD Regulation, 
dated April 16, 1999.
    \15\ NASD Rule 2820(a) states ``[t]his Rule shall apply 
exclusively (and in lieu of Rule 2830) to the activities of members 
in connection with variable contracts, to the extent such activities 
are subject to regulation under the federal securities laws.''
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    Second, NAVA argues that because NASD Rule 2820(g) was not 
specifically included in the 1996 Order's list of NASD rules applicable 
to exempted securities, the non-cash compensation provisions do not 
apply to sales of group variables. As described above, NASD Rule 
2820(g) had not been adopted at the time the NASD identified the NASD 
rules that would apply to exempted securities, other than municipal 
securities. Accordingly, NASD Rule 2820(g) was not listed as one of the 
provisions applicable to exempted securities.
    Third, NAVA argues that if the non-cash compensation rules do apply 
to group variables, separate contests should be permissible for group 
variable products given their different design, cost structures and 
commission payouts. With respect to the allowance of separate contests 
for group variable products, NASD Regulation staff has stated in 
Question #22 of Notice to Member 99-55 (July 1999) that a member may 
structure a non-cash arrangement that is limited only to a specific 
division of the firm. Therefore, if a separate sales force or division 
sells group variable contracts, as the NAVA letter indicates often 
occurs, then a separate contest may be appropriate. However, where the 
same salesperson sells both group variable products and individual 
variable annuities, separate contests would not be permissible, i.e., 
the contest must be based on the entire universe of products within a 
specific product category that the individual sells.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change and Amendment No. 1 are consistent with the Act. Persons making 
written submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to file 
number SR-NASD-00-38 and should be submitted by October 19, 2000.\16\
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-25441 Filed 10-3-00; 8:45 am]
BILLING CODE 8010-01-M