[Federal Register Volume 66, Number 152 (Tuesday, August 7, 2001)]
[Notices]
[Pages 41283-41287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19700]



[[Page 41283]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44631; File No. SR-NASD-00-38]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 to the Proposed Rule Change by the National Association 
of Securities Dealers, Inc. Relating to the Application of NASD Rules 
and Interpretive Materials to Exempted Securities

July 31, 2001.

I. Introduction

    On June 16, 2000, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly owned 
subsidiary, NASD Regulation, filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') a proposed rule change pursuant 
to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder.\2\ NASD Regulation amended its 
proposal on September 11, 2000,\3\ and on March 28, 2001.\4\ The 
proposal, as amended, will: (1) Adopt NASD Rule 0116, ``Application of 
Rules of the Association to Exempted Securities,'' which will enumerate 
the NASD rules and interpretive materials that apply to exempted 
securities, including government securities but not municipal 
securities; and (2) codify a NASD staff interpretation that the non-
cash compensation provisions set forth in paragraph (g) of NASD Rule 
2820, ``Variable Contracts of an Insurance Company,'' apply to group 
variable contracts that are exempted securities.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Alden S. Adkins, Senior Vice President and 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated September 11, 2000 (``Amendment No. 1''). In Amendment No. 1, 
NASD Regulation amended NASD Rule 0116 to: (1) Delete a reference to 
NASD Rule 2300; (2) replace a reference to IM-2520 with a reference 
to IM-2522; and (3) add references to NASD Rules 8110, 8120, 8210, 
8221, 8222, 8223, 8224, 8225, 8226, 8227, 8310, IM-8310-1, IM-8310-
2, NASD Rule 8230, and NASD Rule 8330.
    \4\ See letter from Patrice M. Gliniecki, Vice President and 
Deputy General Counsel, NASD Regulation, to Katherine A. England, 
Assistant Director, Division, Commission, dated March 27, 2001 
(``Amendment No. 2.''). In Amendment No. 2, NASD Regulation amended 
its proposal to: (1) Add NASD Rules 2521, ``Margin Requirements--
Exception for Certain Members,'' and 2522, ``Definitions Related to 
Options, Currency Warrants, Currency Index Warrants and Stock Index 
Warrants Transactions,'' to NASD Rule 0116; (2) clarify that NASD 
Rule 2910, ``Disclosure of Financial Condition to Other Members,'' 
NASD Rule 8220, ``Suspension of Members for Failure to Furnish 
Information Duly Requested,'' and IM-8310-2, ``Release of 
Disciplinary Information,'' were intended to apply to transactions 
and business activities related to exempted securities; and (3) 
clarify its reasons for including NASD Rules 8221 through 8227 in 
NASD Rule 0116.
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    Prior to the publication of the notice of the proposal, the 
Commission received two comment letters asking the Commission to 
refrain from approving the proposal on an accelerated basis, as NASD 
Regulation had requested.\5\ The Commission published notice of the 
proposed rule change and Amendment No. 1 for comment in the Federal 
Register on October 4, 2000.\6\ Following the publication of the 
Federal Register notice, the Commission received two additional letters 
regarding the proposal.\7\ This order approves the proposed rule 
change, as amended. In addition, the Commission is publishing notice to 
solicit comments on, and is simultaneously approving, on an accelerated 
basis, Amendment No. 2 to the proposal.
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    \5\ See letter from Carl B. Wilkerson, Chief Counsel, 
Securities, American Council of Life Insurers (``ACLI''), to 
Jonathan G. Katz, Secretary, Commission, dated August 4, 2000 
(``ACLI I''); and letter from David A. Winston, Vice President, 
Government Affairs, National Association of Insurance and Financial 
Advisors (``NAIFA''), dated August 30, 2000 (``NAIFA I'').
    \6\ See Securities Exchange Act Release No. 43370 (September 27, 
2000), 65 FR 49240.
    \7\ See letter from Carl B. Wilkerson, Chief Counsel, 
Securities, ACLI, to Jonathan G. Katz, Secretary, Commission, dated 
October 17, 2000 (``ACLI II''); and letter from David A. Winston, 
Vice President, Government Affairs, NAIFA, to Jonathan G. Katz, 
Secretary, Commission, dated November 13, 2000 (``NAIFA II'').
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II. Description of the Proposal

