SEC Approves Amendments To Article III, Section 44 Of The NASD Rules Of Fair Practice About Filing Requirements For Modified Guaranteed Annuity And Life Insurance Contracts
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Executive Summary
On March 2, 1995, the Securities and Exchange Commission (SEC) approved amendments to Article III, Section 44 of the Rules of Fair Practice (Corporate Financing Rule) to exempt modified guaranteed annuity contracts and modified guaranteed life insurance contracts from the filing requirements of the Corporate Financing Rule.
Background And Description
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. Thus, the filing requirements apply to public offerings of debt, equity, and public limited partnership securities.
The Corporate Financing Rule filing requirements provide that certain offerings of securities will be exempt from the filing requirement under its Subsection 44(b)(8). Modified guaranteed annuity contracts and modified guaranteed life insurance contracts (Contracts) do not fall within any of the current exemptions in the Corporate Financing Rule filing requirements. As a result, the Contracts will be subject to the filing requirements of the Corporate Financing Rule unless the NASD adopts a specific exemption for such instruments.
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 before 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 as insurance contracts under state insurance law.
The review of the fairness and reasonableness of underwriting terms and arrangements is the central requirement of the Corporate Financing Rule. The NASD believes that it is appropriate to exempt the Contracts from the filing requirements of Article III, Section 44 of the NASD Rules of Fair Practice because the structure of the instrument is that of an insurance product, which has traditionally been regulated under state insurance law, and because 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 terms of the Corporate Financing Rule were not developed to address such products.1
The NASD has amended Subsection 44(b)(8) of the Corporate Financing Rule to exempt the Contracts from the filing requirements of Subsection 44(b). The new provision is paragraph (E) of Subsection 44(b)(8) of the Corporate Financing Rule, and the remaining paragraphs have been renumbered accordingly.
Questions regarding this Notice may be directed to Carl R. Sperapani, Assistant Director, Corporate Financing Department, at (301) 2082759; or Robert J. Smith, Attorney, Office of General Counsel, at (202) 728-8176.
1 In addition, Article III, Sections 26 and 29 of the NASD Rules of Fair Practice do not apply to such instruments, because 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 SEC, particularly the antifraud provisions thereof.
Text Of Amendments To Article III, Section 44(b)(8) Of The Rules Of Fair Practice
(Note: New text is underlined; deletions are in brackets.)
THE CORPORATE FINANCING RULE
Underwriting Terms and Arrangements
Sec. 44.
Notwithstanding the provisions of paragraph (1) above, the following offerings are exempt from this Section, Schedule E to the By-Laws, and Article III, Section 34 of the Rules of Fair Practice. Documents and information relating to the following offerings need not be filed for review: