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[Federal Register Volume 60, Number 46 (Thursday, March 9, 1995)]
[Notices]
[Pages 12994-12996]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5705]

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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35435 File No. SR-NASD-94-61]

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
the Filing Requirements Under Article III, Section 44 of the NASD Rules 
of Fair Practice Regarding Modified Guaranteed Annuity Contracts and 
Modified Guaranteed Life Insurance Contracts

March 2, 1995.
    On January 12, 1995, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\, filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
a proposed rule change\2\ that amends [[Page 12995]] Subsection 
44(b)(8) to Article III of the NASD Rules of Fair Practice (``Corporate 
Financing Rule''). The Commission published notice of the proposed rule 
change in the Federal Register on January 30, 1995.\3\ For the reasons 
discussed below the Commission is approving the proposed rule change.

    \1\15 U.S.C. 78s(b)(1).
    \2\The NASD originally submitted the proposed rule change on 
November 21, 1994. On December 1, 1994 and January 12, 1995, the 
NASD filed amendments to its filing.
    \3\Securities Exchange Act Release No. 35266 (January 23, 1995), 
60 FR 5744.
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I. The Terms of Substance of the Proposed Rule Change

    The rule change amends Subsection 44(b)(8) of the Corporate 
Financing Rule to exempt modified guaranteed annuity contracts and 
modified guaranteed life insurance contracts (collectively, 
``Contracts'') from the filing requirements under Subsection 44(b). The 
Corporate Financing Rule requires members to file with the NASD 
documents and information relating to a public offering of securities 
for review of the fairness of underwriting compensation and 
arrangements. The filing requirements in the Corporate Financing Rule 
also apply to Schedule E of the NASD By-Laws and Article III, Section 
34 of the NASD Rules of Fair Practice.\4\ The Corporate Financing Rule 
filing requirements apply to public offerings of debt, equity and 
public limited partnership securities, and provide that certain 
offerings of securities shall be exempt from the filing requirement 
under Subsection 44(b)(8) of the Rule. The exemptions in Subsection 
44(b)(8) include, among others, open-end investment company securities 
registered under the Investment Company Act of 1940 (except closed-end 
investment company securities) and variable contracts. In addition, the 
exemptions include securities defined as ``exempt securities'' under 
Section 3(a)(12) of the Act and securities exempt from registration 
with the SEC pursuant to Sections 4(1), 4(2) and 4(6) of the Securities 
Act of 1933 (``1933 Act'') and Rules 504 (unless considered a public 
offering), 505 and 506 adopted under the 1933 Act.

    \4\Under Subsection 44(b)(1) of the NASD Rules of Fair Practice 
``[n]o member or person associated with a member shall participate 
in any manner in any public offering of securities subject to this 
Section, Schedule E to the By Laws, or Article III, Section 34 of 
the Rules of Fair Practice unless documents and information as 
specified herein relating to the offering have been filed and 
reviewed by the NASD.'' (Emphasis added).
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    The Contracts did not fall within any of the exemptions contained 
in the Corporate Financing Rule filing requirements. The Contracts are 
similar to variable annuity contracts in that they are issued by an 
insurance company, offered on a continuous basis, subject to the 
registration requirements and regulatory scheme of state insurance law, 
and, shift investment risk to the contract owner by offering variable, 
non-guaranteed rates of return under certain circumstances. That is, 
the Contracts are subject to a market value adjustment upon a Contract 
surrender or partial withdrawal prior to the end of a guarantee period. 
However, unlike variable annuities, the individual account values of 
the Contracts do not reflect the investment experience of one or more 
separate accounts registered under the Investment Company Act of 1940. 
Instead, like traditional fixed annuities, the Contracts are backed by 
the general account assets of the insurance issuer and are registered 
only as insurance contracts under state insurance law.
    The review of the fairness and reasonableness of underwriting terms 
and arrangements is the central requirement of the Corporate Financing 
Rule. The issuance and sale of the Contracts on an open-ended basis 
does not raise the kinds of underwriting issues with which the 
Corporate Financing Rule is primarily and traditionally concerned. The 
structures of the instruments are that of insurance products which 
traditionally have been regulated under state insurance law and the 
terms of the Corporate Financing Rule were not developed to address 
such products. The Commission is therefore approving the NASD's 
proposal to amend the Corporate Financing Rule by adopting as new 
Subsection 44(b)(8)(E) an exemption from the filing and other 
requirements of the Corporate Financing Rule for the Contracts and to 
reletter the remaining sections accordingly. The amended rule thus 
exempts such Contracts from the filing and review requirements of the 
Corporate Financing Rule.\5\ Listed below is the text of the rule 
change approved by the Commission. New language is italicized; proposed 
deletions are in brackets.

