Document ID: SEC-2008-0199-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc
Posted Date: 2008-02-06T05:00Z

[Federal Register: February 6, 2008 (Volume 73, Number 25)]
[Notices]               
[Page 7017-7018]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06fe08-92]                         

[[Page 7017]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57228; File No. SR-FINRA-2007-040]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change to 
Delay Implementation of Certain FINRA Rule Changes Approved in SR-NASD-
2004-183

 January 29, 2008.

I. Introduction

    On December 21, 2007, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to delay the effective date of paragraph (c) of 
NASD Rule 2821 until August 4, 2008. The Commission published the 
proposed rule change for comment in the Federal Register on January 3, 
2008.\3\ The Commission received fourteen comments on the proposed rule 
change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 57050 (Dec. 27, 2007); 73 FR 
0531 (Jan. 3, 2008) (SR-FINRA-2007-040).
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II. Description of the Proposal

    The Commission approved NASD Rule 2821 on September 7, 2007.\4\ 
Rule 2821 created recommendation requirements (including a suitability 
obligation), principal review and approval requirements, and 
supervisory and training requirements tailored specifically to 
transactions in deferred variable annuities.
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    \4\ See Order Approving FINRA's NASD Rule 2821 Regarding 
Members' Responsibilities for Deferred Variable Annuities 
(``Approval Order''), Securities Exchange Act Release No. 56375 
(Sept. 7, 2007), 72 FR 52403 (Sept. 13, 2007) (SR-NASD-2004-183); 
Corrective Order, Securities Exchange Act Release No. 56375A 
(September 14, 2007), 72 FR 53612 (Sept. 19, 2007) (SR-NASD-2004-
183) (correcting the rule's effective date).
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    On November 6, 2007, FINRA published Regulatory Notice 07-52, which 
announced the Commission's approval of Rule 2821 and established May 5, 
2008 as the effective date of the rule. FINRA is proposing to delay the 
effective date of paragraph (c), which addresses principal review and 
approval, until August 4, 2008.
    According to FINRA, several firms requested that the effective date 
of the rule be delayed to allow firms additional time to make necessary 
systems changes. Firms also raised various concerns regarding paragraph 
(c) of the rule. With respect to the timing of principal review, firms 
stated that seven business days beginning from the time when the 
customer signs the application may not allow for a thorough principal 
review in all cases. These firms have asked that a different timing 
mechanism be used. Firms also questioned whether broker-dealers that do 
not make any recommendations to customers should be subject to 
paragraph (c) of the Rule. And finally, firms asked FINRA to reconsider 
its statement in Regulatory Notice 07-53 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.
    FINRA staff believes it is prudent to give further consideration to 
paragraph (c) of Rule 2821 and the interpretation addressed in the 
Regulatory Notice to determine whether certain unintended and harmful 
consequences might ensue upon the currently scheduled effective date of 
May 5, 2008. If, based on this review, FINRA concludes that further 
rulemaking is warranted, it stated that it will file a separate rule 
change with the Commission.