A. NASD Rule 0116

    The Government Securities Act Amendments of 1993 (``GSAA'') \8\ 
eliminated the statutory limitations on the NASD's authority to apply 
sales practice rules to transactions in exempted securities, including 
government securities but not municipal securities.\9\ In 1996, the 
Commission approved an NASD proposal implementing the expanded sales 
practice authority granted to the NASD pursuant to the GSAA.\10\ The 
1996 listed

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the NASD rules that would apply to exempted securities, including 
government securities but not municipal securities. In addition, Notice 
to Member (``NTM'') 96-66, ``SEC Expands Scope of Conduct Rules and 
other NASD Rules to Government Securities; Approves New Suitability 
1,'' identified some of the NASD rules that would apply to exempted 
securities, including government securities but not municipal 
securities.\11\
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    \8\ Government Securities Act Amendments of 1993, Pub. L. No. 
103-202, Section 1(a), 107 Stat. 2344 (1993).
    \9\ The terms ``exempted securities,'' ``government 
securities,'' and ``municipal securities,'' are defined in Sections 
3(a)(12), 3(a)(42), and 3(a)(29) of the Act, respectively.
    \10\ See Securities Exchange Act Release No. 37588 (August 20, 
1996), 61 FR 44100 (August 27, 1996) (order approving File No. SR-
NASD-95-39) (``1996 Order''). The 1996 Order approved the 
application of the following NASD rules to exempted securities, 
including government securities but not municipal securities: NASD 
Rule 2110, ``Standards of Commercial Honor and Principles of 
Trade;'' NASD Rule 2120, ``Use of Manipulative, Deceptive or Other 
Fraudulent Devices;'' NASD Rule 2210, ``Communications with the 
Public;'' IM-2210-1, ``Communications with the Public about 
Collateralized Mortgage Obligations;'' IM-2210-2, ``Communications 
with the Public about Variable Life Insurance and Variable 
Annuities;'' IM-2210-3, ``Use of Rankings in Investment Companies 
Advertisements and Sales Literature;'' NASD Rule 2250, ``Disclosure 
of Participation or Interest in Primary or Secondary Distribution;'' 
NASD Rule 2270, ``Disclosure of Financial Condition to Customers;'' 
NASD Rule 2310, ``Recommendations to Customers (Suitability);'' IM-
2310-2, ``Fair Dealing with Customers;'' IM-2210-3, ``Suitability 
Obligations to Institutional Customers;'' NASD Rule 2320, ``Best 
Execution and Interpositioning;'' NASD Rule 2330, ``Customers' 
Securities or Funds;'' IM-2330, ``Segregation of Customers' 
Securities;'' NASD Rule 2340, ``Customer Account Statements;'' NASD 
Rule 2430, ``Charges for Services Performed;'' NASD Rule 2440, 
``Fair Prices and Commissions;'' IM-2440, ``Mark-Up Policy;'' NASD 
Rule 2450, ``Installment or Partial Sales;'' NASD Rule 2510, 
``Discretionary Accounts;'' NASD Rule 2520, ``Margin Accounts;'' 
NASD Rule 2521, ``Margin Requirements--Exception for Certain 
Members'' (formerly NASD Rule 2520(a); NASD Rule 2522, ``Definitions 
Related to Options, Currency Warrants, Currency Index Warrants and 
Stock Index Warrants Transactions'' (formerly NASD Rule 2520(b); 
NASD Rule 2770, ``Disclosure of Price in Selling Agreements'' 
(applicable only to traditional underwriting arrangements); NASD 
Rule 2780, ``Solicitation of Purchases on an Exchange to Facilitate 
a Distribution of Securities;'' NASD Rule 2910, ``Disclosure of 
Financial Condition to Other Members;'' NASD Rule 3010, 
``Supervision;'' NASD Rule 3020, ``Fidelity Bonds;'' NASD Rule 3030, 
``Outside Business Activities of an Associated Person;'' NASD Rule 
3040, ``Private Securities Transactions of an Associated Person;'' 
NASD Rule 3050, ``Transactions for or by Associated Persons;'' NASD 
Rule 3060, ``Influencing or Rewarding Employees of Others;'' NASD 
Rule 3070, ``Reporting Requirements;'' NASD Rule 3120, ``Use of 
Information Obtained in a Fiduciary Capacity;'' NASD Rule 3110, 
``Books and Records;''IM-3110, ``Customer Account Information;'' 
NASD Rule 3130, ``Regulation of Members Experiencing Financial and/
or Operational Difficulties;'' IM-3130, ``Restrictions on a Member's 
Activity;'' NASD Rule 3131, ``Regulation of Activities of Section 
15C Members Experiencing Financial and/or Operational 
Difficulties;'' NASD Rule 3140, ``Approval of Change in Exempt 
Status under SEC Rule 15c3-3;'' NASD Rule 3230, ``Clearing 
Agreements;'' NASD Rule 3310, ``Publication of Transactions and 
Quotations;'' IM-3310, ``Manipulative and Deceptive Quotations;'' 
NASD Rule 3320, ``Offers at Stated Prices'' IM-3320, ``Firmness of 
Quotations;'' NASD Rule 3330, ``Payment Designed to Influence Market 
Prices, Other than Paid Advertising;'' NASD Rule 8110, 
``Availability to Customers of Certificate, By-Laws, and Rules;'' 
NASD Rule 8120, ``Complaints by Public Against Members for 
Violations of Rules;'' NASD Rule 8130; ``Complaints by District 
Business Conduct Committees;'' NASD Rule 8140, ``Complaints by the 
Board of Governors;'' NASD Rule 8210, ``Reports and Inspections of 
Books for Purpose of Investigation Complaints; NASD Rule 8820, 
``Suspension of Members for Failure to Furnish Information Duly 
Requested;'' NASD Rule 8310, ``Sanctions for Violation of Rules;'' 
IM-8310-1, ``Effect of a Suspension, Revocation, or Bar;'' IM-8310-
2, ``Release of Disciplinary Information;'' NASD Rule 8320, 
``Payment of Fines, Other Monetary Sanctions, or Costs; and NASD 
Rule 8330, ``Cost of Proceedings.'' As discussed more fully below, 
Amendment No. 2 clarifies NASD Regulation's reasons for including 
NASD Rules 2521, 2522, 2910, 8220 (which was expanded to include 
current NASD Rules 8221 through 8227), and IM-8310-2 in its list of 
rules and interpretative materials applicable to exempted 
securities, including government securities, other than municipal 
securities. See Amendment No. 2, supra note 4.
    \11\ NTM 96-66 advised NASD members that the GSAA eliminated the 
statutory limitations on the NASD's authority to apply its sales 
practice rules to transactions in exempted securities, including 
government securities but not municipal securities. NTM 96-66 also 
noted that the Commission approved amendments to the NASD's rules 
implementing the expanded sales practice authority on August 20, 
1996. Although NTM 96-66 listed some of the NASD rules that would 
apply to exempted securities, including government securities but 
not municipal securities, NTM 96-66 omitted from its list of NASD 
rules in the 8000 Series which were included in the 1996 Order.
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    NASD Regulation noted in its filing, however, that the list of NASD 
rules interpretative materials outlined in the 1996 Order was not 
incorporated into a specific NASD rule and does not currently appear in 
the NASD Manual. To enable members and other interested parties to 
identify the NASD rules and interpretative materials applicable to 
exempted securities, including government securities but not municipal 
securities, in a more efficient manner, NASD Regulation proposed to 
codify those NASD rules and interpretative materials in new NASD Rule 
0116.\12\
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    \12\ Specifically, NASD Rule 0116(b) states that, unless 
otherwise indicated within a particular provision, the following 
NASD rules and interpretative materials apply to transactions and 
business activities relating to exempted securities but not 
municipal securities, conducted by members and associated persons: 
2110, 2120, 2210, IM-2210-1, IM-2210-2, IM-2210-3, 2250, 2270, 2300, 
2310, IM-2310-2, IM-2310-3, 2320, 2330, IM-2330, 2340, 2430, 2450, 
2510, 2520, 2521, 2522, 2770, 2780, 2820(g), 2910, 3010, 3020, 3030, 
3040, 3050, 3060, 3070, 3110, IM-3110, 3120, 3130, IM-3130, 3131, 
3140, 3230, 3310, IM-3310, 3320, IM-3320, 3330, 8110, 8120, 8210, 
8221, 8222, 8223, 8224, 8225, 8226, 8227, 8310, IM-8310, IM-8310-1, 
IM-8310-2, 8320, and 8330. See Amendment No. 2, supra note 4.
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    In Amendment No. 2, NASD Regulation clarified that the rules and 
interpretative materials listed in NASD Rule 0116 should include NASD 
Rules 2521, 2522, 2910, 8221 through 8227, and IM-8310-2. Specifically, 
NASD Regulation noted that the 1996 Order approved the application of 
NASD Rule 2520, ``Margin Accounts,'' to exempted securities, including 
government securities but not municipal securities. At that time, 
current NASD Rules 2521, ``Margin Requirements--Exception for Certain 
Members,'' and 2522, ``Definitions Related to Options, Currency 
Warrants, Currency Index Warrants and Stock Index Warrants 
Transactions,'' were paragraphs (a) and (b), respectively, of NASD Rule 
2520. Accordingly, NASD Regulations proposes to include NASD Rules 2521 
and 2522 in NASD Rule 0116.\13\
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    \13\ See Amendment No. 2, supra note 4.
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    In addition, NASD Regulation noted that NASD Rules 2910, 
``Disclosure of Financial Condition to Other Members,'' 8220, 
``Suspension of Members for Failure to Furnish Information Duly 
Requested,'' (now NASD Rules 8221 through 8227, as discussed below), 
and IM-8310-2, ``Release of Disciplinary Information,'' were not 
included in the list of rules provided in the 1996 Order because, prior 
to the 1996 reorganization of the NASD's rules,\14\ NASD Rules 2910 and 
8220 and IM-8310-2 were Resolutions of the Board (``Resolutions'') 
relating to Article III, Section 22, ``Disclosure of Financial 
Condition,'' Article IV, Section 5, ``Reports and Inspection of Books 
for Purpose of Investigating Complaints,'' and Article V, Section 1, 
``Sanctions for Violations of the Rules,'' respectively.\15\ NASD 
Regulation states that the Resolutions were not included in the list 
provided in the 1996 Order because the Resolutions were considered part 
of the rules they accompanied and a specific reference to the 
Resolutions was deemed to be unnecessary. Because the 1996 Order listed 
the rules the resolutions accompanied as applicable to exempted 
securities, including government securities but not municipal 
securities, the Resolutions also applied to exempted securities, 
including government securities but not municipal securities. 
Accordingly, NASD Regulation proposes to include NASD Rules 2910 and 
8221 through 8227 (formerly NASD Rule 8220, as discussed below) and IM-
8310-2 in NASD Rule 0116.\16\
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    \14\ In 1996, the Commission approved a proposal that 
reorganized the NASD's rules into their current format. See 
Securities Exchange Act Release No. 36698 (January 11, 1996), 61 FR 
1419 (January 19, 1996) (order approving File No. SR-NASD-95-51).
    \15\ Specifically, the Resolution relating to Article III, 
Section 22 was ``Requirement of Members to Furnish Recent Financial 
Statement to other Members;'' the Resolution relating to Article IV, 
Section 5 was ``Suspension of Members for Failure to Furnish 
Information Duly Requested;'' and the Resolution relating to Article 
V, Section 1 was ``Notice to Membership and Press of Suspensions, 
Expulsions, Revocations, and Monetary Sanctions and Release of 
Certain Information Regarding Disciplinary History of Members and 
Their Associated Persons.''
    \16\ See Amendment No. 2, supra note 4.
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    NASD Regulation notes that prior to the 1996 reorganization of the 
NASD's rules, NASD Rule 8220 set forth potential penalties resulting 
from a member's failure to provide information requested by the 
NASD.\17\ In 1997, the NASD amended its rules to replace NASD Rule 8220 
with NASD Rules 8221, ``Notice,'' 8222, ``Hearing,'' 8223, 
``Decision,'' 8224, ``Notice to Membership,'' 8225, ``Termination of 
Suspension,'' 8226, ``Copies of Notice and Decision to Member,'' and 
8227, ``Other Action Not Foreclosed.'' \18\ According to NASD 
Regulation, NASD Rules 8221 through 8227 serve the same purpose as NASD 
Rule 8220 in that they provide potential penalties that may result from 
a member's or associated person's failure to provide information 
requested by the NASD.\19\ In addition, NASD Regulation states that 
NASD Rules 8221 through 8227 provide procedural enhancements, 
including, for example, a hearing process through which a member or 
associated person may appeal an initial NASD decision made under NASD 
Rule 8221.\20\
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    \17\ See Amendment No. 2, supra note 4.
    \18\ See Securities Exchange Act Release No. 38908 (August 7, 
1997), 62 FR 43385 (August 13, 1997) (order approving File No. SR-
NASD-97-28).
    \19\ See Amendment No. 2, supra note 4.
    \20\ See Amendment No. 2, supra note 4.
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B. Application of NASD Rule 2820(g) to Group Variable Contracts That 
Are Exempted Securities

