Document ID: SEC-2008-0008-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-01-03T05:00Z

[Federal Register: January 3, 2008 (Volume 73, Number 2)]
[Notices]               
[Page 531-533]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ja08-63]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57050; File No. SR-FINRA-2007-040]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Delay 
Implementation of Certain FINRA Rule Changes Approved in SR-NASD-2004-
183

December 27, 2007.
    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 December 21, 2007, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by FINRA. 
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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to delay the effective date of certain FINRA 
rule changes approved in SR-NASD-2004-183 until August 4, 2008.
    There are no new changes proposed to the text of the FINRA rules. 
Paragraphs (a), (b), (d), and (e) of Rule 2821, approved pursuant to 
SR-NASD-2004-183, will become effective on May 5, 2008.\3\ FINRA is 
proposing to delay the effective date of paragraph (c) of Rule 2821, 
also approved pursuant to SR-NASD-2004-183,\4\ until August 4, 2008.
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    \3\ See Order Approving FINRA's NASD Rule 2821 Regarding 
Members' Responsibilities for Deferred Variable Annuities (Approval 
Order), Securities Exchange Act Release No. 56375 (September 7, 
2007), 72 FR 52403 (September 13, 2007) (SR-NASD-2004-183); 
Corrective Order, Securities Exchange Act Release No. 56375A 
(September 14, 2007), 72 FR 53612 (September 19, 2007) (SR-NASD-
2004-183) (correcting the rule's effective date).
    \4\ Id.
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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 deferred variable 
annuities.\5\ On November 6, 2007, FINRA published Regulatory Notice 
07-53, which announced the Commission's approval of Rule 2821 (SR-NASD-
2004-183) and established May 5, 2008 as the rule's effective date. 
Following Commission approval of the rule and publication of the 
Regulatory Notice, several firms requested that the effective

[[Page 532]]

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 substantially changed by Amendment No. 4.
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    \5\ Id.
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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 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.
    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 
customers. 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 
Commission 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 these concerns, among others, 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, 
FINRA will file a separate rule change with the Commission.
    To provide adequate time for firms to make systems changes and for 
FINRA to consider and potentially act upon the concerns discussed 
above, FINRA is proposing that the effective date of paragraph (c) of 
Rule 2821, approved in SR-NASD-2004-183, be delayed until August 4, 
2008. All other parts of Rule 2821 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,\6\ 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 Rule 2821(c) and will allow FINRA to more fully consider the 
new comments discussed above.
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    \6\ 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2007-040 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-2007-040. 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

[[Page 533]]

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-2007-040 and should be submitted on or before January 24, 2008.
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    \7\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
Nancy M. Morris,
Secretary.
[FR Doc. E7-25571 Filed 1-2-08; 8:45 am]

BILLING CODE 8011-01-P