Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices 18419 

8 15 U.S.C. 78s(b)(3)(A)(iii). 

9 17 CFR 240.19b–4(f)(3). 10 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3On March 17, 2008, FINRA filed a separate 

proposed rule change, which became effective upon 

filing, to delay the effective date of paragraphs (c) 

and (d) of NASD Rule 2821 until 180 days following 

the Commission’s approval or rejection of the 

substantive proposed rule changes found in this 

filing. See Securities Exchange Act Release No. 

57769 (May 2, 2008), 73 FR 26176 (May 8, 2008) 

(delaying order). Paragraphs (a), (b), and (e) of 

NASD Rule 2821 became effective as originally 

scheduled on May 5, 2008. 

4 Id. 

5See Securities Exchange Act Release No. 57920 

(June 4, 2008); 73 FR 32771 (June 10, 2008) 

(‘‘notice’’ or ‘‘proposal’’). 

6See infra note 9. 

7See Letter from James Wrona, Associate Vice 

President and Associate General Counsel, FINRA, to 

Florence Harmon, Acting Secretary, Commission, 

dated November 12, 2008 (‘‘FINRA’s Response’’). 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. The proposed change 

will enhance the clarity of NASDAQ 

OMX’s governance documents by 

restating the various documents 

comprising the Certificate as a single 

document. 

B. Self-Regulatory Organizations’ 

Statements on Burden on Competition 

The NASDAQ OMX Exchange 

Subsidiaries do not believe that the 

proposed rule changes will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act, as amended. 

C. Self-Regulatory Organizations’ 

Statements on Comments on the 

Proposed Rule Changes Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Changes and Timing for 

Commission Action 

The foregoing rule changes have 

become effective pursuant to Section 

19(b)(3)(A)(iii) of the Act 8 and 

subparagraph (f)(3) of Rule 19b–4 

thereunder.9 At any time within 60 days 

of the filing of the respective proposed 

rule change by the applicable NASDAQ 

OMX Exchange Subsidiary, the 

Commission may summarily abrogate 

such rule changes if it appears to the 

Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

changes, are consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml, or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Nos. SR–BX–2009–019, SR–NASDAQ– 

2009–032, SR–Phlx–2009–31 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Nos. SR–BX–2009–019, SR–NASDAQ– 

2009–032, SR–Phlx–2009–31. These file 

numbers should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

changes that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule changes 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 on official business days between 

the hours of 10 a.m. and 3 p.m. Copies 

of such filings also will be available for 

inspection and copying at the principal 

offices of the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Nos. SR–BX–2009– 

019, SR–NASDAQ–2009–032, and SR– 

Phlx–2009–31, and should be submitted 

on or before May 13, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–9202 Filed 4–21–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59772; File No. SR–FINRA– 

2008–019] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Amendment Nos. 1 and 2 and Order 

Granting Accelerated Approval to a 

Proposed Rule Change, as Modified by 

Amendment Nos. 1 and 2, Relating to 

Sales Practice Standards and 

Supervisory Requirements for 

Transactions in Deferred Variable 

Annuities 

April 15, 2009. 

I. Introduction 

On May 21, 2008, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) (f/k/a National Association 

of Securities Dealers, Inc. (‘‘NASD’’)) 

filed with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

amend certain provisions of NASD Rule 

2821.3 The proposed rule change would 

modify the rule’s scope and the timing 

of principal review in addition to 

clarifying, through a ‘‘Supplementary 

Material’’ section following the rule 

text, various issues raised by 

commenters.4 The proposed rule change 

was published for comment in the 

Federal Register on June 10, 2008.5 The 

Commission received letters from 14 

commenters in response to the proposed 

rule change.6 On November 12, 2008, 

FINRA responded to the comments 7

and submitted Amendment No. 1 to the 

proposed rule change. On April 1, 2009, 

FINRA submitted Amendment No. 2 to 

the proposed rule change. This order 

provides notice of the proposed rule 


dwashington3 on PROD1PC60 with NOTICES
18420 Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices 

8 17 CFR 240.15c3–3. 

9The Committee of Annuity Insurers (‘‘CAI’’) 

submitted two separate letters that we consider to 

be one comment. See letter from Clifford Kirsch, 

Sutherland Asbill & Brennan LLP, on behalf of the 

CAI, dated July 1, 2008 (‘‘CAI Letter’’) and from 

Clifford Kirsch, Sutherland Asbill & Brennan LLP, 

on behalf of CAI, dated December 19, 2008 (‘‘CAI 

Letter II’’). 

