[Federal Register Volume 61, Number 120 (Thursday, June 20, 1996)]
[Notices]
[Pages 31604-31605]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15660]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37310; File No. SR-NASD-96-15]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change Relating 
to Schedule A to the By-Laws to Amend the Allowable Exclusions and 
Deductions from the Definition of Gross Revenue for Member Assessment 
Purposes

June 13, 1996.
    On April 4, 1996, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') submitted to the Securities and 
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to amend the allowable 
exclusions and deductions from the definition of gross revenue for 
member assessment purposes.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 37169 (May 6, 1996), 61 FR 21517 (May 10, 
1996). No comments were received on the proposal. This order approves 
the proposed rule change.

I. Background

    Gross revenue is defined for member assessment purposes under 
Section 5 of Schedule A of the NASD By-Laws (``Section 5'') as total 
income reported on FOCUS form Part II or IIA, with certain limited 
exclusions and deductions.\3\ Currently, Section 5 provides that 
revenue derived from interest and dividends \4\ may be excluded by a 
member from gross revenue for assessment purposes.
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    \3\ Securities Exchange Act Release No. 35074 (Dec. 9, 1994), 59 
FR 64827 (Dec. 15, 1994) (order approving File No. SR-NASD-94-58).
    \4\ The term ``interest and dividends'' includes interest from a 
member's customer margin accounts and interest and dividends from a 
member's trading and investment positions, such as from repurchase 
and reverse repurchase agreements and stock loan and borrow 
transactions.
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II. Description of Proposal

    The Association's proposal amends Section 5 to remove interest and 
dividends as an allowable exclusion for assessment purposes. The 
proposal, however, adds a new provision to allow a member to deduct 
from gross revenue for assessment purposes either: (i) its interest and 
dividend expenses, but not in excess of related interest and dividend 
revenue; or, alternatively, (ii) 40% of interest earned by the member 
on customer securities accounts. The proposal also allows a member to 
deduct from its gross revenue an additional $50,000 of net interest and 
dividend revenue. Lastly, the proposal amends Section 5 to provide 
alphabetical references to its two primary subsections and to replace 
all bullets referencing its secondary subsections with numerical 
references.
    The proposed rule will take effect for the 1996 assessment based on 
revenues generated in calendar year 1995. Based on its data, the NASD 
estimates that the proposed rule, if it had been adopted for 1995, 
would have generated assessment revenue of $3 million based on the 
budgeted level of assessment revenue of $39 million for that year. 
Therefore, the NASD believes that the rule proposal

[[Page 31605]]

will raise the requisite funds to finance its operating costs.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the Association, and, in particular, with the 
requirements of Section 15A(b)(5).\5\ Section 15A(b)(5) requires that 
the rules of the Association provide for the equitable allocation of 
reasonable dues, fees, and other charges among members.
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    \5\ 15 U.S.C. Sec. 78o-3(b)(5).
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    The Commission believes that using a member's gross revenue for 
assessment purposes provides for the equitable allocation of reasonable 
assessments among members. The Commission notes that the rule proposal 
recognizes interest and dividend revenue as part of a member's gross 
revenue for assessment purposes, while recognizing that expenses 
incurred in connection with such interest and dividend revenue should 
be allowed to be deducted from such revenue. Moreover, the rule 
proposal allows, alternatively, members whose business incurs less 
direct expense in connection with interest and dividend revenue to 
deduct 40% of interest earned by the member on customer securities 
accounts. This alternative deduction is intended to eliminate the 
potential for inequitable allocation of assessments on those members 
whose interest and dividend revenue is obtained without significant 
expenses related to trading strategies, such as a member that derives 
interest revenue primarily from margin accounts financed by its own 
capital. The purposed rule also allows a member to deduct from its 
gross revenue an additional $50,000 of net interest and dividend 
revenue to encourage the accumulation of net capital.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\6\ that the proposed rule change (SR-NASD-96-15) is approved.

    \6\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-15660 Filed 6-19-96; 8:45 am]
BILLING CODE 8010-01-M