III. Summary of Comments

    The Commission received fourteen comments on the proposed rule 
change. All commenters supported FINRA's proposal to extend the 
effective date of the principal review and approval requirements 
contained in paragraph (c) of Rule 2821 until August 4, 2008.\5\ 
Commenters agreed that additional time is needed to consider the impact 
those requirements will have on member firms and for FINRA to consider 
suggested alternatives.\6\
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    \5\ See, e.g., Letters from Darrell Braman and Sarah McCafferty, 
T. Rowe Prince Investment Services, Inc. (Jan. 23, 2008) (``T. Rowe 
Price Letter''); Michael P. DeGeorge, General Counsel NAVA (Jan. 24, 
2008) (``NAVA Letter''); Cifford Kirsch and Eric Arnold, Partners, 
Sutherland Asbill & Brennan LLP on behalf of the Committee of 
Annuity Insurers (Jan. 24, 2008) (``Comm. Annuity Insurers 
Letter''); Stuart Kaswell, Partner, Dechert LLP on behalf of TIAA-
CREF (Jan. 24, 2008) (``Dechert Letter''); Heidi Stam, Managing 
Director and General Counsel, Vanguard (Jan. 24, 2008) (``Vanguard 
Letter''); David E. Stone, Vice President and Associate General 
Counsel, Charles Schwab & Co., Inc. (Jan. 24, 2008) (``Schwab 
Letter''); Heather Traeger, Assistant Counsel, Investment Company 
Institute (Jan. 24, 2008) (``ICI Letter''); Dale E. Brown, President 
and Chief Executive Officer, Financial Services Institute (Jan. 25, 
2008) (``FSI Letter''); Carl B. Wilkerson, Vice President, American 
Council of Life Insurers (Jan. 28, 2008) (``ACLI Letter''); Amal 
Aly, Managing Director and Associate General Counsel, Securities 
Industry and Financial Markets Association (Jan. 29, 2008) (``SIFMA 
Letter'').
    One commenter stated, however, that waiting until August to 
determine the principal review and approval standard could cost the 
industry millions of dollars in unnecessary expenditures if FINRA 
revises the rule. See Letter from Douglas A. Wright, CCO, The 
Investment Center, Inc. (Jan. 14, 2008). This commenter believed a 
delay in enacting Rule 2821(c) would be welcomed by most firms to 
allow for systems upgrades, but firms do not want to begin paying 
for one system only to have FINRA alter the rule. Id. Another 
commenter addressed his broker-dealer's individual situation 
regarding net capital obligations. See Letter from Jeremiah 
O'Connell (Jan. 4, 2008).
    \6\ See, e.g., Comm. Annuity Insurers Letter; Dechert Letter; 
FSI Letter; SIFMA Letter; Vanguard Letter.
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    In addition to supporting the extended effective date of paragraph 
(c), commenters also expressed concerns and proposed alternatives with 
respect to three aspects of the principal review and approval 
requirements of paragraph (c). Some commenters suggested that FINRA 
eliminate the principal review requirement for non-recommended 
transactions.\7\ According to commenters, some broker-dealers do not 
solicit purchases of deferred variable annuities and do not recommend 
any transactions.\8\ For broker-dealers with this type of business 
model, commenters believed principal review and approval is unnecessary 
and does not further the purposes of the rule.\9\ One commenter stated 
that an exemption from the principal review requirements only for those 
broker-dealers that do not make any recommendations to customers would 
disadvantage broker-dealers who have various business models, some 
models allowing recommendations and others that do not.\10\ This 
commenter suggested that FINRA require a broker-dealer that offers 
recommendations to some customers and not to others to institute 
policies and procedures ensuring that the broker-dealer perform a 
principal review for recommended transactions.\11\
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    \7\ See ACLI Letter; Dechert Letter; ICI Letter; NAVA Letter; 
SIFMA Letter; Vanguard Letter.
    \8\ See Dechert Letter; ICI Letter; NAVA Letter; T. Rowe Price 
Letter; Vanguard Letter.
    \9\ See Dechert Letter; ICI Letter; NAVA Letter; Vanguard 
Letter. Some commenters emphasized that under these types of 
business models, firms do not pay commissions. See Dechert Letter; 
Vanguard Letter. One commenter also noted that its policies and 
procedures prohibit registered representatives from recommending any 
transactions. Vanguard Letter.
    \10\ See Dechert Letter
    \11\ Id.
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    Six commenters also believed that FINRA should allow broker-dealers 
to forward customer checks to the issuing insurance company and allow 
the issuing insurance company to deposit customer funds into a suspense 
account prior to the completion of principal