    NASD Regulation also proposes to codify an NASD staff 
interpretation that the non-cash compensation provisions set forth in 
NASD Rule 2820(g) apply to variable contracts that are exempted 
securities by including NASD Rule 2830(g) in NASD Rule 0116.\21\ NASD 
Regulations notes that at the time the NASD identified the NASD rules 
that would apply to exempted securities, including government 
securities but not municipal securities, the NASD had not adopted NASD 
Rule 2820(g) and, accordingly, NASD Rule 2820(g) was not included in 
the list provided in the 1996 Order.
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    \21\ NASD Rule 2820(g) limits the manner in which members and 
associated persons may pay or accept non-cash compensation in 
connection with the sale or distribution of variable contracts.
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    NASD Regulation states that because certain group variable 
contracts are exempted securities under the Act, members have 
questioned whether NASD Rule 2820(g) applies to group variable 
contracts. NASD Regulation states that it has interpreted NASD Rule 
2820(g) to apply to group variable

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contracts that are exempted securities since the adoption of NASD Rule 
2820(g). To clarify the application of NASD Rule 2820(g) to group 
variable contracts that are exempted securities, NASD Regulation 
proposes to codify the current staff interpretation by including NASD 
Rule 2820(g) in NASD Rule 0116.\22\
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    \22\ Because NASD Rule 2820(g) applies only to transactions in 
variable products, the rule change would result in NASD Rule 2820(g) 
expressly applying to all variable products that are securities, 
including variable products that are exempted securities, such as 
group variable or similar products. NASD Regulation is not at this 
time recommending that other provisions of Rule NASD Rule 2820 apply 
to exempted securities.
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III. Summary of Comments

    The Commission received four comment letters from two commenters 
regarding the proposal.\23\ The two comment letters received prior to 
the publication of the Federal Register notice of the proposal asked 
the Commission to refrain from approving the proposal on an accelerated 
basis, as NASD Regulation had requested in its proposal.\24\ As noted 
above, the Commission published the proposal for comment on October 4, 
2000.\25\
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    \23\ See ACLI I and NAIFA I, supra note 5, and ACLI II and NAIFA 
II, supra.7.
    \24\ See ACLI I and NAIFA I, supra note 5.
    \25\ See Securities Exchange Act Release No. 43370, supra note 
6.
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    In the comment letters received after the publication of the 
Federal Register notice, the ACLI and the NAIFA urged the Commission 
not to approve the proposal.\26\ In addition, the commenters asked the 
Commission to order the NASD to rescind NTM 97-27, ``Application of 
NASD Conduct Rules to Group Variable Contracts and Other Exempted 
Securities,'' \27\ and to issue an interpretative position stating that 
the rules cited in NTM 96-66 do not apply to the variable contracts 
distributed to qualified plans.\28\
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    \26\ See ACLI II and NAIFA II, supra note 7.
    \27\ In NTM 97-27, NASD Regulation asserted that the expanded 
sales practice authority that the Commission approved in the 1996 
Order permits NASD Regulation to apply the NASD's conduct rules 
(``Conduct Rules'') to members and their registered representatives 
who sell or distribute group variable contracts and other exempted 
securities, other than municipal securities, and that such 
securities are subject to the Conduct Rules.
    \28\ See ACLI II and NAIFA II, supra note 7.
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    Among other things, the ACLI asserts that the GSAA eliminated the 
statutory limitation on the NASD's authority to apply its sales 
practice rules to government securities, but not to other types of 
exempted securities. Accordingly, the ACLI believes that the NASD lacks 
the authority to apply its conduct rules to the sale of unregistered 
variable contracts that fund qualified retirement plans.
    In addition, the ACLI maintains that the ``multiple, unnecessary 
layering of regulation caused by proposed [NASD] Rule 0116 and the 
codification of NTM 97-27 creates an anticompetitive burden * * *'' 
that reduces the product choices available to consumers and increases 
costs in the distribution of variable contracts by sales persons who 
are NASD registered representatives.\29\ The ACLI maintains that NTM 
97-27 has disrupted the marketing of variable contracts to qualified 
retirement plans.
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    \29\ See ACLI II, supra note 7 at 11.
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    The ACLI also asserts that the variable contracts distributed to 
qualified plans have not been the source of market conduct or sales 
practice abuses, and that the application of the NASD's conduct rules 
to these products is redundant and unnecessary because the Department 
of Labor, state insurance commissions, and other federal laws 
extensively regulate variable contracts that fund qualified retirement 
plans.
    Like the ACLI, the NAIFA maintains that the GSAA was intended to 
apply only to government securities and that the NASD's application of 
its conduct rules to group variable contracts in NTM 97-27 represents 
an expansion of the NASD's jurisdiction that was not authorized by 
Congress or the Commission. In addition, the NAIFA believes that NASD 
regulation of variable contracts funding qualified retirement plans is 
unnecessary because state and federal authorities extensively regulate 
the sale of these products. The NAIFA also states that NTM 97-27 has 
caused significant anti-competitive effects and disrupted the marketing 
of variable contracts to qualified retirement plans.\30\
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    \30\ See NAIFA II, supra note 7.
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    NASD Regulation responded to the commenters in a letter dated 
January 26, 2001.\31\ In its response, NASD Regulation states that the 
GSAA amended Section 15A(f) of the Act to permit the application of the 
NASD's rules to all exempted securities, other than municipal 
securities. NASD Regulation notes that although Congress specifically 
excluded municipal securities from its grant of authority to the NASD 
in the GSAA, Congress did not exclude group variable contracts from its 
grant of authority to the NASD.
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    \31\ See letter from Jeffrey S. Holik, Vice President and Acting 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division, Commission, dated January 26, 2001 (``January 26 
Letter'').
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    In response to the commenters' assertions that the codification of 
NTM 97-27 will result in multiple and unnecessary layers of regulation, 
NASD Regulation states that the application of the NASD's sales 
practice rules to group variable contracts will protect investors and 
promote the integrity of markets generally. NASD Regulation also notes 
that the scope, focus, and concern of NASD rules differ significantly 
from federal and state regulations that may require plan sponsors to 
act as fiduciary and for the benefit of plan participants and 
beneficiaries. NASD Regulation states, for example, that NASD rules 
require registered representatives to perform a thorough suitability 
analysis when making recommendations to customers and require that 
adequate disclosures be made to customers concerning group variable 
contracts. In addition, NASD Regulation notes that the NASD's rules 
restrict certain uses of non-cash compensation where such compensation 
could create point-of-sale incentives that might compromise the 
requirement to match the investment needs of the customer with the most 
appropriate investment product. NASD Regulation also states that 
members are subject to extensive supervisory requirements and must 
supervise activities by their registered representatives relating to 
group variable contracts.

