Document ID: SEC-2008-0677-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-05-08T04:00Z

[Federal Register: May 8, 2008 (Volume 73, Number 90)]
[Notices]               
[Page 26176-26177]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my08-137]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57769; File No. SR-FINRA-2008-015]

 
Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Delay the Effective Date of Certain FINRA Rule 
Changes Approved in SR-NASD-2004-183

May 2, 2008.
    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 April 17, 2008, 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'') the proposed rule change as described in Items I, 
II, and III below, which Items have been substantially prepared by 
FINRA. FINRA has designated the proposed rule change as constituting a 
``non-controversial'' rule change under paragraph (f)(6) of Rule 19b-4 
under the Act,\3\ which renders the proposal effective upon receipt of 
this filing by the Commission. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing a rule change to delay the effective date of 
paragraphs (c) and (d) of Rule 2821, as approved in SR-NASD-2004-183, 
until after the Commission has approved or disapproved a proposed 
substantive rule change to Rule 2821 that FINRA intends to file in the 
near future. That substantive rule change is not included in this 
proposed rule change, but will be the subject of a separate filing with 
the SEC.\4\ There are no changes to the text of NASD Rule 2821 in this 
proposed rule change.
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    \4\ In the separate filing, FINRA plans to propose changing the 
event that triggers the beginning of the period within which the 
principal must review and determine whether to approve or reject the 
application. FINRA also intends to propose limiting application of 
the rule to recommended transactions. Finally, FINRA plans to 
propose to clarify various other issues, including whether (and, if 
so, under what circumstances) a broker-dealer can forward funds to 
an affiliated insurance company prior to the principal's approval of 
the transactions.
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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, FINRA 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. FINRA 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
    On September 7, 2007, the Commission noticed the filing of 
Amendment Nos. 3 and 4 and granted accelerated approval of SR-NASD-
2004-183, FINRA's new NASD Rule 2821, regarding broker-dealers' 
compliance and supervisory responsibilities for transactions in 
deferred variable annuities.\5\ On November 6, 2007, FINRA published 
Regulatory Notice 07-53, which announced the Commission's approval of 
Rule 2821 and established May 5, 2008 as the rule's effective date. 
Following SEC approval of the rule and publication of the Regulatory 
Notice, several firms requested that the effective date of the approved 
rule be delayed to allow firms additional time to make necessary 
systems changes. In addition, some firms raised various concerns 
regarding paragraph (c) of Rule 2821 (Principal Review and Approval), 
which had been revised by Amendment No. 4.
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    \5\ See SEC Order Approving FINRA's NASD Rule 2821 Regarding 
Members' Responsibilities for Deferred Variable Annuities, 
Securities Exchange Act Release No. 56375 (Sept. 7, 2007), 72 FR 
52403 (Sept. 13, 2007) (SR-NASD-2004-183); SEC Corrective Order, 
Securities Exchange Act Release No. 56375A (Sept. 14, 2007), 72 FR 
53612 (Sept. 19, 2007) (SR-NASD-2004-183) (correcting the rule's 
effective date).
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    Rule 2821(c), in part, 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 firms asserted that seven business days 
beginning at the time when the customer signs the application may not 
allow for a thorough principal review in all cases. These firms asked 
that a different timing mechanism be used.
    Rule 2821(c) also states that a principal must treat ``all 
transactions as if they have been recommended for purposes of this 
principal review'' and may only approve the transaction if he or she 
determines ``that there is a reasonable basis to believe that the 
transaction would be suitable based on the factors delineated in 
paragraph (b) of this Rule.'' A principal who determines that the 
transaction is unsuitable nonetheless may authorize the processing of 
the transaction if the principal determines that the transaction was 
not recommended and that the customer, after being informed of the 
reason why the principal found it to be unsuitable, affirms that he or 
she wants to proceed with the purchase or exchange of the deferred 
variable annuity. Some firms questioned whether broker-dealers that do 
not make any recommendations to customers (and generally do not employ 
principals to perform suitability reviews) should be subject to this 
provision.
    Finally, in Regulatory Notice 07-53, FINRA stated that Rule 2821(c) 
does not permit the depositing of a customer's funds in an account at 
the insurance company prior to completion of principal review. In 
response to the Regulatory Notice, a number of firms explained that 
insurers' financial controls regarding the receipt of money from 
customers often include holding such funds in a general ``suspense'' 
account at the insurer. According to these firms, insurers use an 
identifier to track money held in the suspense account and, if a 
contract is not issued, the funds are promptly returned to the 
customer. The firms further stated that this process has been used for 
many years without complications, makes processing much more efficient 
and effective, and receives significant scrutiny by examiners from the 
SEC and state insurance departments. Accordingly, these firms asked 
that insurers be allowed to deposit customer funds in suspense accounts 
under certain circumstances.
    In light of those concerns, among others, FINRA staff believed it 
was prudent to give further consideration to paragraph (c) of Rule 2821 
and the

[[Page 26177]]

interpretation addressed in the Regulatory Notice to determine whether 
the original scheduled effective date might cause certain unintended 
and potentially harmful consequences. FINRA then asked the Commission 
to delay the effective date of paragraph (c) of Rule 2821, approved in 
SR-NASD-2004-183, until August 4, 2008. FINRA explained that all other 
parts of Rule 2821 approved in SR-NASD-2004-183 would become effective 
as scheduled on May 5, 2008. Finally, FINRA stated that if, based on 
this additional review, FINRA concluded that further rulemaking was 
warranted, FINRA would file a separate rule change with the Commission. 
On January 29, 2008, the Commission granted FINRA's proposed rule 
change to delay implementation of certain FINRA rule changes approved 
in SR-NASD-2004-183 until August 4, 2008.\6\
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    \6\ See Securities Exchange Act Release No. 57228 (Jan. 29, 
2008), 73 FR 7017 (Feb. 6, 2008) (Order approving SR-FINRA-2007-
040).
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    FINRA has now concluded its review and will soon propose 
substantive amendments to Rule 2821, as discussed above. FINRA is 
filing this proposed rule change to delay the effective dates of 
paragraphs (c) and (d) of Rule 2821 until 180 days following the SEC's 
approval or disapproval of the substantive amendment that FINRA plans 
to file in the near future. FINRA has filed this proposed rule change 
as a ``non-controversial'' rule change that is effective upon filing. 
FINRA is proceeding in this manner to give firms notice that they will 
not need to comply with these provisions until a later date. Paragraphs 
(a), (b), and (e) of Rule 2821, as approved in SR-NASD-2004-183, will 
become effective as scheduled on May 5, 2008.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\7\ which requires, among 
other things, that FINRA 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. The rule change will promote investor protection 
because it will allow firms to better prepare procedures and systems to 
implement paragraphs (c) and (d) of Rule 2821 and will allow the 
Commission to more fully consider the new substantive rule change that 
FINRA intends to file in the near future.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not 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 neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change 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 
change is 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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2008-015. 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, 
NW., 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-2008-015 
and should be submitted on or before May 29, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harman,
Deputy Secretary.
 [FR Doc. E8-10253 Filed 5-7-08; 8:45 am]

BILLING CODE 8010-01-P