See letters from Deborah Peters, Director, Broker 

Dealer Compliance, EquiTrust Marketing Services, 

LLC to James Wrona [Associate Vice President and 

Associate General Counsel, FINRA], dated June 11, 

2008 (‘‘EquiTrust Letter’’); Darrell Braman, Vice 

President and Associate Legal Counsel and Sarah 

McCafferty, Vice President and Chief Compliance 

Officer, T. Rowe Price Investment Services, Inc., 

dated June 23, 2008 (‘‘T. Rowe Price Letter’’); 

Theodore Tsung, Financial Services Software 

Innovator—Founder of digiTRADE and EAssist, 

dated June 30, 2008; Laurence S. Schultz, President, 

Public Investors Arbitration Bar Association, dated 

June 26, 2008 (‘‘PIABA Letter’’); Teresa Luiz, GWFS 

Equities, Inc., dated June 30, 2008 (‘‘GWFS Letter’’); 

Heidi Stam, Managing Director and General 

Counsel, Vanguard, dated June 30, 2008 (‘‘Vanguard 

Letter’’); William A. Jacobson, Associate Clinical 

Professor, Cornell Law School, and Director, 

Cornell Securities Law Clinic, dated July 1, 2008 

(‘‘Cornell Letter’’); Dale E. Brown, President and 

CEO, Financial Services Institute, dated July 1, 2008 

(‘‘FSI Letter’’); Heather Traeger, Assistant Counsel, 

Investment Company Institute, dated July 1, 2008 

(‘‘ICI Letter’’); Cheryl Tobin, Asst. Vice President, 

Insurance Counsel, Pacific Life Insurance Company 

change, as modified by Amendment 

Nos. 1 and 2, and approves the 

proposed rule change, as amended, on 

an accelerated basis. 

II. Description of the Proposed Rule 

Change 

FINRA proposed to amend NASD 

Rule 2821 to modify the rule’s scope 

and the timing of principal review. In 

addition, FINRA proposed to clarify 

various issues that commenters have 

raised through a ‘‘Supplementary 

Material’’ section following the rule 

text. These proposed changes are 

discussed in further detail below. 

A. Limit Application of the Rule to 

Recommended Transactions 

Paragraph (c) of NASD Rule 2821 

requires principals to treat all 

transactions as if they have been 

recommended for purposes of the rule. 

Following the Commission’s approval of 

the rule, however, several commenters 

asked that the Commission and FINRA 

reconsider this approach. As FINRA 

stated in the notice, some commenters 

asserted that applying the rule to nonrecommended transactions would have 

unintended and harmful consequences. 

In particular, these commenters claimed 

that applying the rule to nonrecommended transactions would 

effectively force out of the deferred 

variable annuities business some firms 

that offer low priced products, but that 

do not make recommendations or pay 

transaction-based compensation. In 

addition, commenters stated that, absent 

a recommendation, a customer should 

be free to invest in a deferred variable 

annuity without interference or second 

guessing from a broker-dealer. 

In response, FINRA proposed to limit 

the rule’s application to recommended 

transactions. In the notice, FINRA 

explained that limiting the rule to 

recommended transactions would be 

consistent with the approach taken in 

its general suitability rule, Rule 2310. 

FINRA also stated that this change 

would not detract from the effectiveness 

of Rule 2821 because at firms that 

permit registered representatives to 

make recommendations concerning 

deferred variable annuities, the vast 

majority of purchases and exchanges of 

deferred variable annuities are 

recommended. FINRA offered further 

support for the rule change by stating 

that non-recommended transactions 

pose fewer concerns regarding conflicts 

of interest and less of a need for 

heightened sales-practice requirements. 

FINRA also indicated that this change 

would promote competition by allowing 

a wide variety of business models to 

exist, including those premised on 

keeping costs low by, in part, 

eliminating the need for a sales force 

and large numbers of principals. 

Finally, FINRA stated that attempts by 

registered representatives to 

mischaracterize transactions as nonrecommended would be mitigated by 

the requirement that firms implement 

reasonable measures to detect and 

correct circumstances when brokers 

mischaracterize recommended 

transactions as non-recommended. 

B. Modifying the Starting Point for the 

Seven-Business-Day Review Period 

NASD Rule 2821(c) requires principal 

review and approval ‘‘[p]rior to 

transmitting a customer’s application for 

a deferred variable annuity to the 

issuing insurance company for 

processing, but no later than seven 

business days after the customer signs 

the application.’’ A number of 

commenters have asserted that this 

seven-day period may not allow for a 

thorough principal review. As 

mentioned in the notice, these 

commenters provided examples of 

situations where principal review might 

be delayed, such as when a customer 

inadvertently omits information from 

the application or when information 

provided by a customer on the 

application needs clarification. 