    \5\In addition, Article III, Sections 26 and 29 of the NASD 
Rules of Fair Practice are not applicable, since the Contracts are 
not within the definition of ``variable contract'' and do not 
include a separate account registered under the Investment Company 
Act of 1940. However, as securities, sales of the Contracts are 
subject to other applicable Rules of Fair Practice when sold by 
associated persons of a member and the rules and regulations of the 
Commission, particularly the antifraud provisions thereof.
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The Corporate Financing Rule Underwriting Terms and Arrangements

Sec. 44

* * * * *
(b) Filing Requirements
* * * * *
(8) Exempt Offerings
    Nothwithstanding the provisions of paragraph (1) above, the 
following offerings are exempt from this Section, Schedule E to the By-
Laws, and Article III, Section 34 of the Rules of Fair Practice. 
Documents and information relating to the following offerings need not 
be filed for review:
    (A) securities exempt from registration with the Securities and 
Exchange Commission pursuant to the provisions of Sections 4(1), 4(2) 
or 4(6) of the Securities Act of 1933, as amended, or pursuant to Rule 
504 (unless considered a public offering in the states where offered), 
Rule 505 or Rule 506 adopted under the Securities Act of 1933, as 
amended;
    (B) securities which are defined as ``exempt securities'' in 
Section 3(a)(12) of the Securities Exchange Act of 1934, as amended;
    (C) securities of investment companies registered under the 
Investment Company Act of 1940, as amended, except securities of a 
management company defined as a ``closed-end company'' in Section 
5(a)(2) of that Act;
    (D) variable contracts as defined in Article III, Section 29(b)(1) 
of the Rules of Fair Practice;
    (E) modified guaranteed annuity contracts and modified guaranteed 
life insurance policies, which are deferred annuity contracts or life 
insurance policies the values of which are guaranteed if held for 
specified periods, and the nonforfeiture values of which are based upon 
a market-value adjustment formula for withdrawals made before the end 
of any specific period;
    [(E)](F) offerings of municipal securities as defined in Section 
3(a)(29) of the Securities Exchange Act of 1934, as amended;
    [(F)](G) tender offers made pursuant to Regulation 14D adopted 
under the Securities Exchange Act of 1934, as amended; and
    [(G)](H) securities issued pursuant to a competitively bid 
underwriting arrangement meeting the requirements of the Public Utility 
Holding Company Act of 1935, as amended.

II. Commission Findings

    The Commission believes that the rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\6\ which require that the 
rules of the Association promote just and equitable principles of 
[[Page 12996]] trade and protect investors and the public interest 
since the issuance and sale of the Contracts on an open-ended basis 
does not raise the kinds of underwriting issues with which the 
Corporate Financing Rule is primarily and traditionally concerned; the 
structures of the instrument are that of insurance products which 
traditionally have been regulated under state insurance law; the terms 
of the Corporate Financing Rule were not developed to address such 
products.

    \6\15 U.S.C. Sec. 78o-3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-94-61 be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-5705 Filed 3-8-95; 8:45 am]
BILLING CODE 8010-01-M
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