[Federal Register Volume 60, Number 19 (Monday, January 30, 1995)]
[Notices]
[Pages 5744-5745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2205]



[[Page 5744]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35266; File No. SR-NASD-94-61]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc., Relating to 
the Filing Requirements Under Article III, Section 44 of the NASD Rules 
Regarding Modified Guaranteed Annuity Contracts and Modified Guaranteed 
Life Insurance Contracts

January 23, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January 
12, 1995 the National Association of Securities Dealers, Inc. (``NASD'' 
or ``Association'') 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 the 
NASD.\1\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.

    \1\The NASD originally submitted the proposed rule change on 
November 21, 1994. On December 1, 1994 and January 12, 1995, the 
NASD filed letter amendments to its filing correcting errors in its 
November 21, 1994 submission. This notice reflects those amendments.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend Subsection 44(b)(8) to Article III 
of the NASD Rules of Fair Practice (``Corporate Financing Rule'') to 
exempt modified guaranteed annuity contracts and modified guaranteed 
life insurance contracts from the filing requirements under Subsection 
44(b).

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD 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. The NASD 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

    The Corporate Financing Rule requires members to file with the NASD 
documents and information relating to a public offering of securities 
for review of the fairness of underwriting compensation and 
arrangements. The filing requirements in the Corporate Financing Rule 
also apply to Schedule E of the NASD By-Laws and Article III, Section 
34 of the NASD Rules of Fair Practice. The Corporate Financing Rule 
filing requirements apply to public offerings of debt, equity and 
public limited partnership securities, and provide that certain 
offerings of securities shall be exempt from the filing requirement 
under Subsection (b)(8) of the Rule. The exemptions in Subsection 
(b)(8) include, among others, open-end investment company securities 
registered under the Investment Company Act of 1940 (except closed-end 
investment company securities) and variable contracts. In addition, the 
exemptions include securities defined as ``exempt securities'' under 
Section 3(a)(12) of the Act and securities exempt from registration 
with the SEC pursuant to Sections 4(1), 4(2) and 4(6) of the Securities 
Act of 1933 (``1933 Act'') and Rules 504 (unless considered a public 
offering), 505 and 506 adopted under the 1933 Act.
    The NASD recently considered the status of ``Modified Guaranteed 
Annuity Contracts'' and ``Modified Guaranteed Life Insurance Policies'' 
(collectively, ``Contracts'') under the filing requirements of the 
Corporate Financing Rule. The Contracts are similar to variable annuity 
contracts in that they are issued by an insurance company, offered on a 
continuous basis, subject to the registration requirements and 
regulatory scheme of state insurance law, and, shift investment risk to 
the contract owner by offering variable, non-guaranteed rates of return 
under certain circumstances. That is, the Contracts are subject to a 
market value adjustment upon a Contract surrender or partial withdrawal 
prior to the end of a guarantee period. However, unlike variable 
annuities, the individual account values of the Contracts do not 
reflect the investment experience of one or more separate accounts 
registered under the Investment Company Act of 1940. Instead, like 
traditional fixed annuities, the Contracts are backed by the general 
account assets of the insurance issuer and are registered only as 
insurance contracts under state insurance law.
    The Contracts are priced individually and issued on a continuous, 
open-ended basis directly by the issuer, and are sold by state-licensed 
insurance agents that are also registered with a member to sell such 
securities based on the Series 6 examination--the Limited 
Representative for Investment Company and Variable Contract Products. 
Thus, the sale of the Contracts does not resemble the traditional types 
of underwritings of debt, equity, closed-end investment company and 
public limited partnership securities with which the Corporate 
Financing Rule is concerned.
    The Contracts do not fall within any of the current exemptions 
contained within the Corporate Financing Rule Filing Requirements. As a 
result, the Contracts are subject to the filing requirements of the 
Corporate Financing Rule unless the NASD amends its rules to adopt a 
specific exemption for such instruments. The review of the fairness and 
reasonableness of underwriting terms and arrangements is the central 
requirement of the Corporate Financing Rule. The issuance and sale of 
the Contracts on an open-ended basis does not raise the kinds of 
underwriting issues with which the Corporate Financing Rule is 
primarily and traditionally concerned. The structure of the instrument 
is that of an insurance product which has traditionally been regulated 
under state insurance law and the terms of the Corporate Financing Rule 
were not developed to address such products. The NASD is, therefore, 
proposing to amend the Corporate Financing Rule by adopting as new 
Subsection (b)(8)(E) an exemption from the filing and other 
requirements of the Corporate Financing Rule for ``Modified Guaranteed 
Annuity Contracts'' and ``Modified Guaranteed Life Insurance Policies'' 
and to reletter the remaining sections accordingly. The proposed rule 
would thus exempt such Contracts from the filing and review 
requirements of the Corporate Financing Rule.\2\

    \2\In addition, Article III, Sections 26 and 29 of the NASD 
Rules of Fair Practice are not applicable, since the Contracts are 
not within the definition of ``variable contract'' and do not 
include a separate account registered under the Investment Company 
Act of 1940. However, as securities, sales of the Contracts are 
subject to other applicable Rules of Fair Practice when sold by 
associated persons of a member and the rules and regulations of the 
Commission, particularly the antifraud provisions thereof.
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    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\3\ which requires that 
the rules of the Association promote just and equitable principles of 
trade and protect investors and the public interest in that the 
proposed rule change amends the filing requirements of Article III, 
Section 44 to the NASD Rules of Fair Practice to exempt Modified 
Guaranteed Annuity Contracts and Modified Guaranteed Life 
[[Page 5745]] Insurance Policies from NASD review, since the issuance 
and sale of the Contracts on an open-ended basis does not raise the 
kinds of underwriting issues with which the Corporate Financing Rule is 
primarily and traditionally concerned; the structure of the instrument 
is that of an insurance product which has traditionally been regulated 
under state insurance law; and the terms of the Corporate Financing 
Rule were not developed to address such products.

    \3\15 U.S.C. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The NASD 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, as amended.

(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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, D.C. 20549. 
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. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the file number in the caption 
above and should be submitted by February 21, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\

    \4\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2205 Filed 1-27-95; 8:45 am]
BILLING CODE 8010-01-M