Alert January 08, 2008

FINRA Proposes to Delay Effective Date for Principal Review and Approval Provisions of New Variable Annuity Sales Rule

The Financial Industry Regulatory Authority (“FINRA,” formerly the NASD) has proposed to delay the effective date of certain provisions of new NASD Rule 2821, which establishes new suitability, supervisory and training requirements for sales and exchanges of deferred variable annuities.  The rule’s requirements were summarized in the September 18, 2007 Alert.  As reported in the November 20, 2007 Alert, FINRA initially set May 5, 2008 as the effective date for Rule 2821.  In Release No. 34‑57050 (Dec. 27, 2007) (the “Proposing Release”), the SEC announced that FINRA is proposing to delay the effective date of the principal review and approval requirements in Rule 2821(c) until August 4, 2008.  (FINRA is not proposing to change the May 5, 2008 effective date for the remainder of the rule.)  The Proposing Release notes that in response to concerns expressed by affected firms after the announcement that the principal review and approval requirements had been adopted, FINRA determined it would be prudent to give further consideration to Rule 2821(c).  Some of the industry concerns described in the Proposing Release were as follows:

  • whether the seven business day review beginning with signature of the application is the appropriate review period;
  • whether broker-dealers that do not make any recommendations to customers should be subject to the principal approval requirements; and
  • whether insurance companies should be permitted to deposit customer funds in a suspense account prior to the completion of principal review.
The Proposing Release indicates that if, based on its review, FINRA concludes that further rulemaking is warranted, it will file a separate rule change proposal with the SEC.  Comments on FINRA’s proposal to delay Rule 2821(c)’s effectiveness and on the issues discussed in the Proposing Release are due no later than January 24, 2008.