Document ID: SEC-2007-1274-0001
Agency: sec
Document Type: Notice
Title: Securities: Broker-dealers; prompt customer check transmissions for purchase of deferred variable annuity contracts; conditional exemption
Posted Date: 2007-09-13T04:00Z

[Federal Register: September 13, 2007 (Volume 72, Number 177)]
[Notices]               
[Page 52400-52401]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13se07-87]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56376)]

 
Order Granting a Conditional Exemption to Broker-Dealers From 
Requirements in Rules 15c3-1 And 15c3-3 Under the Securities Exchange 
Act of 1934 To Promptly Transmit Customer Checks for the Purchase of 
Deferred Variable Annuity Contracts

September 7, 2007.

I. Background

    The Securities and Exchange Commission (the ``Commission'') today 
approved new National Association of Securities Dealers (``NASD'') \1\ 
Rule 2821.\2\ NASD Rule 2821 sets forth recommendation requirements 
(including a suitability obligation), principal review and approval 
requirements, and supervisory and training requirements with respect to 
transactions in deferred variable annuities.
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    \1\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to Financial Industry Regulatory Authority, 
Inc., or FINRA, in connection with the consolidation of the member 
firm regulatory functions of NASD and NYSE Regulation, Inc. See 
Exchange Act Release No. 56146 (July 26, 2007), 72 FR 42190 (Aug. 1, 
2007).
    \2\ See Exchange Act Release No. 56375 (Sep. 7, 2007).\
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    According to the NASD, it designed the rule to address significant 
and persistent sales-practice problems in sales of deferred variable 
annuities. One component of Rule 2821 is a requirement that registered 
principals perform a comprehensive and rigorous review of the 
transactions. Specifically, Rule 2821(c) states, in part, that: ``Prior 
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 
registered principal shall review and determine whether he or she 
approves of the purchase or exchange of the deferred variable 
annuity.''
    Many broker-dealers are subject to lower net capital requirements 
under Securities Exchange Act of 1934 (``Exchange Act'') Rule 15c3-1 
\3\ and are exempt from the requirement to establish and fund a 
customer reserve account under Rule 15c3-3 \4\ because they do not 
carry customer funds or securities. Some of these broker-dealers 
receive checks from customers that are made out to third parties. 
Pursuant to Rules 15c3-1 and 15c3-3, a broker-dealer is not deemed to 
be carrying customer funds if it ``promptly transmits'' the checks to 
the third parties.\5\ For purposes of Rules 15c3-1 and 15c3-3, the term 
``promptly transmit'' means when ``such transmission or delivery is 
made no later than noon of the next business day after the receipt of 
such funds or securities.'' \6\
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    \3\ 17 CFR 240.15c3-1. The purpose of Rule 15c3-1 is to ensure 
that a broker or dealer at all times has sufficient liquid assets to 
promptly satisfy the claims of customers if the broker or dealer 
goes out of business.
    \4\ 17 CFR 240.15c3-3. The purpose of Rule 15c3-3 is to protect 
customers by assuring that broker-dealers do not use customers' 
funds or securities to fund the broker-dealer's operations. Among 
other things, Rule 15c3-3 requires that a broker-dealer make a 
periodic computation of the amount of money it is holding that 
constitutes customer funds or funds obtained from the use of 
customer securities. If this amount exceeds the amount of money 
customers owe the firm, the broker-dealer must deposit the excess in 
a special reserve bank account for the exclusive benefit of the 
firm's customers.
    \5\ When it amended the net capital rule in 1992, the Commission 
stated that a broker-dealer shall not be deemed to receive funds 
from customers if it receives checks made payable to certain 
entities other than itself (such as another broker-dealer or an 
escrow agent) and promptly transmits such funds. Exchange Act 
Release No. 31511 (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992).
    \6\ See Exchange Act Release No. 31511 (Nov. 24, 1992), note 11, 
and 17 CFR 240.15c3-1(c)(9).
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    According to the NASD, a broker-dealer may need to hold customer 
checks for more than one business day in order to comply with Rule 
2821.

II. Discussion

    The Commission has decided to exempt broker-dealers from any 
additional requirements of Rules 15c3-1 or 15c3-3 due solely to a 
failure to promptly transmit a check made payable to an insurance 
company for the purchase of a deferred variable annuity product by noon 
of the business day following the date the broker-dealer receives the 
check from the customer, provided:
    (i) The transaction is subject to the principal review requirements 
of NASD Rule 2821 and a registered 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 that rule;
    (ii) the broker-dealer promptly transmits the check no later than 
noon of the business day following the date a registered principal 
reviews and determines whether he or she approves of the purchase or 
exchange of the deferred variable annuity; and
    (iii) the broker-dealer maintains a copy of each such check and 
creates a record of the date the check was received from the customer 
and the date the check was transmitted to the insurance company if 
approved, or returned to the customer if rejected.
    The purpose of Rule 15c3-1 is to ensure that a broker or dealer at 
all times has sufficient liquid assets to promptly satisfy the claims 
of customers and other creditors if the broker or dealer goes out of 
business. One purpose of Rule 15c3-3 is to protect customers by 
assuring that broker-dealers do not use customers' funds or securities 
to fund the broker-dealer's operations. The reasons these rules require 
that a broker-dealer promptly forward checks is to reduce the risk that 
a broker-dealer or an associated person