IV. Discussion

    After carefully considering the comments and NASD Regulation's 
response, the Commission finds, for the reasons discussed below, that 
the proposed rule change is consistent with the Act and the rules and 
regulations thereunder applicable to the NASD. In particular, the 
Commission finds that the proposal is consistent with section 15A(b)(6) 
of the Act \32\ in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest.\33\
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    \32\ 15 U.S.C. 78o-3(b)(6).
    \33\ In approving the proposal, the Commission has considered 
the proposal's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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A. NASD Rule 0116

    In the 1996 Order,\34\ the Commission approved the NASD's proposal 
to implement the expanded sales practice authority granted to the NASD 
pursuant to the GSAA. The 1996 Order included a list of NASD rules that 
would apply to exempted securities, including government securities but 
not municipal

[[Page 41286]]

securities.\35\ To the extent that NASD Rule 0116 codifies in one place 
the list of NASD rules that the Commission approved in the 1996 Order, 
the Commission finds that the proposal is consistent with the Act and 
does not raise new regulatory issues. The Commission believes that NASD 
Rule 0116 should help members more easily identify the NASD rules 
applicable to exempted securities, including government securities but 
not municipal securities.
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    \34\ See note 10, supra.
    \35\ See note 10, supra.
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    As discussed more fully above, former NASD Rule 8220 was one of the 
NASD rules in the 1996 Order.\36\ Following the 1996 Order, the NASD 
revised its rules to replace former NASD Rule 8220 with NASD Rules 8221 
through 8227, which serve the same purpose as former NASD Rule 
8220.\37\ Like former NASD Rule 8220, current NASD Rule 8221 sets for 
the potential penalties, including suspension from membership or 
association, resulting from a failure to provide information requested 
by the NASD. NASD Rules 8222 through 8227 provide procedural 
protections, including, for example, a hearing process for members or 
associated persons who have received a notice issued pursuant to NASD 
Rule 8221. Because NASD Rules 8221 through 8227 serve the same purpose 
as former NASD Rule 8220, and, in addition, provide procedural 
protections for members and associated persons, the Commission believes 
that it is reasonable for the NASD to include NASD Rules 8221 through 
8227 in NASD Rule 0116.
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    \36\ See Amendment No. 2, supra note 4.
    \37\ See Amendment No. 2, supra note 4.
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B. Grant of Authority Under the GSAA