FINRA proposed modifying the 

starting point for the seven-day review 

period. Under the proposal, the period 

would begin on the date when the firm’s 

office of supervisory jurisdiction 

(‘‘OSJ’’) receives a complete and correct 

copy of the application. FINRA stated 

that this approach would allow firms to 

resolve issues that result in foreseeable 

delays and to conduct a thorough 

review, while maintaining a definite 

period within which the principal must 

make a final decision. 

To help ensure that the process 

remains efficient, the proposal would 

also require the associated person who 

recommended the annuity to promptly 

transmit the complete and correct 

application package to the OSJ. 

However, that provision, proposed 

paragraph (b)(3), would not preclude a 

customer who chooses to forward 

documents directly from transmitting 

the complete and correct application 

package to the OSJ. 

C. Clarification of Issues Through 

Supplementary Material 

As indicated in the notice, previous 

commenters to the rule have raised a 

number of questions that FINRA 

believes require clarification. 

Accordingly, FINRA proposed adding a 

‘‘Supplementary Material’’ section 

following the rule. FINRA also 

reconsidered the question of whether a 

member may forward funds to an 

insurance company for deposit in the 

insurance company’s ‘‘suspense 

account’’ pending completion of 

principal review. In the notice, FINRA 

proposed modifying its earlier position 

rejecting such a process. Instead, FINRA 

proposed to allow the use of a 

‘‘suspense account’’ under limited 

circumstances, including, among other 

things, a requirement that the insurance 

company segregate the funds in a 

manner equivalent to that required of a 

member under Exchange Act Rule 

15c3–3.8

The proposed Supplementary 

Material section also offered 

clarification in a number of areas, 

including the application of lump-sum 

payments where part of the payment is 

intended for a deferred variable annuity, 

forwarding customer checks, what 

constitutes a ‘‘reasonable effort’’ to 

determine whether a customer has had 

a recent exchange at another brokerdealer, and the permissibility of using 

information required for principal 

review in the contract issuance process. 

FINRA indicated that each of these 

issues could broadly impact how 

broker-dealers sell, or process 

transactions in, deferred variable 

annuities. 

III. Comment Letters 

The Commission received letters from 

14 commenters on the proposed rule 

change.9 FINRA responded to the 


dwashington3 on PROD1PC60 with NOTICES
Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices 18421 

to James Wrona, Associate Vice President and 

Associate General Counsel, FINRA, dated July 1, 

2008 (‘‘Pacific Life Letter’’); Michael P. DeGeorge, 

General Counsel, NAVA, Inc., dated July 1, 2008 

(‘‘NAVA Letter’’); Neal E. Nakagiri, President, CEO, 

CCO, NPB Financial Group, LLC, dated July 2, 2008 

(‘‘NPB Letter’’) and Carl B. Wilkerson, Vice 

President & Chief Counsel, American Council of 

Life Insurers, dated August 20, 2008 (‘‘ACLI 

Letter’’). Unless otherwise noted, all letters are 

addressed to the Secretary or Acting Secretary of 

the Commission. 

10FINRA’s Response, supra note 7. 

11See ACLI Letter, CAI Letter, ICI Letter, NAVA 

Letter, Vanguard Letter, T. Rowe Price Letter. 

12See Cornell Letter and PIABA Letter. 

13See FINRA’s Response, supra note 7. 

14 Id. 

15See Pacific Life Letter. 

16See FINRA’s Response, supra note 7. 

17 Id. (citing NASD Policy Statement Regarding 

Application of the NASD Suitability Rule to Online 

Communications, NASD Notice to Members 01–23 

(April 2001)). 

18See GFWS Letter. 

19NASD Rule 2821(a)(1). 

20See FINRA’s Response, supra note 7. 

21 Id. 

22See ACLI Letter, CAI Letter, FSI Letter, ICI 

Letter, NAVA Letter, NPB Letter. 

23See Pacific Life Letter. 

24See ACLI Letter, CAI Letter. 

25See ACLI Letter, CAI Letter, EquiTrust Letter, 

NAVA Letter. 

26See FINRA’s Response, supra note 7. 

27NASD Rule 2821 initially prohibited brokerdealers from ever forwarding checks/funds prior to 

principal approval of the transaction. Most 

commenters to the original proposal favored 

allowing broker-dealers to forward checks/funds, 

but they differed regarding their views of FINRA’s 

proposed requirements for allowing it. 

28See e.g., ACLI Letter, NAVA Letter, Pacific Life 

Letter, CAI Letter. 

29See CAI Letter. Exchange Act Rule 15c3–3(e) 

applies to broker-dealers that transmit funds 

promptly and that do not hold those funds for 

periods longer than one business day. 17 CFR 

240.15c3–3(e). 

30See CAI Letter. 

comments in a letter to the 

Commission.10 The comments and 

FINRA’s Response are discussed below. 

A. Limiting Application of the Rule to 

Recommended Transactions 

Several commenters supported 

FINRA’s proposal to limit Rule 2821’s 

application to ‘‘recommended’’ 

transactions,11 generally indicating that 

the proposed change would: Make the 

rule consistent with other rules that 

have a suitability requirement; promote 

competition; and not detract from the 

rule’s effectiveness because most 

variable annuity transactions involve a 

recommendation. Two commenters, 

however, disagreed with the approach, 

arguing, among other things, that 

registered representatives could falsely 

assert that an unsuitable transaction was 

not recommended.12 FINRA 

acknowledged the concern, but 

responded that it would be mitigated by 

the requirement that broker-dealers 

implement reasonable measures to 

detect and correct circumstances in 

which transactions can be 

mischaracterized.13 In addition, FINRA 

stated that when a transaction is truly 

initiated by a customer, actual or 

potential conflicts of interest are less 

likely, and thus there is a lesser need for 

heightened sales-practice 

requirements.14

Another commenter requested 

clarification that a non-recommended 

transaction includes a direct sale (i.e., 

one in which no sales-related 

compensation is paid and no registered 

representative is involved).15 FINRA 

responded that whether a transaction is 

recommended does not turn on whether 

it is a direct sale: Some firms use an 

Internet-based computer system to make 

‘‘recommendations’’ without assistance 

from a registered representative, while 

others compensate registered 

representatives for transactions solely 

initiated by the customer.16 FINRA also 

reiterated several factors relevant to 

determining when a particular 

communication would be deemed a 

recommendation, including: A 

communication’s content, context and 

presentation; the tailoring of the 

communication to a certain customer or 

customers; and whether the 

communication was initiated by a 

person employed by the firm or by a 

computer program used by the firm.17

One commenter sought clarification of 

the rule’s application to 

recommendations in the context of 

retirement plans.18 FINRA’s Response 

cited the rule’s text, which states that 

the rule does not generally apply to 

transactions made in connection with 

specific employer-sponsored retirement 

plans except for recommendations made 

to an individual plan participant 

regarding a deferred variable annuity.19

Furthermore, FINRA indicated that a 

member’s ‘‘generic communication to 

all plan participants indicating that the 

employer has chosen a deferred variable 

annuity as the funding vehicle for its 

retirement plan likely would not 

constitute a ‘recommendation’ triggering 

application of the proposed rule.’’ 20

Finally, FINRA reiterated that the rule 

would not apply to plan-level decisions 

made by sponsors, trustees, or 

custodians of qualified retirement or 

benefit plans, regardless of whether a 

member has made a recommendation to 

an individual plan participant.21

B. Modifying the Starting Point for the 

Seven-Business-Day Review Period 

Most commenters supported FINRA’s 

proposal to have the seven-business-day 

period for principal review of the 

application begin on the day that an OSJ 

receives the application.22 One 

commenter expressed the view that the 

proposal gives the broker-dealer too 

much time and that the time period 

should start when any office receives 

the application.23 Some commenters 

stated that the time period for review 

should be longer,24 and some indicated 

that there should be an exception to the 

time limitations when a customer 

consents to a further holding period.25

FINRA responded that they regard seven 

business days after receipt by any OSJ 

as sufficient time in which to review an 

application.26

C. Supplementary Material 

1. Forwarding of Customer Checks/ 

Funds 

Proposed SM.03 states that under 

certain conditions, a FINRA member 

may forward a customer’s check or 

funds to the insurance company prior to 

principal approval.27 One of those 

conditions is that the insurance 

company issuer agrees to ‘‘(1) segregate 

the member’s customers’ funds in a 

bank * * * account * * * (set up as 

described in [Exchange Act] Rules 

15c3–3(k)(2)(i) and 15c3–3(f)) to ensure 

that the customers’ funds will not be 

subject to any right, charge, security 

interest, lien, or claim of any kind in 

favor of the member, insurance 

company, or bank where the insurance 

company deposits such funds or any 

creditor thereof or person claiming 

through them and hold those funds 

either as cash or any instrument that a 

broker or dealer may deposit in its 

Special Reserve Account for the 

Exclusive Benefit of Customers * * *.’’ 

The commenters on this provision 

generally viewed current insurer 

suspense account practices as sufficient 

but stated that the special account 

requirement would be feasible if 

modified.28 For example, one 

commenter suggested that insurers be 

permitted to segregate funds in an 

account ‘‘similar in form and function to 

a Reserve Bank Account under 

[Exchange Act] Rule 15c3–3(e).’’ 29 This 

commenter also suggested that FINRA 

consider adopting exemptions from the 

SM.03 requirements depending on the 

treatment particular states afford to 

insurance company suspense 

accounts.30

FINRA’s Response stated that during 

the period before the transaction is 

approved, when funds may need to be 

returned to the customer, it is important 

for a FINRA member to have reasonable 

assurances that the insurer will handle 

customer funds in a manner that 

provides at least as much protection as 


dwashington3 on PROD1PC60 with NOTICES
18422 Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices 

31See FINRA’s Response, supra note 7. 32 Id. 33See NAVA Letter. NAVA also stated that, in its 

experience, ‘‘unaffiliated broker-dealers do not 

forward customer funds prior to principal 

approval.’’ Id. In this regard, FINRA noted that 

SM.03 allows a broker-dealer to forward checks/ 

funds under certain circumstances prior to 

principal approval; it does not require it. Moreover, 

the Commission’s previous exemptive order 

allowing firms to hold checks for up to seven 

business days to complete the principal review 

applies under the proposed amendments. See 

FINRA’s Response, supra note 7. 

34See FINRA’s Response, supra note 7. 

35 Id. 

36See CAI Letter. 

37See FINRA’s Response, supra note 7. As FINRA 

and the Commission previously have noted, ‘‘Many 

broker-dealers are subject to lower net capital 

requirements under [Exchange Act] Rule 15c3–1 

and are exempt from the requirement to establish 

and fund a customer reserve account under 

[Exchange Act] Rule 15c3–3 because they do not 

carry customer funds or securities.’’ Securities 

Exchange Act Release No. 56376 (September 7, 

2007), 72 FR 52400 (September 13, 2007). Although 

some of these firms receive checks from customers 

made payable to third parties, the Commission does 

not deem a firm to be carrying customer funds if 

it ‘‘promptly transmits’’ the checks to third parties. 

The Commission has interpreted ‘‘promptly 

transmits’’ to mean that ‘‘such transmission or 

delivery is made no later than noon of the next 

business day after receipt of such funds or 

securities.’’ Id. In conjunction with its approval of 

NASD Rule 2821, the Commission provided an 

exemption to the ‘‘promptly transmits’’ requirement 

as long as, among other things, the ‘‘principal has 

reviewed and determined whether he or she 

approves of the purchase or exchange of the 

deferred variable annuity within seven business 

days in accordance with [Rule 2821].’’ Id. The 

Commission’s exemptive order remains applicable 

notwithstanding the modification to the event that 

triggers the principal review period. See discussion 

in Section III.B, supra of the amendment to rule 

2821(c) establishing the timing for principal review. 

38See FINRA’s Response, supra note 7. 

39See NAVA Letter. 

40See FINRA’s Response, supra note 7. Under the 

rule as amended by Amendment No. 1, there could 

be delays between the time when a principal 

approves an application and the time when an 

insurer receives the approved application (e.g., 

when a broker-dealer conveys principal approval to 

the insurer electronically but sends an approved 

application via regular mail), thereby creating a 

situation where the funds in a suspense account are 

released before the insurance company has received 

the application. Amendment No. 2 clarifies that the 

insurance company must receive both a notification 

of approval and the application before funds can be 

released from the suspense account. 

41See PIABA Letter. The rule currently states that 

the broker-dealer must consider whether ‘‘the 

customer’s account has had another deferred 

variable annuity exchange within the preceding 36 

months.’’ The proposal would eliminate the 

reference to an ‘‘account.’’ 

42 Id. 

43See FINRA’s Response, supra note 7. 

44 Id. 

45 Id. 

46 Id. 

47See e.g., ACLI Letter, CAI Letter. 

48See CAI Letter II. 

49See FINRA’s Response, supra note 7. 

