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provide for the transactions described I. Self-Regulatory Organization’s ember has a reasonable basis to believe herein, the requested exemptions from Statement of the Terms of Substance of that. Sections 9(a), 13(a), 15(a), and 15(b) of the Proposed Rule (A) The customer has been informed the 1940 Act and Rules 6e–2(b)(15) and NASD is proposing a new rule, NASD of the material features of a deferred 6e–3(T)(b)(15) thereunder, in Rule 2821, that would set forth variable annuity, such as the potential accordance with the standards of recommendation requirements surrender period and surrender charge; Section 6(c) of the 1940 Act, are in the (including a suitability obligation), potential tax penalty if the customer public interest and consistent with the principal review and approval sells or redeems the deferred variable protection of investors and the purpose annuity before he or she reaches the age requirements, and supervisory and 1 fairly intended by the policy and training requirements tailored of 59 ⁄2; mortality and expense fees; provisiosn of the 1940 Act. specifically to transactions in deferred investment advisory fees; potential charges for and features of riders; the For the Commission, by the Division of variable annuities. Below is the Investment Management, pursuant to amended text of the proposed rule. insurance and investment components of a deferred variable annuity; and delegated authority. * * * * * J. Lynn Taylor, market risk; 2821. Members’ Responsibilities (B) The customer would benefit from Assistant Secretary. Regarding Deferred Variable Annuities the unique features of a deferred [FR Doc. 06–5747 Filed 6–27–06; 8:45 am] variable annuity (e.g., tax-deferred BILLING CODE 8010–01–M (a) General Considerations growth, annuitization or a death (1) Application benefit); and This Rule applies to the purchase or (C) The particular deferred variable SECURITIES AND EXCHANGE annuity as a whole, the underlying COMMISSION exchange of a deferred variable annuity and the subaccount allocations. This subaccounts to which funds are Rule does not apply to reallocations of allocated at the time of the purchase or [Release No. 34–54023; File No. SR–NASD– subaccounts made or to funds paid after exchange of the deferred variable 2004–183] the initial purchase or exchange of a annuity and riders and similar product deferred variable annuity. This Rule enhancements, if any, are suitable (and, Self-Regulatory Organizations: in the case of an exchange, the National Association of Securities also does not apply to deferred variable annuity transactions made in transaction as a whole also is suitable) Dealers, Inc.; Notice of Filing for the particular customer based ont he Amendment No. 2 to Proposed Rule connection with any tax-qualified, employer-sponsored retirement or information required by paragraph (b)(2) Relating to Sales Practice Standards of this Rule. and Supervisory Requirements for benefit plan that either is defined as a ‘‘qualified plan’’ under Section These determinations shall be Transactions in Deferred Variable documented and signed by the Annuities 3(a)(12)(C) of the Securities Exchange Act of 1934 or meets the requirements associated person recommending the June 21, 2006. of Internal Revenue Code Sections transaction. (2) Prior to recommending the Pursuant to section 19(b)(1) of the 403(b), 457(b) or 457(f), unless, in the case of any such plan, a member makes purchase or exchange of a deferred Securities Exchange Act of 1934 variable annuity, a member or person (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 recommendations to an individual plan participant regarding a deferred variable associated with a member shall make notice is hereby given that on December reasonable efforts to obtain, at a 14, 2004, NASD filed with the Securities annuity, in which case the Rule would apply as to the individual plan minimum, information concerning the and Exchange Commission (‘‘SEC’’ or customer’s age, annual income, ‘‘Commission’’), the proposed rule. participant to whom the member makes such recommendations. financial situation and needs, NASD filed amendment No. 1 on July 8, investment experience, investment 2005, which replaced and superseded (2) Creation, Storage and Transmission objectives, intended use of the deferred the text of the original rule filing. The of Documents variable annuity, investment time proposed rule, as amended by For purposes of this Rule, documents horizon, existing investment and life Amendment No. 1, was published for insurance holdings, liquidity needs, comment in the Federal Register on July may be created, stored and transmitted 3 in electronic or paper form, and liquid net worth, risk tolerance, tax 21, 2005. The Commission received status and such other information used approximately 1500 comments on the signatures may be evidenced in 4 electronic or other written form. or considered to be reasonable by the proposal. NASD filed Amendment No. member or person associated with the 2 on May 4, 2006, which addressed the (3) Definitions member in making recommendations to comments and proposed responsive For purposes of this Rule, the term customers. amendments. Amendment No. 2 is ‘‘registered principal’’ shall mean a (c) Principal Review and Approval described in Items I, II and III below, person registered as a General Securities which Items have been prepared by Sales Supervisor (Series 9/10), a General (1) No later than two business days NASD. The Commission is publishing Securities Principal (Series 24) or an following the date when a member or this notice to solicit comments on Investment Company Products/Variable person associated with a member Amendment No. 2 to the proposed rule Contracts Principal (Series 26), as transmits a customer’s application for a from interested persons. applicable. deferred variable annuity to the issuing insurance company for processing and 1 15 U.S.C. 78s(b)(1). (b) Recommendation Requirements irrespective of whether the transaction 2 17 CFR 240.19b–4. (1) No member or person associated has been recommended, a registered 3 See Exchange Act. Re. No. 52046A (July 19, with a member shall recommend to any principal shall review and determine 2005); 70 FR 42126 (July 21, 2005) (SR–NASD– 2004–183). customer the purchase or exchange of a whether he or she approves of the 4 Approximately 1300 of these comments were deferred variable annuity unless such purchase or exchange of the deferred virtually identical. member or person associated with a variable annuity. In reviewing the

