American Council of Life Insurers
1001 Pennsylvania Ave, N.W. , Suite 500
Washington, D.C. 20004-2599
Carl B. Wilkerson
April 10, 2001
Jonathan G. Katz, Secretary
U.S Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-6009
RE: Immediate Effectiveness of Self-Regulatory Rule Modifications; File No. S7-03-01; Release No. 34-43860.
The American Council of Life Insurers ("ACLI") is a national trade association with 426 member life insurance companies which represent 80% of the life insurance in force at all U.S. life insurance companies and 81% of the pension business of those companies. We greatly appreciate the opportunity to share our views on the immediate effectiveness of self-regulatory rule modifications.
Many of our member companies manufacture and distribute variable annuities and variable life insurance through affiliated and independent broker/dealers. Over half of the NASD's 680,468 registered representatives work for broker/dealers affiliated with life insurance companies.
The ACLI regularly comments upon SEC and NASD initiatives. The proposal will have a direct impact on the integrity and fairness of self-regulatory rules.
Summary of Position
We oppose SRO rule changes becoming effective immediately upon filing, without advance notice, public comment or SEC approval.
Summary of Proposed SEC Rule Change
Self Regulatory Organizations ("SROs") generally must file proposed rule changes with the SEC for notice, public comment, and approval prior to implementation, under Section 15 (b) of the Exchange Act. The SEC has a thirty-day period to review SRO rule filings and to consider public comment. This administrative process ensures that SROs fulfill the purposes of the Exchange Act and refrain from using their regulatory powers in an unfair or anticompetitive manner detrimental to investors.
The proposal would streamline the process for filing and authorizing SRO rule modifications under the federal securities laws in several respects.
New Rule 19b-6 under the Exchange Act would implement these features, and would replace current Rule 19b-4. The SEC would retain its statutory authority to abrogate SRO rule changes submitted under §19(b)(3) within 60 days of filing.
Rationale for the Proposed Rule
According to the release, SROs operating securities markets increasingly face competition from "Alternate Trading Systems", which bring together purchasers and sellers of securities or perform functions commonly performed by a stock exchange. Broker-dealer Alternate Trading Systems are not registered as exchanges and can make changes to trading procedures and systems swiftly without waiting for SEC approval. The SEC's streamlined procedures, therefore, were proposed in response to concerns that U.S. self-regulatory organizations "can be placed at a competitive disadvantage because they must wait for the completion of the public comment period and the Commission review process before implementing similar changes."
The release also explains that the proposal will allow SROs "to better compete in a global marketplace, especially because foreign markets may be subject to different regulations than U.S. markets." The expedited procedures are expected "to foster innovation and allow SROs to more adapt quickly and meet the needs of marketplace participants without waiting for Commission approval of proposed rule changes."
1. Absence of Regulatory or Marketplace Need
The need for the proposed rule change is not compelling. The release indicates that streamlined SRO rule approval is justified because U.S. self-regulatory organizations face competitive disadvantages from alternate trading systems that can make trading procedure changes swiftly without waiting for SEC approval. The release also states that automatically effective rule changes will allow SROs to better compete in the global marketplace because foreign markets may be subject toregulations different from U.S. markets.
The need for the rule change has been asserted, but not proven. No evidence shows that SROs face competitive disadvantage from alternative trading systems or foreign markets due to SEC oversight and public comment. A causal link between the competitive disadvantages and regulatory review does not appear. Only five paragraphs out of 13 Federal Register pages discuss the rationale for the proposed rule changes. Unproven theoretical concerns do not merit alteration of SRO rule review. This matter warrants further study to authoritatively document the need for regulatory change and the benefits to be achieved.
The scant justification offered in the release exclusively concerns expedited treatment for SRO trading rules. Nothing in the release explicitly supports the immediate effectiveness of the other categories of "noncontroversial" SRO rule filings without SEC oversight and advance public scrutiny. At best, this segment of the proposal appears to be offered solely at the request of SROs under the guise of regulatory efficiency.2
We are not modern-day Luddites opposing all regulatory modernization. Indeed, we have historically supported commendable SEC endeavors to improve regulation, such as prospectus simplification and plain-English disclosure. We oppose this initiative, however, because SEC oversight and public comment provide important balance against SRO conduct that may harm competition and favor full service broker-dealers. Moreover, we strongly doubt that removal of a 30 day period for SEC review and public comment will measurably "foster innovation" or help SROs "quickly implement new technology."
Competitors to the exchanges operated by SROs will continue to occur in the marketplace. Endless disparities in regulation between SROs and alternative securities trading markets can be expected. Will SROs be entitled to lower standards every time a new competitor evolves? Of course not. The rationale offered in the release, however, provides a least common denominator approach to regulation. Eliminating SEC scrutiny and advance public comment based on competitors' different regulation creates a slippery analytical slope, particularly in the absence of strong justification. A race to the bottom serves the marketplace poorly.
Much of the delay SROs experience in obtaining rule change approval is self-inflicted. The release indicates that SEC review time "is lengthened because the SROs often must correct, clarify, or further substantiate their proposals to address issues identified by the reviewing staff." Elsewhere, the release notes "past problems with SROs submitting unclear and internally inconsistent rule filings." Statistically, the results speak for themselves. In 2000, 10 of 12 NASD petitions for SEC rule approval (83%) had amendments filed.3 Between one and five amendments were filed in each of the 10 petitions, for a total of 19 amendments. Inadequate rule filings are poor cause for abolishing balanced SEC evaluations about competitive impact and the public interest.
According to the release, there are currently 24 SROs, each of which filed an average of 21 rule change proposals per year. The release estimates that in 1999, there were 95 SRO rule filings that could qualify for expedited treatment under the proposed rule. In the absence of strong supporting rationale, 95 automatically effective SRO rule changes per year without SEC evaluation of either competitive impact and public interest are too many.
2. Impairments to Competition Through Abbreviated Rule Review
When it amended the Exchange Act in 1975, Congress specifically charged the SEC with the responsibility to evaluate competitive burdens of SRO rules and rule changes. The Senate report on the legislation stated that:
Sections 6(b)(8), 19(b) and 19(c) of the Exchange Act would obligate the Commission to review existing and proposed rules of the self-regulatory organizations and to abrogate any present rule, or to disapprove any proposed rule, having the effect of a competitive restraint it finds to be neither necessary nor appropriate in furtherance of a legitimate regulatory objective.4
Section 23(a) of the Exchange Act was also added in 1975, and requires the SEC to consider the anti-competitive effects of rule changes, and to balance any impact against the regulatory benefit tobe obtained.5 Similarly, Sections 15A(b)(6)and (9) of the 1934 Act require the SEC to evaluate carefully the competitive impact of proposed SRO rules and amendments.
The Securities Act Amendments of 1975 significantly expanded the SEC's oversight and regulatory powers concerning SRO rules, and specifically directed the SEC to carefully evaluate competitive factors in exercising its SRO oversight. Importantly, Congress did not intend to confer general antitrust immunity on SRO rulemaking that was subject to the SEC's oversight review.6
The antitrust immunity created by Congress contemplates active oversight by the SEC in executing its responsibilities to ensure consistency with the securities laws, and to blunt the anticompetitive behavior inherent in self regulatory conduct. Otherwise, a Congressional grant of substantial regulatory authority to private organizations without federal regulatory oversight would violate the constitutional prohibition against the delegation of legislative powers.
In order for SEC review to provide immunity for self regulatory conduct, the review must be active, and must result in a ruling by the SEC that is judicially reviewable.7 Section 25 of the 1934 Act states that the SEC's actual findings are conclusive if supported by substantial evidence, and that its decisions should be overturned only if "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law, the excess of statutory jurisdiction, authority, or limitations, or short of statutory right, or without observance of procedures required by law."
The proposed rule amendments fail the statutory safeguards to competition set forth above. Immediate effectiveness of SRO rule changes upon filing, without advance notice, public comment or SEC approval would exacerbate troubling anticompetetive deficiencies in SRO rulemaking and governance. The ability of commentators to critique SRO proposals before they become effective has been an important prophylactic against unnecessary competitive mischief.
A bit of background may shed light on our concern. The NASD is the primary, if not sole, SRO for most broker-dealers affiliated with life insurers. These broker-dealers are different from full service broker-dealers in their structure, operation, products, and services. The securities activities of broker-dealers affiliated with life insurers are a component of a larger insurance business. As a by-product of this relationship, supervision and compliance is often conducted through the vehicle of an insurance distribution system. Unlike full service firms, therefore, broker-dealers affiliated with life insurers tend to have many small, geographically dispersed offices. Broker-dealers affiliated with life insurers typically market a significantly narrower range of securities than full service firms, and usually concentrate on variable life, variable annuity, and mutual fund sales. For product and operational differences, several NASD Rules of Conduct apply differently to this type of broker-dealer.
Over the past ten years, a growing number of NASD administrative actions have unreasonably impaired marketplace competition for broker-dealers affiliated with life insurers, and the insurers whose products they distribute. The record explained below speaks for itself.
Currently pending before the SEC for approval is an NASD petition to adopt new NASD Conduct Rule 0116 "to enumerate the NASD rules and interpretive materials that apply to exempted securities, including governmental securities, other than municipal securities", and "to codify an NASD staff interpretation that the non-cash compensation provisions in NASD Conduct Rule 2820(g) apply to group variable contracts that are exempted securities." The NASD filing stated that the initiative will be beneficial by enabling broker-dealers and interested parties to identify which NASD rules apply to exempted securities in a more efficient manner.
The petition and its notice characterized this rule as simple ministerial housekeeping. In truth, the proposal seeks SEC blessing of a significant enlargement of the NASD's jurisdiction over exempt securities sales never authorized by Congress or the SEC. The NASD's request for approval, therefore, is significantly more than a codification and enumeration of applicable rules and interpretations. For the first time, unauthorized NASD administrative actions will be open for clear examination by the public and review by the SEC.
The ACLI opposed the NASD's request for accelerated approval of Rule 0116, and identified significant competitive impairments, administrative irregularities, and abuses of Congressional intent in the NASD rule proposal.8 In its wisdom, the SEC denied the request for accelerated approval, andpermitted advance public input. As one example of anticompetitive consequences, comment letters cited some group annuities being closed out of the marketplace through application of the rule. The NASD, however, avoided this core issue in its Response to Comments filed with the SEC.9 In light of these practices, the NASD and NASDR should not be able to adopt immediately effective rule changes without advance notice, public comment, and SEC approval.
In another action, the ACLI strongly opposed the SEC's approval of an earlier NASD rule change requiring pre-distribution review by a registered principal of all incoming written correspondence directed to registered representatives. This action fit the numerous small and geographically dispersed offices of insurance agencies poorly, and imposed high compliance costs and competitive burdens. In response, the SEC suspended its order approving the NASD rule changes in February 1998, and agreed to study the issue further.10
As a result of the further consideration, the NASD adopted rule amendments that permit correspondence supervision tailored to the unique structure and operation of broker-dealers affiliated with life insurers, and that may vary depending on a firm's office structure. The revised rule also permits a registered representative or an associated person to review correspondence to identify customer complaints and funds. The prior rule mandated that registered principals open and review all mail prior to distribution, and would have fit small offices poorly. The life industry supported these changes and commended the NASD's action.
Several other NASD rule developments underscore the utility of public comment and SEC approval to ensure fair rules and balanced competition. NASD Conduct Rule 3070 requires broker-dealers to submit summary statistics concerning customer complaints to the NASD. This 1995 rule was designed to parallel comparable provisions of New York Stock Exchange Rule 351. During the NASD's deliberations on the rules, broker-dealers affiliated with life insurers noted operational and practical problems with the rule. Unlike full service firms, insurance affiliated broker-dealers were not generally members of the New York Stock Exchange. Compliance with the new customer complaint rule, therefore, was not automatic for all for broker-dealers affiliated with insurers.
Rule 3070 was adopted without implementing interpretive clarifications suggested by the life insurance industry, and caused significant unnecessary burdens. For example, an unclarified, literal application of Rule 3070 would have caused one large life insurance company to report 12,000 incidents per year, although only 600 involved securities sales practices intended to be reported under the rule. This occurred because the initial rule elicited reports about ministerial, non-securities complaints concerning fixed insurance and fixed annuity sales outside the NASD's authority. Broker-dealers reporting an excessive number of complaints could be unnecessarily targeted for special examination or investigation. This disparity had virtually no impact on full service broker-dealers because they typically do not market fixed life insurance or fixed annuities.
