Document ID: SEC-2009-0555-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt FINRA Rule 2320 in the Consolidated FINRA Rulebook
Posted Date: 2009-04-21T04:00Z

[Federal Register: April 21, 2009 (Volume 74, Number 75)]
[Notices]               
[Page 18269-18271]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ap09-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59762; File No. SR-FINRA-2009-023]

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

April 14, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that 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 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been 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 adopt NASD Rule 2820 (Variable Contracts of 
an Insurance Company) as a FINRA rule in the consolidated FINRA 
rulebook with minor changes. The proposed rule change would renumber 
NASD Rule 2820 as FINRA Rule 2320 in the consolidated FINRA rulebook.
    The text of the proposed rule change is available on FINRA's Web 
site at (http://www.finra.org), at the principal office of FINRA, and 
at the Commission's Public Reference Room.

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
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt NASD 
Rule 2820 into the Consolidated FINRA Rulebook with minor changes 
discussed below. The proposed rule change would renumber NASD Rule 2820 
as FINRA Rule 2320.
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    \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).
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    NASD Rule 2820 regulates members in connection with the sale and 
distribution of variable life insurance and variable annuity contracts 
(together, ``variable contracts''). It prohibits members from 
participating in the offer or sale of a variable contract unless 
certain conditions are met. Members may not participate in the offering 
or sale of a variable contract on any basis other than at a value to be 
determined following receipt of payment in accordance with the 
provisions of the contract, the prospectus and the Investment Company 
Act. Members 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. NASD Rule 2820 also 
requires selling agreements between principal underwriters of variable 
contracts and selling broker-dealers. Such agreements must provide that 
the sales commission will be

[[Page 18270]]

returned to the issuer if the contract is tendered for redemption 
within seven business days after acceptance. In addition, 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.
    NASD Rule 2820(g) regulates member compensation in connection with 
the sale and distribution of variable contracts, including both cash 
and non-cash compensation arrangements. Generally, 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. The rule contains an exception to allow 
arrangements where a non-member pays compensation directly to 
associated persons, provided that the member agrees to the arrangement, 
and relies on appropriate rules or guidance from the SEC that apply to 
the specific fact situation of the arrangement, and the relevant 
associated persons treat the funds as compensation.\4\ NASD Rule 
2820(g) also prohibits associated persons 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 certain records to be kept.
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    \4\ For example, the SEC staff has issued a number of ``no-
action'' letters permitting, among other things, associated persons 
of members to receive compensation for the sale of variable contract 
products from a licensed corporate insurance agent acting on behalf 
of one or more insurance companies. See First of America Brokerage 
Service, Inc. (Sept. 28, 1995) (noting that the staff will no longer 
respond to letters regarding networking agreements between 
registered broker-dealers, insurance companies, and insurance 
agencies in connection with the offer and sale of Insurance 
Securities unless the [sic] present novel or unusual issues); FIMCO 
Securities, Inc. (July 16, 1993); Traditional Equinet Corporation of 
New York (January 8, 1992).
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    The rule's non-cash compensation provision requires a member to 
keep records of all compensation received by the member or its 
associated persons from ``offerors'' (generally insurance companies and 
their affiliates), other than small gifts and entertainment permitted 
by the rule. Currently, this provision requires the records to include 
the nature of, and ``if known,'' the value of any non-cash compensation 
received. FINRA proposes to modify this requirement by deleting the 
phrase ``if known'' regarding the value of non-cash compensation. The 
proposed change to Rule 2820 would require members to determine and 
keep records of the value of non-cash compensation received from 
offerors in all cases. This change would make the provision 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)).\5\ Members would 
be permitted to estimate the actual value of non-cash compensation for 
which a receipt (or similar documentation) assigning a value is not 
available.
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    \5\ 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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    The proposed rule change also would make certain non-substantive, 
technical changes to the rule to reflect FINRA's corporate name and the 
new format of the Consolidated FINRA Rulebook.
    Over the past several years, variable life insurance products have 
continued to be of interest to members and the investing public. FINRA 
has noted the growth in sales and popularity of variable life insurance 
products, and has published information, including several Notices, 
addressing regulatory concerns regarding these products.\6\
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    \6\ See, e.g., the following Notices to Members: 98-75 (SEC 
Approves Rule Change Relating to Non-Cash Compensation for Mutual 
Funds and Variable Products) (Sept. 1998); 99-103 (SEC Approves Rule 
Change Relating to Sales Charges for Investment Companies and 
Variable Contracts) (Dec. 1999); 00-44 (NASD Reminds Members of 
Their Responsibilities Regarding the Sale of Variable Life 
Insurance) (July 2000).
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    FINRA believes that the provisions of NASD Rule 2820 continue to be 
an important tool in the effective regulation of variable contracts. 
Accordingly, for the reasons set forth above, FINRA recommends that 
NASD Rule 2820 be transferred with minor changes into the Consolidated 
FINRA Rulebook as FINRA Rule 2320. As noted above, FINRA will announce 
the implementation date of the proposed rule change in a Regulatory 
Notice to be published no later than 90 days following Commission 
approval.
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. FINRA believes that the proposed rule change will 
continue to allow FINRA to effectively regulate members in connection 
with the sale and distribution of variable contracts. The proposed rule 
change makes minor changes to a rule that has proven effective in 
meeting statutory mandates.
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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

    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-2009-023 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2009-023. 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

[[Page 18271]]

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 between the hours of 10 a.m. and 3 p.m. Copies of the 
filing will also 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 No. SR-
FINRA-2009-023 and should be submitted on or before May 12, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-9058 Filed 4-20-09; 8:45 am]

BILLING CODE 8010-01-P