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purchase or exchange of a deferred principal to consider those items on members for transactions in deferred variable annuity, the registered enumerated in paragraph (c) of this variable annuities.6 In general, NASD’s principal shall consider. Rule, as well as whether the associated guidelines on deferred variable annuity (A) The extent to which the customer person effecting the transaction has a transactions, developed with substantial would benefit from the unique features particularly high rate of effecting input from industry participants and of a deferred variable annuity (e.g., tax- deferred variable annuity exchanges. published in Notice to Members 99–35, deferred growth, annunciation or a served as the basis for the proposed (e) Training death benefit); rule. (B) The extent to which the Members shall develop and document The proposed rule would apply to the customer’s age or liquidity needs make specific training policies or programs purchase or exchange of a deferred the investment inappropriate; reasonably designed to ensure that variable annuity and the initial (C) The extent to which the amount of associated persons who effect and subaccount allocations.7 The proposed money invested would result in an registered principals who review rule would not apply to reallocations of undue concentration in a deferred transactions in deferred variable subaccounts or to funds paid after the variable annuity or deferred variable annuities comply with the requirements initial purchase or exchange of a annuities in the context of the of this Rule and that they understand customer’s overall investment portfolio; the material features of deferred variable 6 A variable annuity, in general, is a cotnract and annuities, including those described in between an investor and an insurance company (D) If the transaction involves an whereby the insurance company promises to make paragraph (b)(1)(A) of this Rule. periodic payments to the contract owner or exchange of a deferred variable annuity, * * * * * beneficiary, starting immediately (an immediate the extent to which (i) the customer variable annuity) or at some future time (a deferred would incur a surrender charge, be II. Self-Regulatory Organization’s variable annuity). See Joint SEC and NASD Staff subject to the commencement of a new Statement of the Purpose of, and Report on Broker-Dealer Sales of Variable Insurance Products (June 2004) (‘‘Joint Report’’); NASD Notice surrender period, lose death or existing Statutory Basis for, the Proposed Rule to Members 99–35 (May 1999). The proposed rule benefits, or be subject to increased fees In its filing with the Commission, focuses exclusively on transactions in deferred or charges (such as mortality and NASD included statements concerning variable annuities. NASD recognizes that expense fees, investment advisory fees transactions involving immediate variable annuities the purpose of and basis for the have begun to increase recently, and NASD will and charges for riders and similar proposed rule and discussed the continue to monitor sales practices relating to these product enhancements), (ii) the comments it received on the proposed products. Currently, however, deferred variable customer would benefit from any annuities make up the majority of variable annuity rule. The text of these statements may transactions. Moreover, to date, most of the potential product enhancements and be examined at the places specified in problems associated with transactions in variable improvements, and (iii) the customer’s Item IV below. NASD has prepared annuities that NASD has uncovered involve the account has had another deferred summaries, set forth in sections A, B, purchase or exchange of deferred variable annuities. variable annuity exchange within the and C below, of the most significant 7 NASD notes that the proposed rule focuses on preceding 36 months. customer purchases and exchanges of deferred aspects of such statements. variable annuities, areas that, to date, have given These considerations shall be rise to many of the problems NASD has uncovered. documented and signed by the A. Self-Regulatory Organization’s The proposed rule would thus cover a standalone registered principal who reviewed and Statement of the Purpose of, and purchase of a deferred variable annuity and an approved the transaction. Statutory Basis for, the Proposed Rule exchange of one deferred variable annuity for another for another deferred variable annuity. For (2) When a member or a person 1. Purpose purposes of the proposed rule, an ‘‘exchange’’ of a associated with a member has product other than a deferred variable annuity recommended the purchase or exchange a. Background (such as a fixed annuity) for a deferred variable of a deferred variable annuity, a On December 14, 2004, NASD filed annuity would be covered by the proposed rule as a ‘‘purchase.’’ The proposed rule would not cover registered principal, taking into account with the Commission proposed Rule customer sales of deferred variable annuities, the underlying supporting 2821 (SR–NASD–2004–183). NASD including the sale of a deferred variable annuity in documentation described in paragraph filed with the Commission Amendment connection with an ‘‘exchange’’ of a deferred (b)(2) of this Rule, shall review, No. 1 to the proposed rule on July 8, variable annuity for another product (such as a fixed annuity). However, recommendations of determine whether to approve and, if 2005. The Commission published the customer sales of deferred variable annuities are approved, sign the suitability proposed rule, as amended by fully and adequately covered by Rule 2310, NASD’s determination document required by Amendment No. 1, in the Federal general suitability rule. Rule 2310 requires that, paragraph (b)(1) of this Rule no later 5 when recommending that a customer purchase, sell Register on July 21, 2005. The or exchange a security, an associated person than two business days following the comment period closed on September determine whether the recommendation is suitable date when the member or person 19, 2005. Based on comments received for the customer. In general, deferred variable associated with the member transmits in response to the publication of the annuities are suitable only as long-term investments and are inappropriate short-term trading vehicles. the customer’s application for a deferred proposed rule in the Federal Register, As part of any analysis under Rule 2310 regarding variable annuity contract to the issuing NASD filed Amendment No. 2 to SR– the suitability of a recommendation that a customer insurance company for processing. NASD–2004–183 to address the sell a deferred variable annuity, the associated comments and to make certain changes person must consider significant tax consequences, (d) Supervisory Procedures surrender charges and loss of death or other to the proposed rule as discussed benefits. As NASD emphasized in a Regulatory & In addition to the general supervisory herein. Compliance Alert in 2002, entitled ‘‘Reminder— and recordkeeping requirements of Suitablity of Variable Annuity Sales,’’ members and Rules 3010, 3012, 3013 and 3110, a b. Proposed Rule their associated persons ‘‘must keep in mind that member must establish and maintain As described in the original and the suitability rule applies to any recommendation to sell a variable annuity regardless of the use of specific written supervisory procedures amended rule filings, NASD is the proceeds, including situations where the reasonably designed to achieve proposing new NASD Rule 2821, which member recommends using the proceeds to compliance with the standards set forth would impose specific sales practice purchase an unregistered product such as an equity- in this Rule. In particular, the member indexed annuity. Any recommendation to sell the standards and supervisory requirements variable annuity must be based upon the financial must implement procedures to screen situation, objectives and needs of the particular the transaction and require a registered 5 See supra note 3. investor.’’

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deferred variable annuity. However, to Members announcing Commission response to comments, NASD stated other NASD rules would continue to approval. that the rule should not apply to plan- apply. For instance, NASD’s suitability level decisions. In NASD’s view, the c. Comments on the Proposed Rule rule, Rule 2310, would continue to factors that can be important to apply to any recommendations to The Commission received nearly 1500 understanding the appropriateness of a reallocate subaccounts.8 comment letters in response to the recommendation to a sponsor, trustee or The proposed rule also would not publication of the proposed rule in the custodian of a qualified retirement or apply to sales of deferred variable Federal Register. These comments are benefit plan can be distinct from those annuities to certain tax-qualified, available on the Commission’s Internet that are important regarding the employer-sponsored retirement or Web site (http://www.sec.gov/rules/ determination of the appropriateness of benefit plans. It would, however, apply sro.shtml). A summary of the comments a recommendation to a retirement-plan if a member makes recommendations to and NASD’s response is set forth below. participant. individual plan participants regarding a While some commenters expressed One commenter suggested that, in 15 deferred variable annuity.9 In addition, support for the proposed rule, most addition to transactions in connection 16 the rule would apply to the purchase or opposed it. Reasons for their with ‘‘qualified plans’’ as defined in exchange of deferred variable annuities opposition varied. Several commenters Section 3(a)(12)(C) of the Act and plans to fund individual retirement accounts stated that the proposal should be that meet the requirements of Internal (IRAs). In part, NASD determined not to withdrawn, viewing it as unnecessary Revenue Code Sections 403(b) and exclude IRAs from the scope of the and arguing that NASD has not 457(b), the rule should not apply to 17 proposed rule because, unlike demonstrated a need for it. While transactions with plans that meet the transactions for tax-qualified, employer- NASD disagreed with the suggestion requirements of Section 457(f) of the sponsored retirement or benefit plans, that there must be demonstrable harm Internal Revenue Code, unless the investors funding IRAs are not limited before it can engage in rulemaking, in its member makes a recommendation to an to the options provided by a plan.10 response to comments it also noted the individual plan participant.19 NASD The proposed rule has four main numerous Notices to Members, agreed and proposes to exclude provisions: (1) Requirements governing Regulatory & Compliance Alerts and transactions in connection with these recommendations, including a Investor Alerts that it has issued plans from the rule. Another commenter suitability obligation, specifically regarding deferred variable annuities. argued that the rule should not apply to tailored to deferred variable annuity NASD also noted that notwithstanding transactions with individual plan transactions; 11 (2) principal review and those efforts, a recent joint review with participants if the only funding vehicle approval obligations; 12 (3) a specific the Commission, NASD examinations for a tax-qualified employer sponsored and NASD enforcement actions indicate requirement for members to establish plan is a deferred variable annuity.20 NASD’s prior efforts have not been and maintain written supervisory NASD disagreed and in its response to sufficiently effective at curbing procedures reasonable designed to comments stated that the proposed rule problems in this area. achieve compliance with the standards would apply if a registered set forth in the proposed rule; 13 and (4) i. Comments on Proposed Rule representative recommends the deferred a targeted training requirement for 2821(a)(1)—Application variable annuity in the plan to an members’ associated persons, including Numerous commenters argued that individual plan participant. It noted, 14 their registered principals. the rule should not apply to tax- however, that only communications NASD will announce the effective qualified, employer-sponsored constituting a ‘‘recommendation’’ would date of the proposed rule in a Notice to retirement or benefit plans. One trigger application of the rule. Members to be published no later than commenter believed, however, that the A number of commenters asked 60 days following Commission rule should apply to those plans in NASD to clarify that the rule would not approval. The effective date will be 180 which the plan sponsor, trustee, or apply to premiums paid into a deferred days following publication of the Notice custodian is either ‘‘unsophisticated’’ or variable annuity after the initial primarily relied on the recommendation purchase and to subsequent purchase 8 Indeed, except to the extent that specific of the member.18 NASD disagreed. In its payments.21 As it noted in its response provisions in the proposed rule would govern, or to comments, NASD has modified the unless the context otherwise requires, the provisions of the by-laws and rules and all other 15 See, e.g., North American Securities proposed rule to specify that it ‘‘does interpretations and policies of the NASD Board of Administrators Association (‘‘NASAA’’), Patricia D. not apply * * * to funds paid after Governors would be applicable to transactions in Struck, President and Wisconsin Securities the initial purchase or exchange.’’ deferred variable annuities. Administrator (9/20/05); Pace Investor Rights One commenter asserted that the Project (‘‘Pace’’), Barbara Black, Director (9/19/05); 9 In other words, the proposed rule would apply NASD has no basis for excluding an as to the individual plan participants to whom the and Public Investors Arbitration Bar Association member makes recommendations, but would not (‘‘PIABA’’), Rosemary J. Shockman, President (9/9/ investor’s reallocation of his or her 05). apply as to the plan sponsor, trustee or custodian subaccounts from the scope of the 16 regarding the plan-level selection of investment See, e.g., America Council of Life Insurers proposed rule.22 This commenter vehicles and options for such plans. (‘‘ACLI’’), Carl B. Wilkerson, Vice President & Chief Counsel (9/19/05); Committee of Annuity Insurers believed that specific attention should 10 NASD notes as well that a deferred variable (‘‘CAI’’), W. Thomas Conner and Eric A. Arnold, be paid to the broker’s obligation to annuity purchased to fund an IRA does not provide Sutherland Asbill & Brennan LLP (9/19/05), oversee and reallocate sub-accounts any additional tax deferred treatment of earnings National Association for Variable Annuities beyond the treatment provided by the IRA itself. (‘‘NAVA’’), Michael P. DeGeorge, General Counsel Accordingly, where a customer is purchasing a (9/19/05); Securities Industry Association (‘‘SIA’’), 19 NAVA. deferred variable annuity to fund an IRA, firms Ira D. Hammerman, Senior Vice President and 20 Lincoln Investment Planning (‘‘Lincoln’’), must ensure that the deferred variable annuity’s General Counsel (9/19/05); T. Rowe Price Deirdre B. Koerick, Vice President (9/19/05). features other than tax deferral make the purchase Investment Securities, Inc. (‘‘T. Rowe Price’’), 21 CAI; Massachusetts Mutual Life Insurance of the deferred variable annuity for the IRA Henry H. Hopkins, Darrell N. Braman and Sara Company (‘‘Mass Mutual’’); Jennifer B. Sheehan, appropriate. McCafferty (9/19/05); and Wachovia Securities, LLC Assistant Vice President and Counsel (9/19/05); 11 See Proposed Rule 2821(b). (‘‘Wachovia’’), Ronald C. Long, Senior Vice NAVA; and Northwestern Mutual Investment 12 See Proposed Rule 2821(c). President (9/19/05). Services (‘‘NMIS’’), Daniel A. Riedl, Senior Vice 13 See Proposed Rule 2821(d). 17 See, e.g., ACLI; CAI; NAVA; and SIA. President and Chief Operating Officer (9/16/05). 14 See Proposed Rule 2821(e). 18 NASAA. 22 PIABA.

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because brokers do not pay attention or facto requirement to provide written modification would not mean that a fail to follow-up on a customer’s disclosure to customers 27 Commenters firm and its associated person may subaccount investments, often allowing asserted that this disclosure along with ignore product-specific features. It noted these accounts to flounder in unsuitable the other disclosures already provided that the firm and its associated person investments. NASD declined to take this to investors in deferred variable must be capable of discussing the suggestion, but noted that NASD Rule annuities would be redundant and specific features of the deferred variable 2310 continues to apply to a customer’s would overwhelm investors.28 annuity under consideration, and must subaccount investments. A few commenters supported a know these features in order to Another commenter stated that the mandatory plain English summary and adequately perform a suitability rule should also apply to the sale of an industry-wide or product specific analysis. 23 immediate variable annuities. In Q&A that would answer basic questions The proposed rule would have response, NASD stated that the majority about fees, taxes, liquidity and other required a registered representative to 29 of variable annuity transactions issues. While one commenter document and sign the determinations currently are in deferred variable requested that NASD wait and consider that he or she has made pursuant to the annuities, and that most of the problems the proposed rule after the Commission proposed rule’s recommendation NASD has uncovered have been acts on its ‘‘point of sale’’ rule requirements. Some commenters 30 associated with the purchase or proposal. another stated that the criticized this requirement, noting that exchange of deferred variable annuities. ‘‘point of sale’’ disclosure form would neither the rule nor the release However, NASD also stated that it will not be a substitute for a ‘‘plain English’’ described what the documentation 31 continue to monitor sales practices risk disclosure. should look like or how detailed it relating to immediate variable annuities. Some commenters opined that the should be.34 Another commenter rule would be more effective if it ii. Comments on Proposed rule supported this requirement, opining required a registered representative to 2821(b)—Recommendation that it would serve the dual purpose of direct the customer to the variable Requirements creating a regulatory paper trail and annuity synopsis, fee table and risk reminding NASD members of the (a) General Comments 32 disclosure in the prospectus. Others serious analytical undertaking involved Several commenters urged NASD to argued that if NASD and the in recommending a deferred variable eliminate the specific suitability Commission believe that the prospectus annuity.35 After considering the requirements from paragraph (b) of the is inadequate, the solution would be to comments, NASD has determined to proposed rule.24 Some commenters revise the prospectus rather than to retain the requirement. asserted that deferred variable annuities require additional disclosures.33 are too varied and complex to mandate While noting in its response to (c) Comments on Proposed Rule specific criteria for determining comments that numerous commenters 2821(b)(1)(B)—Long-Term Investment suitability.25 Others stated that NASD sought to eliminate this provision, Objective would need to clarify the level of NASD modified it to no longer require product-specific disclosure. As revised, The rule, as originally proposed, knowledge that would be sufficient to would have required members support a registered representative’s the proposed rule would require a registered representative to have a recommending a deferred variable ‘‘reasonable basis’’ for believing the annuity to have a reasonable belief that standards of paragraph (b) have been reasonable belief that the customers has been informed of the material features of the customers had a long-term met with respect to a particular investment objective. Commenters customer.26 deferred variable annuities in general. NASD cautioned, however, that this asserted that an investor’s time horizon (b) Comments on Proposed Rule does not have to be long-term in all 2821(b)(1)(A)—Deferred Variable 27 See, e.g., American Bankers Insurance circumstances for a deferred variable Annuity’s Material Features Association/ABA Securities Association (‘‘ABIA/ annuity to be suitable, noting that some The rule, as originally proposed, ABASA’’), Beth L. Climo, Executive Director deferred variable annuities have features (9/20/06); ACLI; A.G. Edwards & Sons, Inc. (‘‘A.G. that can benefit a customer regardless of would have required members to have Edwards’’), Thomas M. Vacovino, Vice President a reasonable basis to believe that the (9/20/05); HD Vest; ING; Intersecurities; NAVA; age and potential for a long term 36 customer has been informed of the SIA; and Wachovia. investment. Some commenters stated material features of a specific deferred 28 AALU/NAIFA; ACLI; Intersecurities; NAVA; that an investor’s time horizon should variable annuity before recommending SIA; and World Group. Commenters pointed out be one factor in a suitability analysis, that investors already receive a prospectus and but that a deferred variable annuity it. Commenters criticized this provision, state-mandated disclosures and may in the future arguing that it would amount to a de receive an SEC-mandated point of sale disclosure should not be deemed per se unsuitable form. based on that factor alone.37 23 NASAA. 29 MWA Financial Services (‘‘MWA’’), Pamela S. 24 See, e.g., Association for Advanced Life Fritz, Chief Compliance Officer (3/18/05); NASAA; 34 See, e.g., ACLI; HD Vest; ING; NAVA; and SIA. Underwriting/National Association of Insurance and Pace.l 35 Pace. and Financial Advisers (‘‘AALU/NAIFA’’), Gary A. 30 National Planning Holdings, Inc. (‘‘National 36 A.G. Edwards; CAI; Fintegra Financial Sanders, Senior Counsel (9/19/05); ACLI; Planning’’), M. Shawn Dreffein, President and Chief Solutions (‘‘Fintegra’’), Kenneth M. Cherrier, Chief Intersecurities, Inc. (‘‘Intersecurities’’), Thomas R. Executive Officer (9/9/05). For details regarding the Compliance Officer (8/11/05); HD Vest; ING; Moriarty, President (9/16/05); NAVA; SIA; and Commission’s point of sale rule proposal, see, Intersecurities; Lincoln; NMIS; NAVA; New York World Group Securities, Inc. (‘‘World Group’’); Securities Exchange Act Release No. 49148, Life Insurance and Annuity Corporation (‘‘NY Leesa M. Easley, Chief Legal Officer (9/8/05). (January 29, 2004), 69 FR 6438 (February 10, 2004) Life’’), John R. Meyer, Senior Vice President (9/19/ 25 HD Vest Financial Services (‘‘HD Vest’’), Roger and Securities Exchange Act Release No. 51274 05); SIA; United Planners Financial Services of C. Ochs, President (9/20/05); Investment Company (Feb. 28, 2005), 70 FR 10521 (March 1, 2005). America (‘‘United Planners), Julie Gebert, Vice Institute (‘‘ICI’’), Frances M. Stadler, Deputy Senior Securities Exchange Act Release No. 51274 (Feb. 28, President and Chief Compliance Officer (9/19/06); Counsel (9/19/06); and T. Rowe Price. 2005), 70 FR 10521 (March 1, 2005) (‘‘Supplemental and World Group.’’ 26 Associated Securities Corporation (‘‘Associated Release’’). 37 Fintegra; Financial Services Institute (‘‘FSI’’), Securities’’), Denise M. Evans, General Counsel 31 Pace. Dale E. Brown, Executive Director (9/19/05); Great (9/19/05); Lincoln; and Pacific Select Distributors, 32 ABIA./ABASA; ACLI; A.G. Edwards; HD Vest; American Advisors (‘‘Great American’’), Shawn M. Inc. (‘‘Pacific Distributers’’), John L. Dixon, ING; NAVA; SIA; Wachovia; and World Group. Mihal, Chief Compliance Officer (9/19/05); HD President (9/16/05). 33 ACLI and World Group. Continued

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In response to comments, NASD require firms to perform a side-by-side determined to retain this paragraph with deleted this provision from paragraph comparison of a deferred variable limited revisions. (b) of the proposed rule and all annuity with other investment vehicles iii. Comments on Proposed Rule references to long-term investment or require firms to prove that the 2821(c)—Principal Review and objectives in paragraph (c) (‘‘Principal customer needed the deferred variable Approval Review and Approval’’) and paragraph annuity to the exclusion of all other (d) (‘‘Supervisory Procedures’’). In investments. Instead, NASD intends to The rule, as originally proposed, addition, NASD stated that in general, require firms to analyze whether the would have required principals to deferred variable annuities are customer would benefit from the unique review and approve the purchase or appropriate only for customers with features of a deferred variable annuity. exchange of a deferred variable annuity long-term investment objectives who To clarify this, NASD eliminated the before the customer’s application was intend to take advantage of tax-deferred references in the proposed rule to transmitted to the issuing insurance accumulation and annuitization. ‘‘need’’ and ‘‘as compared with other company for processing, regardless of Although NASD recognized that some investment vehicles.’’ As revised, the whether the transaction was deferred variable annuities have shorter rule would require a member or recommended. holding periods and smaller surrender associated person to have a reasonable (a) General Comments fees than traditional deferred variable basis to believe that ‘‘the customer annuities, it stated that a deferred would benefit from the unique features Several commenters viewed the variable annuity is suitable for an of a deferred variable annuity (e.g., tax- proposed principal review requirement investor without a long-term investment deferred growth, annuitization or a as unduly duplicative of NASD Rule 48 objective only in rare cases. NASD also death benefit)’’. 3110. Some stated that the proposed ‘‘strongly cautioned’’ firms to scrutinize timing requirement and additional any deferred variable annuity (e) Comments on proposed Rule standards for principal review would be transaction involving customers without 2921(b)(2)—Customer Information disruptive for firms that use automated long-term investment objectives and to As originally proposed, the rule systems to approve transactions that carefully document any analysis in would have required members to make meet established criteria,49 and one favor of recommending such a reasonable efforts to obtain from a suggested requiring manual principal transaction. customer a variety of information, review only when an application does not meet a firm’s standard criteria.50 (d) Comments on Proposed Rule including age, financial situation, liquid 2821(b)(1)(C)—Need for the Product as net worth and intended use of the (b) Comments on Proposed Rule Compared With Other Investment deferred variable annuity. Some 2821(c)(1)—Timing of Principal Review commenters urged NASD to delete this Vehicles Two commenters supported the provision, stating that NASD Rules 2310 proposed provisions relating to the As originally proposed, the rule and 3110, as well as Rule 17a– timing of principal review, stating that would have required members to have 3(17)(i)(A) of the Act, should govern the it would ensure that a principal would a reasonable belief that the customer information that members are required have sufficient time for a complete had a need for the deferred variable to gather in making recommendations to review while providing greater annuity as compared with other purchase or exchange deferred variable investment vehicles. Many commenters assurances that unsuitable transactions annuities.43 criticized this provision.38 Some stated would not be consummated.51 Commenters also criticized a number that while customers may ‘‘benefit’’ Numerous commenters, however, of the terms used in this provision. from a deferred variable annuity, no objected to the principal review Some viewed the terms ‘‘financial customer ‘‘needs’’ one.39 Some viewed deadline.52 Some were concerned that situation’’ and ‘‘liquid net worth’’ as the standard as subjective and members would be subject to liability vague and redundant.44 Others overreaching, stating that it would for market changes during the delay for questioned what constitutes a legitimate require a determination that a deferred supervisory review.53 Others stated that intended use of a deferred variable variable annuity is the sole, unique the timing deadline would require annuity 45 and whether ‘‘other insurance investment to satisfy the needs of a costly reprogramming of broker-dealers’ holdings’’ would be limited to life customer.40 Commenters also electronic processing systems that insurance or would also encompass questioned what other investment forward contracts to the insurance automobile and health insurance.46 One vehicles would have to be compared company and the broker’s home office at commenter also inquired whether a with the deferred variable annuity 41 the same time.54 registered representative must look to and whether a registered representative One commenter stated that the liquidity needs at the time of the sale or would have to compare the deferred interaction of this provision with other in the future and whether investment variable annuity to products that he or Commission and NASD rules could experience means experience in she is not licensed to sell.42 limit a firm’s ability to review deferred variable annuities or overall NASD noted in its response to applications thoroughly.55 Another investment experience.47 comments that it did not intend to After stated that time-linking the application considering the comments, NASD has process with supervisory review would Vest; MWA; NMIS; National Planning; Pacific Select; United Planners; and World Group. 43 National Planning; NAVA; NMIS; and Pacific 48 See, e.g., ACLI; Lincoln; Mass Mutual; NAVA; 38 Select. See, e.g., ACLI; CAI; HD Vest; NAVA; Pacific and SIA. Select; United Planners; and World Group. 44 NAVA and NY Life. 49 CAI and NAVA. 39 45 Associated Securities and FSI. Another ACLI; CAI; NAVA; and ICI. Some commenters 50 also stated that these provisions conflict with commenter asked if these terms were the same as NAVA. NASD’s longstanding concerns about product the investment objective. Lincoln. 51 NASAA and PIABA. comparisons. 46 See, e.g., 1717 Capital Management Company 52 See, e.g., ACLI; CAI; ING; and NAVA. 40 A.G. Edwards; Intersecurities; NMIS; NY Life; and Nationwide Securities, Inc. (‘‘1717 Capital’’), 53 Associated Securities; Pacific Direct; and SIA; and World Group. Lance A. Reihl, President (9/19/05); AALU/AIFA; United Planners. 41 ACLI; CAI; ICI; ING; Mass Mutual; and NAVA. ACLI; CAI; NAVA; NMIS; and NY Life. 54 CAI and NMIS. 42 Intersecurities and World Group. 47 Lincoln. 55 ING.

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impair the goal under the Investment stated that requiring completion of the One commenter criticized permitting Company Act of 1940’s for timely principal review within two business firms to individually set their own processing.56 Some commenters stated days of the firm’s transmittal of the standards, stating that firms would that a delay in pricing the contract application to the insurance company is defend suitability challenges by would be unfair to investors.57 necessary for the protecting of investors asserting that the transaction met their Two commenters recommended that and should promote efficiency. It also own standards.68 Others expressed NASD require the review to be noted that the proposed rule would not concern that without defined standards, completed prior to the insurance preclude firms from using automated a firm’s suitability decisions would be company issuing the contract.58 One of supervisory systems, or a mix of second guessed and there would be these commenters noted that while this automated and manual supervisory inconsistent regulation as different would require logistical coordination systems, to facilitate compliance with NASD districts establish and impose between the principal and the issuer, it the rule. In addition, NASD delineated different standards.69 One commenter would allow insurers to process what, at a minimum, a principal would stated that the provision would lead applications coextensively with the need to do if his or her firm intends to principals to emphasize two or three supervisory review, but before the rely on automated supervisory systems elements of a customer’s profile rather security is issued.59 Others to comply with the proposed rule. than considering all of the facts and recommended requiring principals to Specifically, a principal would need to circumstances.70 conduct their review and approval (1) approve the criteria that the In its response to comments, NASD promptly after the completion of the automated supervisory system uses, (2) stated that the particular provisions contract application and in accordance audit and update the system as requiring members to establish with procedures reasonably designed to necessary to ensure compliance with the standards were never intended to ensure that problematic purchases are proposed rule, (3) review exception require the adherence to brightline detected and disapproved.60 reports that the system creates, and (4) standards. It noted that the A few commenters stated that the remain responsible for each establishment of specific thresholds in time deadline would not work in the transaction’s compliance with the these instances would unnecessarily context of direct sales, in which an proposed rule. Finally, NASD noted that limit a firm’s discretion in establishing insurance company may not know of an a principal would be responsible for any procedures that adequately address its applicant’s interest in a deferred deficiency in the system’s criteria that overall operations. NASD intended for variable annuity until it receives the would result in the system not being principals to consider these factors as application.61 Another stated that the reasonably designed to comply with the part of their facts and circumstances timing deadline would not take into rule. review. As a result, NASD deleted the account situations in which the NASD also noted that commenters requirement for firms to establish registered principal is housed in the asked whether the principal review standards for age, liquidity needs and insurance company.62 would need to start, but not necessarily dollar amounts. A few commenter also stated that be completed, by the time specified in (d) Comments on Proposed Rule their current supervisory structure as an the rule. In most circumstances, NASD 2821(c)(1)—Non-Recommended Office of Supervisory Jurisdiction would stated that under the revised timing Transactions be incapable of dealing with the prior requirement for principal review firms approval requirement and they would would be able to determine the Some commenters objected to be forced to eliminate this form of appropriateness of the transactions requiring principal review of supervisory structure.63 One commenter before the insurance company issues the transactions that are not stated the requirement could overwhelm contract. In NASD’s view, requiring recommended,71 and one noted that the principals,64 and another stated that it completion of the principal review with information that would be needed for a would require members to allocate two this time period is necessary for the principal review is not currently to three times the supervisory staff for protection of investors. Moreover, it also required to be collected for non- deferred variable annuities than for any believes that requiring a thorough recommended annuity transactions.72 other product.65 principal review at the early stages of Another commenter stated that NASD responded to commenters’ the process also should promote requiring review for non-recommended concerns by modifying the timeframe efficiency. transactions would allow principals to for principal review from ‘‘prior to second guess investors’ decisions.73 transmitting a customer’s application for (c) Comments on Proposed Rule NASD disagreed, noting that due to a deferred variable annuity to the 2821(c)(1)—Specific Standard for the complexity of the products, it is issuing insurance company’’ to ‘‘no later Principal Review appropriate to require firms to review than two business days following the Commenters objected to the proposed all deferred variable annuity date when a member or person requirements for members to establish transactions for problematic sales associated with a member transmits a standards regarding age, liquidity needs practices. It stated that the proposed customer’s application for a deferred and the dollar amount involved in the rule would create requirements to variable annuity to the issuing transactions and questioned the need for ensure that firms perform a consistent, insurance company for processing.’’ It such standards.66 While some requested baseline analysis of transactions, more clarification of appropriate irrespective of whether the customer 56 ACLI. standards, others stated that NASD purchased the deferred variable annuity 57 ACLI; Pacific Select; and United Planners. should mandate specific standards.67 as a result of an associated person’s 58 ACLI and NY Life. 59 ACLI. 68 66 See, e.g., Associated Securities; Dominion Pace. 60 CAI and NMIS. 69 Investor Services, Inc. (‘‘Dominion’’), Kevin P. See, e.g., ABIA/ABASA; Associated Securities; 61 CAI; NAVA; and T. Rowe Price. Takacs, Chief Compliance Officer (9/9/05); FSI; Dominion; FSI; Great American; and ING. 62 NMIS. Great American; ING; Intersecurities; Pacific Select; 70 Intersecurities. 63 Great American and ING. and United Planners. 71 See, e.g., ICI; NMIS; and T. Rowe Price. 64 Wachovia. 67 Associated Securities; Dominion; FSI; Fintegra; 72 T. Rowe Price. 65 Associated Securities. Great American; MWA; and Wachovia. 73 ICI and NMIS.