The ACLI began a dialogue with the NASD to rectify Rule 3070 in 1996, which was followed by a no-action request dated September 30, 1996.11 In March 1998, the NASD ultimately corrected this situation with amendments to Forms U-4 and U-5.12 This unnecessary administrative burden could have been avoided had the NASD not assumed all broker-dealers were members of the New York Stock Exchange, or had addressed the industry's concerns at the outset.
This particular incident is especially topical because proposed Rule 19b-6 would define "copycat" rules paralleling other SRO rules to be a new form of "noncontroversial" rule change. The history of Rule 3070 shows that immediately effective rules can create burdensome, mischievious results, even when they replicate existing rules of other SROs and appear noncontroversial.
In 1988, the NASD sought to amend its rules and prohibit associated persons from concurrently registering with more than one broker-dealer. The proposal was modeled on the template of full service firms that typically prohibited salespersons from associating with another broker-dealer. The rule change, however, competitively impaired broker-dealers affiliated with life insurers that allowed salespersons to affiliate with another broker-dealer and access a broader menu of products or services for clients. Dual registration also helped to attract and retain skilled salespersons, and required both broker-dealers to be fully responsible for the individual's supervision. In response to negative feedback from limited purpose broker-dealers, the NASD withdrew the proposal.
The examples of administrative and competitive deficiencies highlighted above were unnecessary and avoidable. SRO rules should not favor full service broker-dealers to the detriment of other competing broker-dealers. There are several systemic reasons why this imbalance tends to occur.
The NASD's governance and committee makeup do not reflect the composition of its membership. Although more than 50% of the NASD's 680,468 registered representatives work for broker/dealers affiliated with life insurance companies, not a single member of the NASD Board of Governors works for a life insurance company or a broker-dealer affiliated with a life insurance company.13
The NASDR committee with jurisdiction over broker-dealers affiliated with life insurers is a combined Independent Dealer/Insurance Affiliate Committee. Only five of the 13 committee members have connections to broker-dealers affiliated with life insurance companies. In contrast, the NASDR Bank Broker/Dealer Committee is primarily composed of members with affiliations to the banking industry, as it should.
The life insurance industry operates in a highly competitive financial services marketplace. Efficient regulation is an important component of competition. In November 1999, the ACLI issued an extensive report entitled Regulatory Efficiency and Modernization. Among other things, the report pinpointed aspects of state and federal regulation working well, and identified those aspects hindering life insurers' ability to compete effectively.14 One segment of the report evaluated the federal regulation of variable annuities and variable life insurance.
The NASD's overall score in the report was: Needs Improvement. In summary, the report noted:
The need for self regulation in securities distribution is critical to market conduct and investor protection. NASDR's regulatory objective is sound and the structure exists to fulfill its mandate. Regrettably, a number of significant NASDR rules and interpretations fit broker/dealers affiliated with life insurers poorly, being designed on the template of full service broker/dealers. Accordingly, compliance costs are often unnecessarily high, and impose a burden on competition. NASDR has exhibited an insensitive, and sometimes hostile, attitude toward variable products and insurance broker/dealers. NASDR is slow in completing regulatory initiatives, and slow in seeking insurance industry input. Turn around on advertising review is good, although policy determinations are occasionally inconsistent or arbitrary.
The NASD's specific elements were rated as follows:
Equity Products - National Association of Securities Dealers (NASD)
|Overall Score||Needs Improvement|
|Necessity and Relevance||Excellent|
|Sensitivity to Industry||Unsatisfactory|
By way of comparison, the SEC's overall score in the report was: Good. In summary, the report noted:
The SEC is legitimately considered one of the best federal regulators. Traditionally, the Staff has sought to accommodate the evolution and increasing sophistication of life insurance equity-based product offerings, and has generally managed to do so without sacrificing its regulatory objectives or creating imbalances favoring insurers or non-insurers competing in various financial services markets. Most problems encountered by insurers with the SEC are engendered because the securities statutes were not formulated with insurance company products in mind. Although insurance products are regulated by a special office of insurance products in Investment Management Division, the office is small considering the volume of product filings.
