FROM REQUIREMENTS IN RULES 15c3-1 AND 15c3-3 UNDER THE

SECURITIES AND EXCHANGE COMMISSION  
(Release No. 34-56376)  
September 7, 2007  
ORDER GRANTING A CONDITIONAL EXEMPTION TO BROKER-DEALERS 
FROM REQUIREMENTS IN RULES 15c3-1 AND 15c3-3 UNDER THE 
SECURITIES EXCHANGE ACT OF 1934 TO PROMPTLY TRANSMIT 
CUSTOMER CHECKS FOR THE PURCHASE OF DEFERRED VARIABLE 
ANNUITY CONTRACTS 
I.          Background
 
The Securities and Exchange Commission (the “Commission”) today approved 
new National Association of Securities Dealers (“NASD”)
1
 Rule 2821.
2
  NASD Rule 
2821 sets forth recommendation requirements (including a suitability obligation), 
principal review and approval requirements, and supervisory and training requirements 
with respect to transactions in deferred variable annuities.   
According to the NASD, it designed the rule to address significant and persistent 
sales-practice problems in sales of deferred variable annuities.  One component of Rule 
2821 is a requirement that registered principals perform a comprehensive and rigorous 
review of the transactions.  Specifically, Rule 2821(c) states, in part, that:  “Prior to 
transmitting a customer’s application for a deferred variable annuity to the issuing 
insurance company for processing, but no later than seven business days after the 
customer signs the application, a registered principal shall review and determine whether 
he or she approves of the purchase or exchange of the deferred variable annuity.” 
                                                
 
1
  On July 26, 2007, the Commission approved a proposed rule change filed by NASD to amend 
NASD’s Certificate of Incorporation to reflect its name change to Financial Industry Regulatory 
Authority, Inc., or FINRA, in connection with the consolidation of the member firm regulatory 
functions of NASD and NYSE Regulation, Inc. See
 Exchange Act Release No. 56146 (July 26, 
2007), 72 FR 42190 (Aug. 1, 2007). 
2 
            See Exchange Act Release No. 56375 (Sep. 7, 2007). 

 
2
Many broker-dealers are subject to lower net capital requirements under 
Securities Exchange Act of 1934 (“Exchange Act”) Rule 15c3-1
3
 and are exempt from 
the requirement to establish and fund a customer reserve account under Rule 15c3-3
4
 
because they do not carry customer funds or securities.  Some of these broker-dealers 
receive checks from customers that are made out to third parties.  Pursuant to Rules 15c3-
1 and 15c3-3, a broker-dealer is not deemed to be carrying customer funds if it “promptly 
transmits” the checks to the third parties.
5
  For purposes of Rules 15c3-1 and 15c3-3, the 
term “promptly transmit” means when “such transmission or delivery is made no later 
than noon of the next business day after the receipt of such funds or securities.”
6
   
According to the NASD, a broker-dealer may need to hold customer checks for 
more than one business day in order to comply with Rule 2821.   
II.        Discussion
 
The Commission has decided to exempt broker-dealers from any additional 
requirements of Rules 15c3-1 or 15c3-3 due solely to a failure to promptly transmit a 
check made payable to an insurance company for the purchase of a deferred variable 
                                                
 
3
  17 CFR 240.15c3-1.  The purpose of Rule 15c3-1 is to ensure that a broker or dealer at all times 
has sufficient liquid assets to promptly satisfy the claims of customers if the broker or dealer goes 
out of business. 
4
  17 CFR 240.15c3-3.  The purpose of Rule 15c3-3 is to protect customers by assuring that broker-
dealers do not use customers’ funds or securities to fund the broker-dealer’s operations.  Among 
other things, Rule 15c3-3 requires that a broker-dealer make a periodic computation of the amount 
of money it is holding that constitutes customer funds or funds obtained from the use of customer 
securities.  If this amount exceeds the amount of money customers owe the firm, the broker-dealer 
must deposit the excess in a special reserve bank account for the exclusive benefit of the firm’s 
customers. 
5
  When it amended the net capital rule in 1992, the Commission stated that a broker-dealer shall not 
be deemed to receive funds from customers if it receives checks made payable to certain entities 
other than itself (such as another broker-dealer or an escrow agent) and promptly transmits such 
funds.  Exchange Act Release No. 31511 (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992). 
6
  See Exchange Act Release No. 31511 (Nov. 24, 1992), note 11, and 17 CFR 240.15c3-1(c)(9).   