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recommendation, thereby enhancing Some suggested that the training on competition that is not necessary or investor protection for all customers. obligations in the proposed rule could appropriate in furtherance of the be met through existing ‘‘Firm Element’’ purposes of the Act. (e) Comments on Proposed Rule programs.80 After considering the 2821(c)(1)(D)—Rate of Exchanges C. Self-Regulatory Organization’s comments, NASD determined to retain Two commenters criticized the this requirement. Statement on Comments on the proposed provision that would require Proposed Rule Received from Members, principals to consider whether the (f) Comments on the Effective Date of Participants, or Others Proposed Rule 2821 customer’s account had a deferred The Commission published proposed variable annuity exchange within the NASD stated that the effective date of rule 2821 (SR–NASD–2004–183) in the preceding 36 months, stating it could the proposal would be 120 days Federal Register on July 21, 2005. The signal to registered representatives that following publication of its Notice to comment period closed on September exchanges occurring more than 36 Members announcing Commission 19, 2005. The Commission received 74 months apart are appropriate. One approval. Numerous commenters nearly 1500 comment letters in response 81 commenter stated that, while a firm requested more time, from 180 days to to the Federal Register publication of 82 should generate reports and review a no less than one year, to comply with the SR–NASD–2004–183. The comment registered representative’s sales activity the proposed rule. In its response to letters and NASD’s response to them are for patterns of inappropriate comments, NASD stated that because discussed in section II above. replacements as part of its supervisory some firms likely will have to make procedures, it should not be required to operational changes, it would be III. Date of Effectiveness of the approve each transaction.75 After appropriate to provide additional time Proposed Rule and Timing for considering the comments, NASD has for members to comply with the rule, if Commission Action determined to retain the requirement. approved. As a result, NASD stated that Within 35 days of the date of the proposed rule’s effective date would iv. Comments on Proposed Rule publication of this notice in the Federal be 180 days following publication of the 2821(d)—Supervisory Procedures Register or within such longer period Notice to Members in which it (1) as the Commission may designate up The rule, as originally proposed, announces Commission approval. would require members to establish and to 90 days of such date if it finds such maintain specific written supervisory 2. Statutory Basis longer period to be appropriate and procedures reasonably designed to NASD believes that the proposed rule publishes its reasons for so finding or achieve compliance with the rule. is consistent with the provisions of (ii) as to which the self-regulatory Members would be required to Section 15A(b)(6) of the Act,83 which organization consents, the Commission implement procedures to screen requires, among other things, that NASD will: transactions and require registered rules be designed to prevent fraudulent (A) By order approve such proposed principals to consider all of the factors and manipulative acts and practices, to rule, or enumerated in paragraph (c) of the promote just and equitable principles of (B) Institute proceedings to determine proposed rule. They would also have to trade and, in general, to protect whether the proposed rule should be consider whether the associated person investors and the public interest. NASD disapproved. effecting a transaction has a particularly believes that the proposed rule is high rate of effecting deferred variable consistent with the provisions of the Act IV. Solicitation of Comments annuity exchanges. noted above in that it will enhance Interested persons are invited to One commenter supported requiring firms’ compliance and supervisory submit written data, views and registered principals to review the total systems and provide more arguments concerning Amendment No. production attributable to variable comprehensive and targeted protection 2, including whether the proposed rule annuities of associated person.76 One to investors in deferred variable is consistent with the Act.84 We also commenter requested guidance as to annuities. As such, the proposed rule invite interested persons to discuss what a ‘‘particularly high rate’’ refers to will decrease the likelihood of fraud and how, if at all, the proposed rule’s timing and what must be compared to manipulative acts, promote just and requirement for principal review would determine it.77 After considering the equitable principles of trade and impact member firms’ ability to comments, NASD determined to retain increase investor protection. efficiently review deferred variable without modification the provision B. Self-Regulatory Organization’s annuity transactions. What changes, if relating to high rates of exchange. Statement on Burden on Competition any, would member firms need to make to their supervisory procedures and v. Comments on Proposed Rule NASD does not believe that the 2821(e)—Training systems in order to comply with the proposed rule will result in any burden proposed rule’s timing requirement for Most of the commenters that principal review? If changes would be addressed the training provision 80 See, e.g., Pacific Select; United Planners; and 78 Wachovia. NASD Rule 1120(b) requires each necessary, we invite interested persons supported it. However, one to discuss how current supervisory commenter questioned the need for a member to establish a training plan that identifies certain minimum requirements. Each year the firm procedures and systems operate and specific training requirement and must prepare a written training plan after an why those procedures and systems requested clarification regarding what analysis of its training needs. Firms must consider would not accommodate the proposed additional training is contemplated.79 certain factors when conducting their analyses and in developing their training plans, such as the rule’s timing requirement for principal firm’s size, organizational structure, scope and type review. 74 Intersecurities and World Group. of business activities, as well as regulatory 75 Intersecurities. developments. This training is referred to as the Comments may be submitted by any 76 NASAA. ‘‘Firm Element’’ portion of NASD’s continuing of the following methods: 77 Wachovia. education requirements. 78 See, e.g., FSI; Great American; Lincoln; Mass 81 ING and Intersecurities. 84 The Commission will consider the comments Mutual; MWA; NAVA; and PIABA. 82 NAVA, SIA, and World Group. we previously received. Commenters may reiterate 79 ING. 83 15 U.S.C. 78o–3(b)(6). or cross-reference previously submitted comments.

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Electronic Comments SECURITIES AND EXCHANGE March 31, 2006.6 No comments were received on this proposal. This order • COMMISSION Use the Commission’s Internet approves the proposed rule change, as comment form (http://www.sec.gov/ [Release No. 34–54028; File No. SR–NASD– amended. rules/sro.shtml); or 2005–067] I. Description of the Proposal • Send an e-mail to rule- [email protected]. Please include File Self-Regulatory Organizations; Recently, the Commission approved Number SR –NASD–2004–183 on the National Association of Securities NASD Rule 6530(e), which limits the subject line. Dealers, Inc.; Order Granting Approval eligibility for quotation on the OTCBB to Proposed Rule Change and of the security of an issuer that is Paper Comments Amendment Nos. 1, 2, and 3 Thereto repeatedly late or otherwise delinquent Relating to Amendments to NASD Rule in filing periodic reports to the issuer’s • Send paper comments in triplicate 6530 To Clarify the Review Process for respective regulator.7 Specifically, to Nancy M. Morris, Secretary, OTCBB Eligibility Determinations and NASD Rule 6530(e) provides that an Securities and Exchange Commission, To Implement Fees for Such Review NASD member will not be permitted to 100 F Street, NE., Washington, DC quote a security on the OTCBB: (1) If the 20549–1090. June 21, 2006. issuer has failed to file a complete All submissions should refer to File On May 24, 2005, the National required report with the Commission or Number SR–NASD–2004–183. This file Association of Securities Dealers, Inc. other respective regulator by the due number should be included on the (‘‘NASD’’), through its subsidiary, the date for such report (even if it later files subject line if e-mail is used. To help the Nasdaq Stock Market, Inc. (‘‘Nasdaq’’), within the grace period allowed by Commission process and review your filed with the Securities and Exchange NASD Rule 6530(a)) three times in the comments more efficiently, please use Commission (‘‘Commission’’), pursuant prior two-year period; or (2) if the only one method. The Commission will to section 19(b)(1) of the Securities security has been removed from the Exchange Act of 1934 (‘‘Act’’) 1 and Rule OTCBB due to the issuer’s failure to file post all comments on the Commission’s 2 Internet Web site (http://www.sec.gov/ 19b–4 thereunder, a proposed rule a complete required report two times in change to amend NASD Rules 6530 and the prior two-year period. Following the rules/sro.shtml). Copies of the 7010 to clarify the availability of a removal of an issuer’s security pursuant submission, all subsequent process to review a determination of an to NASD Rule 6530(e), such security amendments, all written statements issuer’s eligibility under NASD Rule shall not be eligible for quotation on the with respect to the proposed rule that 6530 for continued quotation of its OTCBB by an NASD member until such are filed with the Commission, and all securities on the Over-the-Counter time as the issuer has timely filed in a written communications relating to the Bulletin Board (‘‘OTCBB’’) and seek complete form all required periodic due proposed rule between the Commission review of such determination. On in a one-year period. and any person, other than those that September 27, 2005, Nasdaq filed with NASD’s proposed revisions to NASD may be withheld from the public in the Commission Amendment No. 1 to Rule 6530 would set forth procedures accordance with the provisions of 5 the proposed rule change.3 On for an aggrieved party to request a U.S.C. 552, will be available for December 8, 2005, NASD filed with the review by a hearing panel, pursuant to inspection and copying in the Commission Amendment No. 2 to the the NASD Rule 9700 Series, of a Commisison’s Public Reference Room. proposed rule change,4 and on February determination by NASD that an issuer is Copies of such filing also will be 23, 2006, NASD filed with the ineligible for continued quotation on the available for inspection and copying at Commission Amendment No. 3 to the OTCBB. The proposed rule change also the principal office of NASD. proposed rule change.5 The proposed would set forth the process for an All comments received will be posted rule change, as amended, was published aggrieved party to request review of the without change; the Commission does for comment in the Federal Register on hearing panel’s decision. In addition, the proposal would require an aggrieved not edit personal identifying 1 party to pay a fee of $4,000 when information from submissions. You 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. requesting either a review by the should submit only information that 3 In Amendment No. 1, NASD removed the hearing panel or a review of the hearing you wish to make available publicly. All record-keeping fee it had originally proposed to panel’s decision. Finally, the proposal establish in NASD Rule 7010. submissions should refer to File would codify the notification Number SR–NASD–2004–183 and 4 In Amendment No. 2, NASD amended the filing to reflect the Commission’s approval of a separate requirements to which NASD would should be submitted on or before July proposed rule change in which NASD amended its adhere in the event that an issuer’s 19, 2006. Plan of Allocation and Delegation of Functions by security approaches the point of NASD to Subsidiaries, as well as certain For the Commission, by the Division of corresponding NASD rules, to permit NASD to removal from quotation on the OTCBB Market Regulation, pursuant to delegated assume direct authority for OTC equity operations, for failure to comply with the provisions authority.85 including the OTCBB, rather than continuing to of NASD Rule 6530. delegate this authority to Nasdaq. See Securities J. Lynn Taylor, Exchange Act Release No. 52508 (September 26, II. Discussion and Commission Assistant Secretary. 2005); 70 FR 57346 (September 30, 2005) (SR– Findings [FR Doc. 06–5730 Filed 6–27–06; 8:45 am] NASD–2005–089). 5 In Amendment No. 3, which replaced and The Commission finds that the BILLING CODE 8010–01–M superseded the prior filings in their entirety, NASD proposed rule change, as amended, is clarified the availability of the hearing process set consistent with the provisions of section forth in proposed NASD Rule 6530(f) in the event that an OTCBB security is subject to removal from the OTCBB under NASD Rule 6530(e)(1) and made 6 See Securities Exchange Act Release No. 53546 clarifying changes relating to the application of the (March 24, 2006), 71 FR 16350 (‘‘Notice’’). NASD Rule 9700 Series to hearings conducted to 7 See Securities Exchange Act Release No. 52786 determine the security’s eligibility for quotation on (November 16, 2005), 70 FR 70907 (November 23, 85 17 CFR 200.30–3(a)(12). the OTCBB. 2005) (SR–NASD–2005–011).

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