The SEC's specific elements were rated as follows:
Equity Products - Securities and Exchange Commission (SEC)
|Necessity and Relevance||Excellent/Good|
|Sensitivity to Industry||Good/Excellent|
Not all broker-dealers are full service firms. NASD rules are too often designed in a one-size-fits all approach. We are concerned that automatic effectiveness of NASD rules without advance notice, public comment and SEC approval will force insurance affiliated broker-dealers to face unwarranted competitive disadvantages. It is strangely ironic that rule changes helping SROs avoid competitive disadvantages from Alternate Trading Systems and foreign exchanges would facilitate competitive disadvantages for broker-dealers competing with full service firms.
NASD Regulation was established in 1996 "as part of an unprecedented restructuring of the NASD, a major feature of which was to separate the regulation of the broker/dealer profession from the operation of the Nasdaq Stock Market."15 The NASD's bifurcation occurred to assure regulation and enforcement were independent of competitive and business pressures from NASD members. Some have expressed concern that as the NASDR seeks financial self-sufficiency, interpretations may be influenced by their positive impact on revenue.
Regrettably, in the interest of protecting the Nasdaq from competition, proposed Rule 19b-6 facilitates procedures for immediately effective NASD rule amendments that could favor full service firms over their competitors. This juxtaposition is not tenable. It directly contradicts the reasons for spinning off the NASD's regulatory functions in 1996 following an SEC sanction for ineffective enforcement.
3. Administrative Procedure Act Considerations
Several definitional and procedural features of the proposal contradict the APA. In a number ofplaces, Proposed Rule 19b-6(b)(4), (5) and (6) uses terminology that is unacceptably vague under the APA. For example, Rule 19b-6(b)(5) allows immediate effectiveness of rule changes designated by an SRO as:
Likewise, proposed Rule 19b-6(b)(6) allows immediate effectiveness of trading a rule change designated by an SRO as:
The italicized words are not defined in the rule proposal or the 1934 Act. The meaning and application of these benchmarks can be interpreted differently by marketplace competitors, regulators, and investors. A rule change burden on competition that is not significant to full service broker-dealers may be significant to competing broker-dealers. Similarly, what is not significant to the protection of some investors may be highly significant for other differently situated investors.
These important, but undefined, terms can quickly lead to unresolvable interpretive confusion. Those challenging an automatically effective SRO rule will be deprived of clear benchmarks to measure a rule's legitimacy. Even the SEC will be hard pressed to abrogate automatic rules on these standards. Absent advance SEC scrutiny and public notice and comment, SRO rulemaking will remain in the shadows and out of the sunlight.
The undefined terms of Rule 19b-6 italicized above fail the APA's requirement for clear language capable of interpretation and judicial review. The words significantly, minor, and fundamental are equivocal and insufficiently precise for a federal rule because they are judgmental in nature. Like beauty in the eye of the beholder, these terms are ephemeraly defined by the user. The federal securities laws deserve better than moving targets of interpretation.
Automatically effective SRO rule changes contradict the APA's requirement for reasonable periods for notice and comment. This protection is especially important for meaningful participation by trade groups and large industries. The special time burdens confronting regulated industries and large organizations in digesting regulatory proposals was explicitly recognized by the AdministrativeConference of the United States in its publication entitled A Guide to Federal Agency Rulemaking which observes:
The 60-day period established by Executive Order 12044 for significant regulations (and no longer in effect unless adopted by agency rule) is a more reasonable minimum time for comment. However a longer time may be required if the agency is seeking information on particular subjects or counter-proposals from regulated industry. "Interested persons" often are large organizations and they need time to coordinate and approve an organizational response or to authorize expenditure of funds to do the research needed to produce informed comments.16
After-the-fact opportunity to challenge an SRO rule change occurs too late, because irreparable damage to competition or investors will have already occurred. For example, the NASD's illicit assertion of jurisdiction over the sale of unregistered group annuities in Notice to Members 97-27 closed out of the market some life insurers relying on independent distributors. Long standing selling relationships evaporated after broker-dealers could deny distribution agreements following the NASD's assertion of jurisdiction without explicit SEC approval. Recovery of previous selling arrangements will be unlikely when, and if, the SEC intervenes in the NASD's request for approval of its Rule 0116 on this issue. The four year hiatus between the NASD's action and the SEC's currently pending review is too lengthy to adequately protect against anticompetitive SRO conduct.