 
3
annuity product by noon of the business day following the date the broker-dealer receives 
the check from the customer, provided:  
(i)     the transaction is subject to the principal review requirements of NASD Rule 
2821 and a registered principal has reviewed and determined whether he or she 
approves of the purchase or exchange of the deferred variable annuity within 
seven business days in accordance with that rule; 
(ii)    the broker-dealer promptly transmits the check no later than noon of the 
business day following the date a registered principal reviews and determines 
whether he or she approves of the purchase or exchange of the deferred variable 
annuity; and 
(iii)   the broker-dealer maintains a copy of each such check and creates a record of 
the date the check was received from the customer and the date the check was 
transmitted to the insurance company if approved, or returned to the customer if 
rejected. 
The purpose of Rule 15c3-1 is to ensure that a broker or dealer at all times has 
sufficient liquid assets to promptly satisfy the claims of customers and other creditors if 
the broker or dealer goes out of business.  One purpose of Rule 15c3-3 is to protect 
customers by assuring that broker-dealers do not use customers’ funds or securities to 
fund the broker-dealer’s operations.  The reasons these rules require that a broker-dealer 
promptly forward checks is to reduce the risk that a broker-dealer or an associated person 
of a broker-dealer will convert or misuse customer funds or securities and to assure that 
the price of the security the customer purchases has not moved substantially from the date 
the customer decided to purchase that security. 
In the Approval Order for Rule 2821 we stated, 

 
4
“[Proposed Rule 2821] is designed to curb sales practice abuses in 
deferred variable annuities.  Its recommendation requirements provide a 
specific framework for a broker-dealer’s suitability analysis of these 
securities.  By setting forth factors that a broker-dealer must specifically 
consider in recommending deferred variable annuities and requiring the 
registered representative to obtain certain information from his or her 
customers, the proposed rule should improve communications between 
registered representatives and customers regarding these securities.  The 
supervisory review component should foster a thorough analytical review 
of every deferred variable annuity transaction in a timeframe that will 
limit the possibility of unsuitable recommendations and transactions.  The 
proposed rule as a whole is geared to protecting investors by requiring 
firms to implement more robust compliance cultures, and to give clear 
consideration of the suitability of these complex products.” 
Further, we found that Rule 2821 is designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, and, in general, to protect 
investors and the public interest.  Consequently, we approved NASD’s proposed Rule 
2821. 
As we believe the NASD’s Rule 2821 to be in the public interest but a broker-
dealer would be burdened with additional requirements under Exchange Act Rules 15c3-
1 and 15c3-3 were it to comply with Rule 2821, we must balance the investor protections 
provided by Rules 15c3-1 and 15c3-3 with those provided by Rule 2821.  For this reason, 
we have specifically tailored the above-described exemption. 
First, the exemption is specifically limited to situations where a broker-dealer has 
failed to promptly transmit “a check made payable to an insurance company for the 
purchase of a deferred variable annuity product,” and “the transaction is subject to the 
principal review requirements of NASD Rule 2821 and a registered principal has 
reviewed and determined whether he or she approves of the purchase or exchange of the 
deferred variable annuity within seven business days in accordance with that rule.”  In all 

 
5
other situations where a check is received by a broker-dealer and is not promptly 
forwarded, the full provisions of both Rule 15c3-1 and 15c3-3 still apply. 
Second, the exemption requires a broker-dealer to promptly transmit such checks 
no later than noon of the business day following the date a registered principal reviews 
and determines whether he or she approves of the purchase or exchange of the deferred 
variable annuity.  This is designed to assure that the broker-dealer holds the customer’s 
check no longer than is necessary to comply with Rule 2821.  
Third, a broker-dealer must maintain a copy of each such check and create a 
record of the date the check was received from the customer and the date the check was 
transmitted to the insurance company if approved, or returned to the customer if rejected.  
This requirement will allow the broker-dealer’s compliance and internal audit 
departments, as well as Commission, self-regulatory organization, and other examiners to 
verify that a broker-dealer is complying with the provisions of this exemption.  
For the foregoing reasons, the Commission finds that granting the above-
described exemption is necessary and appropriate in the public interest, and is consistent 
with the protection of investors. 
III.       Conclusion
 
Accordingly, IT IS ORDERED, pursuant to Section 36 of the Exchange Act
7
 that, 
a broker-dealer shall be exempt from any additional requirements of Rules 15c3-1 or 
15c3-3 due solely to a failure to promptly transmit a check made payable to an insurance 
                                                
 
7
  Section 36 of the Exchange Act authorizes the Commission, by rule, regulation, or order, to 
conditionally or unconditionally exempt any person, security, or transaction, or any class or 
classes of persons, securities, or transactions from any provision or provisions of the Exchange 
Act or any rule or regulation thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the protection of investors. 

 
6
company for the purchase of a deferred variable annuity product by noon of the business 
day following the date the broker-dealer receives the check from the customer, provided:  
(i)     the transaction is subject to the principal review requirements of NASD Rule 
2821 and a registered principal has reviewed and determined whether he or she 
approves of the purchase or exchange of the deferred variable annuity within 
seven business days in accordance with that rule;  
(ii)    the broker-dealer promptly transmits the check no later than noon of the 
business day following the date a registered principal reviews and determines 
whether he or she approves of the purchase or exchange of the deferred variable 
annuity; and 
(iii)   the broker-dealer maintains a copy of each such check and creates a record of 
the date the check was received from the customer and the date the check was 
transmitted to the insurance company if approved, or returned to the customer if 
rejected. 
By the Commission.  
 
 
 
Nancy M. Morris  
Secretary  

SECURITIES AND EXCHANGE COMMISSION  
(Release No. 34-56376)  

September 7, 2007  

ORDER GRANTING A CONDITIONAL EXEMPTION TO BROKER-DEALERS 
FROM REQUIREMENTS IN RULES 15c3-1 AND 15c3-3 UNDER THE 
SECURITIES EXCHANGE ACT OF 1934 TO PROMPTLY TRANSMIT 
CUSTOMER CHECKS FOR THE PURCHASE OF DEFERRED VARIABLE 
ANNUITY CONTRACTS 

I. Background 

The Securities and Exchange Commission (the “Commission”) today approved 

new National Association of Securities Dealers (“NASD”)1 Rule 2821.2  NASD Rule 

2821 sets forth recommendation requirements (including a suitability obligation), 

principal review and approval requirements, and supervisory and training requirements 

with respect to transactions in deferred variable annuities.   

According to the NASD, it designed the rule to address significant and persistent 

sales-practice problems in sales of deferred variable annuities.  One component of Rule 

2821 is a requirement that registered principals perform a comprehensive and rigorous 

review of the transactions.  Specifically, Rule 2821(c) states, in part, that:  “Prior to 

transmitting a customer’s application for a deferred variable annuity to the issuing 

insurance company for processing, but no later than seven business days after the 

customer signs the application, a registered principal shall review and determine whether 

he or she approves of the purchase or exchange of the deferred variable annuity.” 

                                                 
1  On July 26, 2007, the Commission approved a proposed rule change filed by NASD to amend 

NASD’s Certificate of Incorporation to reflect its name change to Financial Industry Regulatory 
Authority, Inc., or FINRA, in connection with the consolidation of the member firm regulatory 
functions of NASD and NYSE Regulation, Inc. See Exchange Act Release No. 56146 (July 26, 
2007), 72 FR 42190 (Aug. 1, 2007). 