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review.\12\ Commenters stated customer funds could be held in these 
accounts and would not result in the issuance of a contract until 
principal review has been completed.\13\ Some commenters also stated 
that customer funds could be refunded in the event a contract is not 
issued.\14\
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    \12\ See Letter from MaryAnn Lamendola, Chief Compliance 
Officer, Chase Investment Services Corporation (Jan. 24, 2008) 
(``Chase Letter''); ACLI Letter; Comm. of Annuity Insurers Letter; 
Dechert Letter; NAVA Letter; SIFMA Letter. One of these commenters 
believes that both the broker-dealer and the issuing insurance 
company should be allowed to negotiate checks upon receipt. See 
Dechert Letter. This commenter noted that customers may send back an 
application and one check to cover a variable annuity and other 
investment options, including mutual funds. Id. In this situation, 
the commenter stated there is a conflict between NASD Rule 2830(m), 
which requires the prompt purchase of mutual fund shares, and Rule 
2821(c), which requires the broker-dealer to hold the customer's 
check pending principal review. Id.
    \13\ See ACLI Letter; Comm. of Annuity Insurers Letter; Dechert 
Letter. One commenter noted this could be accomplished by the 
broker-dealer developing controls to ensure that a variable annuity 
is not issued until after the completion of principal review. Chase 
Letter.
    \14\ Id.
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    Eight commenters suggested that FINRA revise the timing of 
principal review requirement.\15\ Paragraph (c) requires a registered 
principal to review a transaction and determine whether he or she 
approves of it prior to transmitting the customer's application to the 
issuing insurance company for processing, but no later than seven 
business days after the customer signs the application.\16\ Commenters 
stated that beginning the seven business day review period from the 
time when the customer signs the application is problematic because 
often the customer signs and mails the application, leaving the broker-
dealer no control over the timing.\17\ Commenters also stated that they 
have no control over which means a customer uses to mail an application 
and how long it takes for that application to arrive at the broker-
dealer.\18\ Some commenters suggested that the principal review process 
be required to be completed seven business days after the broker-dealer 
has received an application ``in good order.'' \19\ Other commenters 
suggested that the seven-day period should begin when the broker-dealer 
receives the application and the broker-dealer reasonably deems the 
application is complete.\20\
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    \15\ See Letter from Barbara Gill, Deputy Director of Regulatory 
Affairs, Stifel, Nicolaus & Company, Inc. (Jan. 22, 2008) (``Stifel 
Letter''); Comm. of Annuity Insurers Letter; Dechert Letter; FSI 
Letter; ICI Letter; NAVA Letter; SIFMA Letter; Schwab Letter.
    \16\ See NASD Rule 2821(c).
    \17\ See, e.g., Comm. of Annuity Insurers Letter; Dechert 
Letter; SIFMA Letter; Stifel Letter.
    \18\ Id.
    \19\ See, e.g., ACLI Letter; ICI Letter; T. Rowe Price Letter.
    \20\ See Comm. of Annuity Insurers Letter; Dechert Letter; FSI 
Letter; NAVA Letter; Schwab Letter. Three commenters also specified 
that the seven days should not begin to run until a complete 
application is specifically received by the broker-dealer's Office 
of Supervisory Jurisdiction. See Comm. of Annuity Insurers Letter; 
Dechert Letter; SIFMA Letter.
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    Two commenters requested that FINRA propose a single implementation 
date for the entire rule.\21\ These commenters stated that establishing 
two different compliance dates would create confusion when implementing 
the proposed rule as well unnecessary and redundant system design 
costs.\22\ Paragraph (d) requires members to establish supervisory 
procedures reasonably designed to achieve compliance with the rule and 
paragraph (e) require members to develop training policies and programs 
to ensure compliance with the rule. One of these commenters believed 
imposing two separate compliance dates would require broker-dealers to 
provide duplicate sets of supervisory procedures to account for what 
the rule requires on May 5, 2008 and for what it requires on August 4, 
2008.\23\ It also stated broker-dealers would have to implement one 
training program for the part of rule becoming effective on May 5, 2008 
and another training program for principal review starting on August 4, 
2008.\24\
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    \21\ See ACLI Letter; Dechert Letter.
    \22\ Id.
    \23\ See Dechert Letter.
    \24\ Id.
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IV. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change and 
the comments, and finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association. In 
particular, the Commission finds that the proposed rule change is 
consistent with section 15A(b)(6) of the Act, which requires, among 
other things, that the rules of a national securities association 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.\25\
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    \25\ 15 U.S.C. 78o-3(b)(6).
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    The proposed rule change does not change any of the substantive 
provisions of Rule 2821. It allows broker-dealers additional time to 
comply with one portion of the rule and provides FINRA with additional 
time to further consider its members' concerns. It is consistent with 
the requirements of the Act for FINRA to further consider paragraph (c) 
of Rule 2821 and its related Regulatory Notice to determine whether any 
unintended or harmful consequences might ensue upon the current 
effective date.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-FINRA 2007-040) be, and it 
hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-2074 Filed 2-5-08; 8:45 am]

BILLING CODE 8011-01-P