Similarly, the NASD's three year delay in narrowing the scope of its Rule 3070 to cover only securities-related complaints over which it had jurisdiction created avoidable competitive burdens, and unnecessarily exposed one subset of broker-dealers to reputational damage. The NASD's unsuccessful attempt to obtain accelerated approval of Rule 0116 on an important matter of competition and investor protection underscores the need for uncompressed notice and comment periods under the APA, and explicit SEC approval of SRO rule changes.
An after-the-fact opportunity to challenge SRO abuses, therefore, is impotent and hollow. SEC abrogation procedures and ex post facto public scrutiny are like trying to unscramble eggs. Often, competitive marketplace damage cannot be undone.
4. Rule 19b-6 Degrades Statutory Protections
Rule 19b-6 is an unnecessary abdication of the SEC's statutory duty to protect investors and competition in SRO rule filings. After-the-fact SEC abrogation of self-certified SRO rule changes unreasonably threatens competition and investor protection. These risks are unwarranted because the proposal fails to demonstrate a nexus between a delayed 30 day effectiveness period for trading rules and competition from foreign markets or Alternate Trading Systems. Even worse, the release offers nothing to justify immediate effectiveness for the other categories of "noncontroversial" SRO rule changes. Automatic effectiveness of SRO rule modifications without SEC scrutiny effectively leaves the fox guarding the chicken coop.
Auto-certification by SROs that rule changes do not significantly burden competition or do not significantly affect investor protection is an inadequate substitute for impartial SEC determinations on these matters. The nebulous self-certification standards in Rule 19b-6 invite unwarranted SRO mischief in claiming changes do not have a significant burden on competition, or do not significantly affect investor protection.
Although the proposal does not allow any inference that the SEC has made determinations on investor protection or anticompetitive burdens in automatically effective SRO rule changes, this qualification does not honestly discharge the 1934 Act's concern for anticompetitive SRO conduct and investor protection. In the absence of explicit SEC approval, Rule 19b-6 effectively operates as an inappropriate delegation to SROs of SEC legislative and administrative responsibilities. This initiative establishes a repugnant deference to SROs.
We agree with the SEC's sentiment that the SRO "rule review process serves fundamental public policy goals" of preventing unfair practices and advancing the public interest.17 The approach of Rule 19b-6 does a great disservice to these statutory principles. The regulatory need to threaten fair competition and investor protection has not been established. The NASD's track record in promulgating rule changes favoring full service broker-dealers augurs heavily against Rule 19b-6. Pulling the plug on this rule restores the paramount priority of marketplace competition over a mere thirty-day delay in rule effectiveness.
5. Alternative Solutions to Expedited SRO Rule Approval
The most effective solution to expedited SRO rule changes lies within the SROs' own control. As the release observes, SEC review time "is lengthened because the SROs often must correct, clarify, or further substantiate their proposals to address issues identified by the reviewing staff." The SEC also criticized "past problems with SROs submitting unclear and internally inconsistent rule filings." The system is not in need of repair based on these kinds of delay. Instead, SROs can do a better job of getting rule filings right on the first submission.
No evidence suggests that the delay in SRO rule approval is attributable to the SEC's resources. From our perspective, the SEC staff has processed properly formed SRO rule filings in an appropriately timely fashion. Nonetheless, perhaps authorization for more staff in the Division of Market Regulation to process SRO rule filings would provide added capacity to expedite SRO rule filings even more swiftly. This is a preferable alternative to eliminating advance notice, public comment, and SEC review of SRO rule changes.
The life insurance industry supports efficient, effective federal securities regulation. A number of commendable initiatives, such as prospectus simplification, have simultaneously streamlined regulation and enhanced meaningful disclosure to the benefit of consumers. With a flexible approach to new developments in the marketplace, the SEC has improved regulatory efficiency while protecting the integrity of the U.S. capital markets.
The SEC should, however, jettison proposed Rule 19b-6. It is a retrograde rule not warranted by the unproven benefits alleged in the release. The need for automatically effective SRO rules is uncompelling. Moreover, there is no nexus between the current 30-day delayed effectiveness procedure and the ability of SRO exchanges to compete with foreign markets or alternate trading markets.