[[Page 52401]]

of a broker-dealer will convert or misuse customer funds or securities 
and to assure that the price of the security the customer purchases has 
not moved substantially from the date the customer decided to purchase 
that security.
    In the Approval Order for Rule 2821 we stated,

    [Proposed Rule 2821] is designed to curb sales practice abuses 
in deferred variable annuities. Its recommendation requirements 
provide a specific framework for a broker-dealer's suitability 
analysis of these securities. By setting forth factors that a 
broker-dealer must specifically consider in recommending deferred 
variable annuities and requiring the registered representative to 
obtain certain information from his or her customers, the proposed 
rule should improve communications between registered 
representatives and customers regarding these securities. The 
supervisory review component should foster a thorough analytical 
review of every deferred variable annuity transaction in a timeframe 
that will limit the possibility of unsuitable recommendations and 
transactions. The proposed rule as a whole is geared to protecting 
investors by requiring firms to implement more robust compliance 
cultures, and to give clear consideration of the suitability of 
these complex products.

    Further, we found that Rule 2821 is 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. Consequently, we approved NASD's proposed Rule 2821.
    As we believe the NASD's Rule 2821 to be in the public interest but 
a broker-dealer would be burdened with additional requirements under 
Exchange Act Rules 15c3-1 and 15c3-3 were it to comply with Rule 2821, 
we must balance the investor protections provided by Rules 15c3-1 and 
15c3-3 with those provided by Rule 2821. For this reason, we have 
specifically tailored the above-described exemption.
    First, the exemption is specifically limited to situations where a 
broker-dealer has failed to promptly transmit ``a check made payable to 
an insurance company for the purchase of a deferred variable annuity 
product,'' and ``the transaction is subject to the principal review 
requirements of NASD Rule 2821 and a registered 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 that rule.'' In all other situations where a check is 
received by a broker-dealer and is not promptly forwarded, the full 
provisions of both Rule 15c3-1 and 15c3-3 still apply.
    Second, the exemption requires a broker-dealer to promptly transmit 
such checks no later than noon of the business day following the date a 
registered principal reviews and determines whether he or she approves 
of the purchase or exchange of the deferred variable annuity. This is 
designed to assure that the broker-dealer holds the customer's check no 
longer than is necessary to comply with Rule 2821.
    Third, a broker-dealer must maintain a copy of each such check and 
create a record of the date the check was received from the customer 
and the date the check was transmitted to the insurance company if 
approved, or returned to the customer if rejected. This requirement 
will allow the broker-dealer's compliance and internal audit 
departments, as well as Commission, self-regulatory organization, and 
other examiners to verify that a broker-dealer is complying with the 
provisions of this exemption.
    For the foregoing reasons, the Commission finds that granting the 
above-described exemption is necessary and appropriate in the public 
interest, and is consistent with the protection of investors.

III. Conclusion

    Accordingly, it is ordered, pursuant to Section 36 of the Exchange 
Act \7\ that, a broker-dealer shall be exempt from any additional 
requirements of Rules 15c3-1 or 15c3-3 due solely to a failure to 
promptly transmit a check made payable to an insurance company for the 
purchase of a deferred variable annuity product by noon of the business 
day following the date the broker-dealer receives the check from the 
customer, provided:
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    \7\ Section 36 of the Exchange Act authorizes the Commission, by 
rule, regulation, or order, to conditionally or unconditionally 
exempt any person, security, or transaction, or any class or classes 
of persons, securities, or transactions from any provision or 
provisions of the Exchange Act or any rule or regulation thereunder, 
to the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of investors.
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    (i) The transaction is subject to the principal review requirements 
of NASD Rule 2821 and a registered 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 that rule;
    (ii) the broker-dealer promptly transmits the check no later than 
noon of the business day following the date a registered principal 
reviews and determines whether he or she approves of the purchase or 
exchange of the deferred variable annuity; and
    (iii) the broker-dealer maintains a copy of each such check and 
creates a record of the date the check was received from the customer 
and the date the check was transmitted to the insurance company if 
approved, or returned to the customer if rejected.

    By the Commission.
Nancy M. Morris,
Secretary.
 [FR Doc. E7-18023 Filed 9-12-07; 8:45 am]

BILLING CODE 8010-01-P