Amendments to Rule 2821; Effective Date: February 8, 2010
On April 15, 2009, the SEC approved amendments to NASD Rule 2821 governing purchases and exchanges of deferred variable annuities.
Rule 2821 establishes sales practice standards regarding purchases and exchanges of deferred variable annuities. The rule addresses four main areas of concern.
• The rule has requirements governing broker recommendations, including suitability and disclosure obligations.
• It includes various principal review and approval obligations.
• The rule requires member firms to establish and maintain supervisory procedures reasonably designed to achieve compliance with the standards set forth in the rule.
• The rule has a training component.
The recommendation and training sections currently are effective. The effective dates of the principal review and supervisory procedures sections were extended to give the SEC time to consider amendments that FINRA filed after careful consideration of public comments.
On April 15, 2009, the SEC approved those amendments, which become effective on February 8, 2010. The amendments, among other things, limit the rule’s application to recommended transactions, change the triggering event that begins the principal review period, and clarify various other issues through new supplementary material to the rule.
Prior to the amendments, paragraph (c) of NASD Rule 2821 would have required principals to treat “all transactions as if they have been recommended for purposes of this principal review.” After considering the public comments, FINRA proposed, and the SEC approved, limiting the rule’s application to recommended transactions.
Under the earlier version of paragraph (c) of NASD Rule 2821, principals were required to review and determine whether to reject or approve a deferred variable annuity transaction no later than seven business days after the customer signed the application.
Based on the public comments, FINRA proposed, and the SEC approved, modifying the beginning of the period within which the principal must review and determine whether to approve or reject the application. Pursuant to the amendments, the period will begin to run not from the date of the customer’s signature but from the date when a firm’s office of supervisory jurisdiction (OSJ) receives a complete and correct copy of an application.
The supplementary material makes clear, that firms generally allowed to handle and carry customer funds under SEA Rules 15c3-1 and 15c3-3 are not prohibited by NASD Rule 2821 from depositing funds for a deferred variable annuity prior to principal approval.
FINRA also reconsidered the question of whether firms could forward funds to insurance companies for deposit in the companies’ “suspense accounts” prior to principal approval. FINRA has modified its earlier position rejecting such a process, discussed in Regulatory Notice 07-53 (Nov. 2007), and now will allow such action under certain conditions, including, that the insurance company segregate the funds in a manner equivalent to that required of a member firm under SEA Rule 15c3-3.
Tags: FINRA, FINRA Rule 2821, NASD Rule 2821, Quest CE, Rule 2821, SEC Amendments