Imbalances in SRO governance can produce rules favoring subcategories of broker-dealers to the detriment of others. Advance notice, public comment and SEC review of SRO rule changes better serves the important mandates of the 1934 Act to protect marketplace competition and investors. After-the-fact review and abrogation procedures are inadequate substitutes for deliberative, independent SEC analysis. SRO self-certification of competitive impact and investor protection effectively leaves the fox guarding the chicken coop.
Other less intrusive alternatives can expedite approval of SRO rule changes. SROs can greatly accelerate turn-around on rule submissions by filing clear, internally consistent materials. This practice will reduce the need for multiple amendments that procrastinate approval. Although the SEC staff has historically processed SRO filings expeditiously, perhaps authorization for additional staff to review SRO filings would allow even quicker approval.
As drafted, proposed Rule 19b-6 is defective under the Administrative Procedure Act. Several operative terms in the rule are critically vague, and incapable of clear interpretation. Without rectification, the rule gives SROs carte blanche to determine whether their actions significantly burden competition, make fundamental changes to the market, or significantly affect investor protection. Such practices unreasonably abdicate important SEC administrative and statutory responsibilities to SROs.
We greatly appreciate the opportunity to express our views on proposed Rule 19b-6. We hope to continue to have the opportunity to offer advance comment on SRO rule filings. If any questions develop, please call.
Carl B. Wilkerson
|1||The release identifies this category as "copycat" filings of SRO rules previously filed with, and approved by, the SEC pursuant to Section 19(b)(2) of the Exchange Act.|
|2||In 1994 amendments to Rule 19b-4, t he SEC declined SROs' recommendation that the 30-day delay for noncontroversial rule changes be shortened or eliminated. See text accompanying note 41 in34 Act Release No. 43860.|
|3||See, 2000 Rule filings, NASD website at http//www.nasdr.com/2685_2000.htm|
|4||S. Rep. 94, 94th Cong., 1st Sess. (April 14, 1975) at 12.|
|5||Id. at 12.|
|6||See, Smythe, Government Supervised Self-Regulation in the Securities Industry and the Antitrust Laws: Suggestions for an Accommodation, 62 N.C. L. Rev. 475 (1984) at 504 [the SEC has an obligation in reviewing SRO conduct to "weigh the competitive impact in reaching regulatory conclusions"].|
|8||A copy of the ACLI letter of comment on this matter is attached and identified as Exhibit #1.|
|9||See, NASD Response to Comments( January 26, 2001) http://www.nasdr.com/pdf-text/rf00_38_resp.pdf|
|10||A copy of ACLI's letter of comment on this action is attached and identified as Exhibit #2. This rule action also raised issues under the APA because the first NASD rule change approved by the SEC contained more restrictive standards than those first proposed.|
|11||A copy of ACLI's interpretive request concerning Rule 3070 is attached and identified has Exhibit #3.|
|12||See, Special NASD Notice to Members 98-27 (March 1998), which clarified that only customer complaints and proceedings involving securities or commodities transactions were reportable under Rule 3070.|
|13||The NASD board includes a member who retired from a large mutual life insurance company in 1998.|
|14||The report provided an overall score aggregating the results of the following rating factors: Uniformity; Speed/Timing; Cost; Objective Achieved; Necessity and Relevance; and, Expertise/Capacity. The report's ratings were: Excellent; Good; Needs Improvement; and, Unsatisfactory. Some ratings were a combination, such as Good/Needs Improvement. A copy of the report's discussion of SEC and NASD regulation is attached and identified as Exhibit #4.|
|15||NASD Manual (CCH) [Profile of the NASD] at 151 (2001).|
|16||See, A Guide to Federal Agency Rulemaking (1983) at 124. The Administrative Conference's observations relate generally to rulemaking under the Administrative Procedure Act rather than approval of SRO rule changes under Section 19(b)(1) of the 1934 Act. The justification for reasonable periods of time for commentary from trade associations and regulated broker-dealers is nonetheless instructive.|
|17||1934 Act Rel. No.43860, 66 Fed. Reg. 24 at 8914.|