    The ACLI and NAIFA assert that the GSAA permitted the NASD to apply 
its sales practice rules solely to government securities and not to 
unregistered variable contracts that are exempted securities. The 
Commission notes, as it stated in the 1996 Order,\39\ that the GSAA 
eliminated the statutory limitations on the NASD's authority to apply 
sales practice rules to transactions in exempted securities, including 
government securities but not municipal securities. Although Congress 
specifically excluded municipal securities. Although Congress 
specifically excluded municipal securities from its grant of authority 
to the NASD under the GSAA, it did not exclude any other type of 
exempted securities from its grant of authority.\39\ Indeed, as 
amended, Section 15A(f) of the Act explicitly refers only to municipal 
securities. Accordingly, the NASD has the authority to apply its sales 
practice rules to transactions in group variable products that are 
exempted securities.
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    \38\ See note 10, supra.
    \39\ Under Section 3(a)(12)(A) of the Act, the term ``exempted 
security'' includes ``any security arising out of a contract issued 
by an insurance company, which . . . security is issued in 
connection with a qualified plan as defined in subparagraph (C) of 
this paragraph.'' Section 3(a)(12)(C) indicates that, for purposes 
of subparagraph (A)(iv), ``the term `qualified plan' means (i) a 
stock bonus, pension, or profit-sharing plan which meets the 
requirements for qualification under section 401 of the Internal 
Revenue Code of 1954, (ii) an annuity plan which meets the 
requirements for the deduction of the employer's contribution under 
section 404(a)(2) of such Code, or (iii) a governmental plan as 
defined in section 414(d) of such Code which as been established by 
an employer for the exclusive benefit of its employees or their 
beneficiaries for the purpose of distributing to such employees or 
their beneficiaries the corpus and income of the funds accumulated 
under such plan, if under such plan it is impossible, prior to the 
satisfaction of all liabilities with respect to such employees and 
their beneficiaries, for any part of the corpus or income to be used 
for, or diverted to, purposes other than the exclusive benefit of 
such employees or their beneficiaries, other than any plan described 
in clause (i), (ii), or (iii) of this subparagraph which (I) covers 
employees some or all of whom are employees within the meaning of 
section 401(c) of such Code, or (II) is a plan funded by an annuity 
contract described in section 403(b) of such Code.''
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    With regard to the commenters' assertions that NTM 97-27 has 
created a competitive burden and disrupted the marketing of variable 
contracts qualified retirement plans, the Commission notes that NASD 
Regulation maintains that sales of group variable contracts raise 
investor protection issues similar to those presented by sales of other 
types of securities products that are subject to the NASD's rules, such 
as individual variable annuities, variable life insurance, and mutual 
funds.\40\ NASD Regulation also notes that NASD rules require 
registered representatives to perform a thorough suitability analysis 
when making a recommendation to a customer and require adequate 
disclosures to customers concerning group variable contracts.\41\ In 
addition, NASD members must supervise activities by their registered 
representatives relating to group variable contracts.\42\
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    \40\ See January 26 Letter, supra note 31.
    \41\ See January 26 Letter, supra note 31.
    \42\ See January 26 Letter, supra note 31.
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    The Commission believes that the application of the NASD's sales 
practice rules to the sale of group variable contracts will help to 
ensure that customers purchasing group variable contracts that are 
securities are subject to the same sales practice protections as 
customers purchasing similar exempted securities. Accordingly, although 
the application of the NASD's rules to sales of group variable 
contracts may have affected the marketing of group variable contacts to 
qualified retirement plans, the Commission believes that the proposal 
does not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, consistent with 
section 15A(b)(9) of the Act.

C. NASD Rule 2820(g)

    NASD Rule 2820(g) addresses the payment and acceptance of non-cash 
compensation in connection with the sale or distribution of variable 
contracts. NASD Regulation proposes to include NASD Rule 2820(g) in 
NASD Rule 0116 to clarify that NASD Rule 2820(g) applies to group 
variable contracts that are exempted securities. Because NASD Rule 
2820(g) had not been adopted at the time of the 1996 Order, it was not 
included in the 1996 Order's list of NASD rules applicable to exempted 
securities, including government securities but not municipal 
securities. However, NASD Regulation states that it has consistently 
interpreted NASD Rule 2820(g) to apply to group variable contracts that 
are exempted securities since the adoption of NASD Rule 2820(g).
    The Commission believes that including NASD Rule 2820(g) in NASD 
Rule 0116 will clarify NASD Regulation's position that NASD Rule 
2820(g) applies to all variable contracts that are securities, 
including variable contracts that are exempted securities. In addition, 
the Commission believes that application of NASD rule 2820(g) will 
protect investors and the public interest by helping to reduce the 
point-of-sale impact of non-cash sales incentives that may compromise 
the duty of registered representatives to match the investment needs of 
customers with the most appropriate investment product.\43\
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    \43\ See Securities Exchange Act Release No. 40214 (July 15, 
1998), 63 FR 39614 (July 23, 1998) (order approving File No. SR-
NASD-97-35).
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D. Accelerated Approval of Amendment No. 2

    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Amendment No. 2 strengthens the 
proposal by clarifying NASD Regulations' rationale for including NASD 
Rules 2521, 2522, 2910, 8221 through 8227, and IM-8310-2 in NASD Rule 
0116. Accordingly, the Commission finds it is consistent with Sections 
15A(b)(6) and 19(b) of the Act to approve Amendment No. 2 on an 
accelerated basis.

[[Page 41287]]

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether amendment No. 2 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 file number SR-NASD-00-38 and should be 
submitted by August 28, 2001.

VI. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-NASD-00-38), as amended, is 
approved.
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    \44\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-19700 Filed 8-6-01; 8:45 am]
BILLING CODE 8010-01-M