2  See Exchange Act Release No. 56375 (Sep. 7, 2007). 



 2

Many broker-dealers are subject to lower net capital requirements under 

Securities Exchange Act of 1934 (“Exchange Act”) Rule 15c3-13 and are exempt from 

the requirement to establish and fund a customer reserve account under Rule 15c3-34 

because they do not carry customer funds or securities.  Some of these broker-dealers 

receive checks from customers that are made out to third parties.  Pursuant to Rules 15c3-

1 and 15c3-3, a broker-dealer is not deemed to be carrying customer funds if it “promptly 

transmits” the checks to the third parties.5  For purposes of Rules 15c3-1 and 15c3-3, the 

term “promptly transmit” means when “such transmission or delivery is made no later 

than noon of the next business day after the receipt of such funds or securities.”6   

According to the NASD, a broker-dealer may need to hold customer checks for 

more than one business day in order to comply with Rule 2821.   

II. Discussion 

The Commission has decided to exempt broker-dealers from any additional 

requirements of Rules 15c3-1 or 15c3-3 due solely to a failure to promptly transmit a 

check made payable to an insurance company for the purchase of a deferred variable 

                                                 
3  17 CFR 240.15c3-1.  The purpose of Rule 15c3-1 is to ensure that a broker or dealer at all times 

has sufficient liquid assets to promptly satisfy the claims of customers if the broker or dealer goes 
out of business. 

4  17 CFR 240.15c3-3.  The purpose of Rule 15c3-3 is to protect customers by assuring that broker-
dealers do not use customers’ funds or securities to fund the broker-dealer’s operations.  Among 
other things, Rule 15c3-3 requires that a broker-dealer make a periodic computation of the amount 
of money it is holding that constitutes customer funds or funds obtained from the use of customer 
securities.  If this amount exceeds the amount of money customers owe the firm, the broker-dealer 
must deposit the excess in a special reserve bank account for the exclusive benefit of the firm’s 
customers. 

5  When it amended the net capital rule in 1992, the Commission stated that a broker-dealer shall not 
be deemed to receive funds from customers if it receives checks made payable to certain entities 
other than itself (such as another broker-dealer or an escrow agent) and promptly transmits such 
funds.  Exchange Act Release No. 31511 (Nov. 24, 1992), 57 FR 56973 (Dec. 2, 1992). 

6  See Exchange Act Release No. 31511 (Nov. 24, 1992), note 11, and 17 CFR 240.15c3-1(c)(9).   



 3

annuity product by noon of the business day following the date the broker-dealer receives 

the check from the customer, provided:  

(i)  the transaction is subject to the principal review requirements of NASD Rule 

2821 and a registered principal has reviewed and determined whether he or she 

approves of the purchase or exchange of the deferred variable annuity within 

seven business days in accordance with that rule; 

(ii)  the broker-dealer promptly transmits the check no later than noon of the 

business day following the date a registered principal reviews and determines 

whether he or she approves of the purchase or exchange of the deferred variable 

annuity; and 

(iii)  the broker-dealer maintains a copy of each such check and creates a record of 

the date the check was received from the customer and the date the check was 

transmitted to the insurance company if approved, or returned to the customer if 

rejected. 

The purpose of Rule 15c3-1 is to ensure that a broker or dealer at all times has 

sufficient liquid assets to promptly satisfy the claims of customers and other creditors if 

the broker or dealer goes out of business.  One purpose of Rule 15c3-3 is to protect 

customers by assuring that broker-dealers do not use customers’ funds or securities to 

fund the broker-dealer’s operations.  The reasons these rules require that a broker-dealer 

promptly forward checks is to reduce the risk that a broker-dealer or an associated person 

of a broker-dealer will convert or misuse customer funds or securities and to assure that 

the price of the security the customer purchases has not moved substantially from the date 

the customer decided to purchase that security. 