if those funds were handled by a brokerdealer that is permitted to hold 

customer funds.31 Accordingly, FINRA 

declined to modify or eliminate the 

proposed requirements to maintain 

equivalent standards.32

In response to one commenter’s 

question regarding whether the ‘‘Special 

Account Requirement’’ of SM.03 

requires the segregation by the 

insurance company of customer funds 

from one broker-dealer from those of 

other broker-dealers,33 FINRA indicated 

that it does not.34 FINRA’s Response 

further stated that the insurer could use 

one special account for the customers of 

all the broker-dealers with which it does 

business.35

One commenter asked whether an 

insurance company could return 

customer checks/funds to the brokerdealer rather than directly to the 

customer if the broker-dealer’s principal 

rejects the transaction.36 FINRA 

responded that the insurance company 

may make checks payable to the brokerdealer if the broker-dealer is permitted 

to hold customer funds.37 If brokerdealers that are not authorized to hold 

customer funds receive checks from the 

insurance company, they should be 

payable to the customer. In those cases, 

FINRA stressed that broker-dealers must 

forward such checks to their customers 

‘‘promptly’’ and keep an incoming and 

outgoing record of the customer checks, 

as well as any other funds that are 

remitted to the broker-dealer.38

Finally, one commenter expressed 

confusion regarding this provision, 

stating that ‘‘the insurance company 

would necessarily have a claim for 

payment if an application is approved 

and a contract issued, while the member 

would necessarily have a claim for a 

return of the funds if the application is 

not approved and the contract is not 

issued.’’ 39 FINRA responded that it did 

not intend to suggest that the funds had 

to remain in a segregated bank account 

of the type referenced in SM.03 in 

perpetuity, but only until such time as 

the insurance company is notified of the 

broker-dealer’s approval and is provided 

with the application, or is notified of the 

broker-dealer’s rejection of the 

application.40

2. Inquiries About Exchanges 

One commenter supported FINRA’s 

proposal to clarify, in Rule 

2821(b)(1)(B)(iii) and SM.05, that an 

analysis of whether the customer has 

had another recent exchange should 

include exchanges at other brokerdealers, but suggested that brokerdealers should be required to do more 

than simply ask the customer whether 

he or she has had another exchange.41

The commenter explained that variable 

annuity transactions can be complex 

and confusing, and that some customers 

might not understand that they had 

engaged in previous exchanges.42

FINRA responded that requiring 

broker-dealers to investigate whether 

the customer has in fact had another 

exchange at another broker-dealer is 

overly burdensome in light of the 

potential benefits. FINRA indicated that 

instances of customer confusion 

regarding whether or not an exchange 

had occurred would likely be the 

exception rather than the rule.43 FINRA 

further noted that SM.05 requires that a 

broker-dealer determine whether a 

customer has had another exchange at 

that firm and that, solely for exchanges 

that occurred at other firms, is permitted 

to rely on a customer’s response to an 

inquiry regarding possible exchanges by 

the customer at other broker-dealers.44

In addition, FINRA reiterated the SM.05 

requirement that broker-dealers 

document in writing both the nature of 

the inquiry and the response from the 

customer.45 FINRA stated that it 

believes that this requirement would 

help ensure that broker-dealers ask 

customers about exchanges in a manner 

that is reasonably calculated to elicit 

accurate responses.46

D. Effective Date of the Proposed 

Amendments 

Some commenters requested a delay 

in the effective date of the proposed rule 

change of between 12 and 18 months.47

One commenter stated that the method 

by which the effective dates would be 

determined has been confusing.48

Although FINRA believes that a delay of 

12 to 18 months would be unreasonably 

long,49 it nevertheless agreed to delay 

the effective date until 240 days 

following publication of the Regulatory 

Notice announcing Commission 

approval. FINRA will announce the 

effective date of the proposed rule 

change in a Regulatory Notice to be 

published no later than 60 days 

following Commission approval. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning whether the 

proposed rule change as modified by 

Amendment Nos. 1 and 2 is consistent 

with the Exchange Act. Comments may 

be submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 


dwashington3 on PROD1PC60 with NOTICES
Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices 18423 

50 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

51 15 U.S.C. 78o–3(b)(6). 52See FINRA’s Response, supra note 7. 53 17 CFR 240.15c3–3(k)(2)(i), 15c3–3(f). 

Number SR–FINRA–2008–019 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2008–019. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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, 100 F Street, NE., Washington, 

DC 20549, on official business days 

between the hours of 10 a.m. and 3 p.m. 

Copies of such filing also will be 

available for inspection and copying at 

the principal office of FINRA. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2008–019 and 

should be submitted on or before May 

13, 2009. 

V. Discussion and Findings 

After careful review of the proposal 

and consideration of the comment 

letters and FINRA’s Response, the 

Commission finds that the proposed 

rule change, as amended, is consistent 

with the requirements of the Exchange 

Act and the rules and regulations 

thereunder applicable to FINRA.50 In 

particular, the Commission finds that 

the proposed rule change is consistent 

with Section 15A(b)(6) of the Exchange 

Act,51 which requires, among other 

things, that FINRA’s rules be designed 

to prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. 

The Commission finds that the 

proposed rule change, as amended, is 

reasonably designed to accomplish 

these ends by creating a mechanism 

through which policies and procedures 

that are designed to ensure that 

recommended variable annuity 

transactions are properly identified and 

subject to timely principal review are 

put in place. As FINRA noted, while 

most variable annuity transactions are 

‘‘recommended,’’ whether by a 

registered representative or an Internetbased computer system, and thus would 

be subject to principal review, there are 

some broker-dealers that do not make 

any recommendations as part of a 

business model that provides lower cost 

products.52 The Commission believes 

that principal review is less necessary 

when a particular variable annuity 

transaction is not recommended. 

Accordingly, the Commission believes 

that the rule change strikes the proper 

balance between investor protection and 

efficiency by requiring principal review 

of recommended transactions while, at 

the same time, removing an unnecessary 

impediment to the purchase of these 

investments by investors who do not 

need or seek a recommendation. 

