Document ID: SEC-2009-0817-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-06-17T04:00Z

[Federal Register Volume 74, Number 115 (Wednesday, June 17, 2009)]
[Notices]
[Pages 28743-28745]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-14148]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60086; File No. SR-FINRA-2009-023]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA 
Rule 2320 in the Consolidated FINRA Rulebook

June 10, 2009.

I. Introduction

    On March 31, 2009, 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 adopt NASD Rule 2820 as FINRA Rule 2320 in the 
consolidated FINRA rulebook (``Consolidated FINRA Rulebook) \3\ with 
minor changes. The proposal was published in the Federal Register on 
April 21, 2009.\4\ The Commission received one comment letter on the 
proposal.\5\ On June 1, 2009, FINRA responded to the comment letter.\6\ 
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\ The current FINRA rulebook consists of (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules 
are referred to as the ``Transitional Rulebook''). While the NASD 
Rules generally apply to all FINRA members, the Incorporated NYSE 
Rules apply only to those members of FINRA that are also members of 
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA 
members, unless such rules have a more limited application by their 
terms. For more information about the rulebook consolidation 
process, see FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \4\ See Securities Exchange Act Release No. 59762 (April 14, 
2009), 74 FR 18269 (``Notice'').
    \5\ See letter from Clifford E. Kirsch and Eric A. Arnold for 
the Committee of Annuity Insurers, Sutherland Asbill & Brennan LLP, 
to Elizabeth M. Murphy, Secretary, Commission, dated May 12, 2009 
(``CAI Comment Letter'').
    \6\ See letter from Stan Macel, Assistant General Counsel, 
FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated June 1, 
2009.
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II. Description of the Proposal

    NASD Rule 2820 prohibits members from participating in the offer or 
sale of variable life insurance and variable annuity contracts unless 
certain conditions are met (collectively, ``variable contract''). 
Specifically, members: (i) May not participate in the offering or sale 
of a variable contract on any basis other than at a value to be

[[Page 28744]]

determined following receipt of payment in accordance with the 
provisions of the contract, the prospectus and the Investment Company 
Act; (ii) must promptly transmit to the issuing insurance company all 
contract applications and at least the portion of the purchase payment 
required to be credited to the contract; and (iii) requires selling 
agreements between principal underwriters of variable contracts and 
selling broker-dealers that provide that the sales commission will be 
returned to the issuer if the contract is rendered for redemption 
within seven business days after acceptance. Additionally, under NASD 
Rule 2820, members may not sell variable contracts unless the insurance 
company promptly honors customer redemption requests in accordance with 
the contract, its prospectus and the Investment Company Act.
    Furthermore, NASD Rule 2820(g) prohibits associated persons of a 
member from accepting any compensation from any person other than the 
member with which the person is associated, in connection with the sale 
and distribution of variable contracts. However, there is an exception 
permitting arrangements where a non-member pays compensation directly 
to associated person, provided that the member agrees to the 
arrangement, and relies on appropriate rules or guidance from the 
Commission that apply to the specific fact situation of the 
arrangement, and the relevant associated persons treat the funds as 
compensation. Additionally, it prohibits associated person from 
accepting securities as compensation, limits the payment or receipt of 
non-cash compensation (such as gifts, entertainment, training or 
education meetings and sales contests), and requires that certain 
records be kept. Currently, this provision requires a member to keep a 
record of all compensation received by the member or its associated 
persons from ``offerors,'' other than small gifts and entertainment 
permitted by the rule, and include the nature of, and ``if known,'' the 
value of any non-cash compensation received.
    The proposed rule change would renumber NASD Rule 2820 as FINRA 
Rule 2320 in the Consolidated FINRA Rulebook and eliminate the phrase 
``if known'' regarding the value of non-cash compensation. The deletion 
would require members to estimate the actual value of non-cash 
compensation for which a receipt (or similar documentation) assigning a 
value is not available and would be more consistent with the non-cash 
compensation recordkeeping requirements regarding public offerings of 
securities (FINRA Rule 5110(i)(2)) and direct participation programs 
(NASD Rule 2810(c)(2)).\7\ As stated in the Notice, FINRA will announce 
the implementation date of the proposed rule change in a Regulatory 
Notice.
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    \7\ FINRA has proposed to transfer NASD Rule 2810 without 
material change into the Consolidated FINRA Rulebook as FINRA Rule 
2310. See SR-FINRA-2009-016.
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III. Summary of Comments and FINRA's Response

    As previously noted, the Commission received one comment letter on 
the proposed rule change.\8\ While expressing general approval of the 
proposed rule change, the commenter expressed concern and sought 
clarification about the proposed change regarding the rule's non-cash 
compensation provision. The commenter requested that FINRA confirm that 
it would respect a member's reasonable estimate of the value of non-
cash compensation. Specifically, the commenter asserted that, because 
the proposed ``estimation'' standard would be inherently imprecise, it 
would undoubtedly result in members valuing similar forms of non-cash 
compensation differently. As such, the commenter requested that a 
member's estimate of value be respected, unless it is patently 
unreasonable.
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    \8\ See CAI Comment Letter, supra note 5.
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    In response, FINRA stated that members would be required to use 
good faith when estimating the value of non-cash compensation if a 
receipt or similar documentation is not available. FINRA acknowledged 
that, while there could be some differences regarding firms' estimates, 
FINRA believes that a good faith standard should help ensure that such 
differences are not significant, or can be distinguished based on 
underlying facts and circumstances. In addition, as stated in the 
Notice, the change would be consistent with the recordkeeping 
requirements for non-cash compensation received in connection with 
public offerings of securities \9\ and the offer or sale of direct 
participation programs.\10\
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    \9\ See FINRA Rule 5110(i)(2).
    \10\ See NASD Rule 2810(c)(2). See also note 7.
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    The commenter also requested no less than 180 days to implement the 
proposed rule change. It noted that members would need this amount of 
time to adopt new policies and procedures, modify or create 
computerized and/or other compensation tracking systems, notify and 
educate their registered representatives, and adjust their training 
programs to ensure compliance with the new requirements.
    In response, FINRA stated that its general protocol is to announce 
the effective dates for new FINRA rules in Regulatory Notices that are 
published every other month. Each Regulatory Notice announces the 
effective dates of the new FINRA rules approved by the Commission 
during the preceding two months. The new FINRA rules' effective dates 
generally are sixty days following publication of the relevant 
Regulatory Notice. Accordingly, FINRA would announce the effective date 
of the approved rule change, FINRA Rule 2320, in a Regulatory Notice to 
be published on or about August 17, 2009, which would establish an 
effective date for the rule on or about October 19, 2009. FINRA 
believes that an implementation period consistent with this general 
protocol would be adequate to implement the proposal, considering that 
the changes proposed are minor.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act, and the rule and 
regulations thereunder that are applicable to a national securities 
association,\11\ and in particular, with Section 15A(b)(6) of the 
Act,\12\ which requires, among other things, that FINRA rules 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. FINRA's adoption of NASD 
2820 with minor changes as FINRA Rule 2320 in the Consolidated FINRA 
Rulebook will continue the regulation of members in connection with the 
sale and distribution of variable contracts. Requiring members to 
assign a value for non-cash compensation based on a good faith estimate 
should make members' records more complete. The Commission also notes 
that a good faith standard should encourage reasonable estimates of the 
value of non-cash compensation. The Commission believes FINRA responded 
appropriately to the issues raised by the commenter.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3(b)(6).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the

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proposed rule change (SR-FINRA-2009-023) be, and hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-14148 Filed 6-16-09; 8:45 am]
BILLING CODE 8010-01-P