In the Approval Order for Rule 2821 we stated, 



 4

“[Proposed Rule 2821] is designed to curb sales practice abuses in 
deferred variable annuities.  Its recommendation requirements provide a 
specific framework for a broker-dealer’s suitability analysis of these 
securities.  By setting forth factors that a broker-dealer must specifically 
consider in recommending deferred variable annuities and requiring the 
registered representative to obtain certain information from his or her 
customers, the proposed rule should improve communications between 
registered representatives and customers regarding these securities.  The 
supervisory review component should foster a thorough analytical review 
of every deferred variable annuity transaction in a timeframe that will 
limit the possibility of unsuitable recommendations and transactions.  The 
proposed rule as a whole is geared to protecting investors by requiring 
firms to implement more robust compliance cultures, and to give clear 
consideration of the suitability of these complex products.” 

Further, we found that Rule 2821 is designed to prevent fraudulent and manipulative acts 

and practices, to promote just and equitable principles of trade, and, in general, to protect 

investors and the public interest.  Consequently, we approved NASD’s proposed Rule 

2821. 

As we believe the NASD’s Rule 2821 to be in the public interest but a broker-

dealer would be burdened with additional requirements under Exchange Act Rules 15c3-

1 and 15c3-3 were it to comply with Rule 2821, we must balance the investor protections 

provided by Rules 15c3-1 and 15c3-3 with those provided by Rule 2821.  For this reason, 

we have specifically tailored the above-described exemption. 

First, the exemption is specifically limited to situations where a broker-dealer has 

failed to promptly transmit “a check made payable to an insurance company for the 

purchase of a deferred variable annuity product,” and “the transaction is subject to the 

principal review requirements of NASD Rule 2821 and a registered principal has 

reviewed and determined whether he or she approves of the purchase or exchange of the 

deferred variable annuity within seven business days in accordance with that rule.”  In all 



 5

other situations where a check is received by a broker-dealer and is not promptly 

forwarded, the full provisions of both Rule 15c3-1 and 15c3-3 still apply. 

Second, the exemption requires a broker-dealer to promptly transmit such checks 

no later than noon of the business day following the date a registered principal reviews 

and determines whether he or she approves of the purchase or exchange of the deferred 

variable annuity.  This is designed to assure that the broker-dealer holds the customer’s 

check no longer than is necessary to comply with Rule 2821.  

Third, a broker-dealer must maintain a copy of each such check and create a 

record of the date the check was received from the customer and the date the check was 

transmitted to the insurance company if approved, or returned to the customer if rejected.  

This requirement will allow the broker-dealer’s compliance and internal audit 

departments, as well as Commission, self-regulatory organization, and other examiners to 

verify that a broker-dealer is complying with the provisions of this exemption.  

For the foregoing reasons, the Commission finds that granting the above-

described exemption is necessary and appropriate in the public interest, and is consistent 

with the protection of investors. 

III. Conclusion 

Accordingly, IT IS ORDERED, pursuant to Section 36 of the Exchange Act7 that, 

a broker-dealer shall be exempt from any additional requirements of Rules 15c3-1 or 

15c3-3 due solely to a failure to promptly transmit a check made payable to an insurance 

                                                 
7  Section 36 of the Exchange Act authorizes the Commission, by rule, regulation, or order, to 

conditionally or unconditionally exempt any person, security, or transaction, or any class or 
classes of persons, securities, or transactions from any provision or provisions of the Exchange 
Act or any rule or regulation thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the protection of investors. 



 6

company for the purchase of a deferred variable annuity product by noon of the business 

day following the date the broker-dealer receives the check from the customer, provided:  

(i)  the transaction is subject to the principal review requirements of NASD Rule 

2821 and a registered principal has reviewed and determined whether he or she 

approves of the purchase or exchange of the deferred variable annuity within 

seven business days in accordance with that rule;  

(ii)  the broker-dealer promptly transmits the check no later than noon of the 

business day following the date a registered principal reviews and determines 

whether he or she approves of the purchase or exchange of the deferred variable 

annuity; and 

(iii)  the broker-dealer maintains a copy of each such check and creates a record of 

the date the check was received from the customer and the date the check was 

transmitted to the insurance company if approved, or returned to the customer if 

rejected. 

By the Commission.  

 
 
 

Nancy M. Morris  
Secretary