In addition, the Commission believes 

that FINRA struck a reasonable balance 

with regard to the timeframe during 

which variable annuity transactions 

must be reviewed by a principal. 

Requiring the seven-business-day 

review requirement to begin at the time 

that a signed and completed application 

is received by an OSJ will encourage the 

OSJ that received the application to 

route it, within a reasonable time, to the 

principal required to review it. We are 

not persuaded that the principal review 

clock should begin to run when any 

office of a broker-dealer receives an 

application because of the practical 

delays often associated with processing 

an application and routing it to the 

appropriate person. We also are not 

persuaded that the principal review 

clock should be delayed until a 

particular OSJ receives the application, 

because doing so could result in undue 

delays to the prompt processing and 

completion of an investor’s transaction. 

The Commission gave careful 

consideration to the comments raised 

regarding the forwarding of customer 

funds during the period when an 

application is under principal review. 

We believe that until a transaction has 

been approved or denied, segregation of 

customer funds in a special account 

similar in form and function as those 

described in Exchange Act Rules 15c3– 

3(k)(2)(i) and 15c3–3(f) 53 offers the best 

assurance that investors’ funds will be 

safeguarded in a manner that most 

closely parallels the protective features 

of the Federal securities laws, and that 

investors in different products should 

receive similar treatment. Specifically, 

when an investor purchases a nonvariable annuity investment through a 

broker-dealer, she is protected by the 

Securities Investor Protection 

Corporation in the event the brokerdealer becomes insolvent. Because 

insurance companies are subject to a 

different regulatory scheme than brokerdealers, including differences resulting 

from variation in State insurance laws, 

we believe deferred variable annuity 

investors are best protected by a rule 

that closely mimics the protections and 

safeguards governing other investors. 

Consequently, we believe that FINRA’s 

proposed rule change strikes a fair 

balance between the practical needs of 

broker-dealers associated with 

transmitting funds to insurance 

companies and protecting investors 

from the possibility that an insurance 

company may become insolvent. 

With regard to FINRA’s proposed 

requirement that broker-dealers 

determine the number of prior customer 

exchanges, the Commission agrees with 

FINRA that it is reasonable and 

appropriate for a broker-dealer to be 

required to determine the number of 

exchanges that have occurred at the firm 

itself. We believe this burden should be 

minimal, in that the broker-dealer will 

have ready access to that information 

from its books and records. The 

Commission also believes that it is 

reasonable to rely on a customer’s 

representations regarding exchanges 

conducted at other firms given that most 

customers are in a good position to 

know whether they have made any 

exchanges. While a customer’s 

recollection of this information may not 

always be fully accurate, the burdens 

associated with requiring broker-dealers 

to obtain this information through other 

means outweigh the benefits of any 

potential improvement in accuracy. 

Moreover, this requirement is designed 

to help ensure that broker-dealers ask 

about customers’ exchanges in a manner 

that is reasonable calculated to elicit 

accurate responses from customers 


dwashington3 on PROD1PC60 with NOTICES
18424 Federal Register / Vol. 74, No. 76 / Wednesday, April 22, 2009 / Notices 

54See Securities Exchange Act Release No. 56375 

(September 7, 2007), 72 FR 52403, 52411 

(September 13, 2007). 

55 Id. 

56 15 U.S.C. 78o–3(b)(6). 

57 15 U.S.C. 78s(b)(2). 

58 15 U.S.C. 78o–3(b)(6). 

59 15 U.S.C. 78s(b)(2). 

60 15 U.S.C. 78s(b)(2). 

61 17 CFR 200.30–3(a)(12). 

when they are asked about exchanges at 

other broker-dealers. 

Finally, given the rule’s operational 

impact, we believe that it is appropriate 

for its effective date to be delayed by 

240 days following publication of the 

Regulatory Notice announcing 

Commission approval. This should 

provide sufficient time for brokerdealers and any other affected parties to 

make necessary changes to their systems 

and procedures without undue further 

delay of the rule’s implementation. 

In approving Rule 2821, the 

Commission took note of the numerous 

examinations of, and enforcement 

actions against, broker-dealers involving 

the sale of variable annuity products.54

We understood that many FINRA 

enforcement actions against brokerdealers involved unsuitable 

recommendations of variable annuities 

and noted that the rule was designed to 

curb these sales practice abuses.55 Rule 

2821 has been subject to a thorough 

notice and comment process, and these 

amendments to the rule respond 

directly to comments and questions 

raised by commenters. For that reason, 

we believe that it is appropriate to 

finalize the rule in order to provide 

broker-dealers and others affected by it 

with the clarity needed to make 

operational and systems changes 

required to implement the rule and 

achieve the investor protections for 

which it is designed. Accordingly, based 

on the foregoing reasons, the 

Commission believes that good cause 

exists, consistent with Sections 

15A(b)(6) 56 and 19(b)(2) 57 of the 

Exchange Act, to approve the proposed 

rule change. 

The Commission also finds good 

cause for approving the proposed rule 

change as modified by Amendment Nos. 

1 and 2 prior to the thirtieth day after 

the date of publication of notice in the 

Federal Register. Amendment No. 1 

originally indicated that funds had to 

remain in a segregated bank account 

until such time as the insurance 

company is notified of the brokerdealer’s approval or rejection of the 

application. Under the rule as amended 

by Amendment No. 1, there could be 

delays between the time when a 

principal approves an application and 

the time when an insurer receives the 

approved application (e.g., when a 

broker-dealer conveys principal 

approval to an insurer electronically but 

sends an approved application via 

regular mail), thereby creating a 

situation where the funds in a suspense 

account are released before the 

insurance company has received the 

application necessary to issue the 

contract. Therefore, Amendment No. 2 

clarifies that the insurance company 

must receive both a notification of 

approval and the application before 

funds can be released from the suspense 

account. Because these amendments do 

not significantly alter the proposed rule, 

which was subject to a full notice and 

comment period, the Commission finds 

that it is in the public interest to 

approve the proposed rule change, as 

modified by Amendment Nos. 1 and 2, 

as soon as possible to expedite their 

implementation. Accordingly, the 

Commission finds that there is good 

cause, consistent with and in 

furtherance of the objectives of Sections 

15A(b)(6) 58 and 19(b)(2) 59 of the 

Exchange Act, to approve Amendment 

Nos. 1 and 2 on an accelerated basis. 

VI. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,60

that the proposed rule change (SR– 

FINRA–2008–019), as modified by 

Amendment Nos. 1 and 2, be and 

hereby is, approved on an accelerated 

basis. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.61

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–9159 Filed 4–21–09; 8:45 am] 

BILLING CODE 8010–01–P 

SOCIAL SECURITY ADMINISTRATION 

[Docket No. SSA–2009–0024] 

Financial Literacy Research 

Consortium Request for Applications 

(RFA); Program Announcement No. 

SSA–ORP–09–1 

AGENCY: Social Security Administration. 

ACTION: Notice and request for 

applications. 

SUMMARY: Social Security benefits are a 

key foundation in providing income 

security for millions of Americans. 

However, they are intended to 

complement other sources of income 

wherever feasible, such as pensions, taxdeferred retirement savings accounts, or 

personal savings. The current economic 

climate means that many Americans are 

now in danger of having insufficient 

savings for retirement and other life 

events. This situation occurs at a time 

when workers also need to take 

increasing responsibility for their 

savings decisions as many employers 

are moving from defined benefit to 

defined contribution plans. 

As described in the new SSA Agency 

Strategic Plan, we believe we have a 

special responsibility to help Americans 

of all working ages to understand the 

role of Social Security benefits and the 

need for Americans to save as they plan 

for retirement and other life events. 

More fundamentally, we also need to 

educate the public about the role of 

Social Security as one of the 

foundations of household income in the 

event of retirement, disability, or death. 

This includes a focus on key decisions 

such as when to stop working and when 

to take retirement benefits. 

The Financial Literacy Research 

Consortium (FLRC) will be an 

innovative, non-partisan 

multidisciplinary research and 

development (R&D) initiative to develop 

products to better inform the public 

about key financial literacy topics 

related to retirement savings and 

planning. We are interested in 

developing products—such as Internet 

tools as well as print materials—that 

help foster retirement and other savings 

strategies at all stages of the life cycle. 

Products may be tailored to new 

entrants to the workforce, mid-career 

workers, those approaching retirement, 

and those in retirement who must 

successfully manage retirement assets. 

In addition, as part of the FLRC, we are 

seeking some (but not exclusive) focus 

on educational products to help low and 

moderate income populations 

successfully plan and save for 

retirement and other life events, as well 

as products that improve understanding 

of Social Security’s programs. We are 

also interested in potentially evaluating 

optimal distributional channels for 

some or many of these products. 

Due to our existing relationship with 

the public, we are uniquely positioned 

to encourage saving. We have over 1,300 

field offices across the country, a Web 

site that received over 88 million visits 

in 2008, a Social Security Statement that 

is sent to approximately 150 million 

workers every year and professional 

public affairs staff around the country. 

We may distribute FLRC products (or 

revised products) to better inform the 

public about retirement savings topics. 

In addition, the FLRC will make 

available to the public products 

developed by the FLRC that may be of 


dwashington3 on PROD1PC60 with NOTICES