July 19, 2006 

Ms. Nancy M. Morris
Secretary
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090

Re: NASD Proposal Relating to Transactions in Deferred Variable Annuities (File No. SR-NASD 004-183)

Dear Ms. Morris:

The Investment Company Institute¹ supports the goal of NASD's proposed Rule 2821 - to address problems relating to sales practices in the area of deferred variable annuities. Nevertheless, we continue to believe that NASD's proposal sets a bad precedent and may prove unworkable.

While the changes made by NASD in the amendments to the proposal² address several of the Institute's concerns,³ the proposal continues to establish a separate regulatory framework for one particular investment product. Such an approach could lead to the adoption of separate and distinct suitability rules for other complex products, complicating compliance efforts of broker-dealers.⁴ We also continue to question whether a separate rule is necessary to accomplish NASD's goals and instead recommend that NASD rely on and enforce its existing rules and issue updated guidance on sales of deferred variable annuities.⁵

We are pleased that NASD's amendments to the proposal made several changes to the proposed requirements relating to recommendations of deferred variable annuities. In particular, we support the elimination of the provision in the proposal that would have required members to have a reasonable belief that the customer had a need for the deferred variable annuity "as compared with other investment vehicles." However, for the reasons discussed in our prior comment letter, we continue to have concerns about the proposed principal review requirements. This is especially true in situations where the transaction is not recommended. We recommend that NASD not apply the proposed principal review requirements in such situations.⁶ We further note that, whether applied only to transactions involving a recommendation or more broadly, the proposed principal review requirements are overly detailed and prescriptive. We recommend that NASD provide firms with flexibility to design principal review procedures that fit their particular circumstances and business models.

If you have any questions concerning these comments, or would like additional information, please contact the undersigned by at 202/371-5408.

Sincerely,

Ari Burstein
Associate Counsel

Attachment

cc: Andrew J. Donohue, Director
William J. Kotapish, Assistant Director, Office of Insurance Products
Division of Investment Management
Securities and Exchange Commission

Thomas M. Selman, Senior Vice President, Investment Companies/Corporate Financing
James S. Wrona, Associate Vice President and Associate General Counsel, Office of General Counsel
Regulatory Policy and Oversight
NASD

1 The Investment Company Institute is the national association of the American investment company industry. The Investment Company Institute's membership includes 8,712 open-end investment companies (mutual funds), 653 closed-end investment companies, 177 exchange-traded funds, and five sponsors of unit investment trusts. Mutual fund members of the ICI have total assets of approximately $9.212 trillion (representing more than 98 percent of all assets of U.S. mutual funds); these funds serve approximately 89.5 million shareholders in more than 52.6 million households.

2 SEC Release No. 34-54023 (June 21, 2006), 71 FR 36840(June 28, 2006).

3 See Letter from Frances Stadler, Deputy Senior Counsel, Institute, to Jonathan G. Katz, Secretary, Securities and Exchange Commission, dated September 19, 2005 (a copy of which is attached).

4 In a recent speech, Robert R. Glauber, Chairman and CEO of NASD, noted the importance of leveling the playing field of sales rules that cover nearly identical products and stated that "neither broker nor investor is well-served when sales rules for two or more products that look pretty much the same to investors are different for each product." Speech by Robert R. Glauber, Chairman and CEO, NASD, at the ICI General Membership Meeting, May 18, 2006.

5 We also recommend that NASD defer any action in this area until after the working groups formed as a result of NASD's recent Annuity Roundtable complete their examination of the regulatory standards that currently apply to annuity products in general and make recommendations relating to, among other things, supervision, suitability, and sales force training.

6 If NASD determines to apply the proposed principal review requirements to non-recommended transactions, the Institute suggests that NASD modify the proposed factors that must be considered under Rule 2821(c)(1) in reviewing the transaction to adequately reflect the differences between recommended and non-recommended transactions. For example, it would be very burdensome and illogical to require a member who did not recommend a transaction and who may not have information about the customer to assess the extent to which the investment in deferred variable annuities represents an undue concentration in the context of the customer's overall investment portfolio.