Document ID: SEC-2009-1304-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Section 1(c) of Schedule A to the FINRA By-Laws To Amend the Personnel Assessment and Gross Income Assessment
Posted Date: 2009-09-11T04:00Z

[Federal Register: September 11, 2009 (Volume 74, Number 175)]
[Notices]               
[Page 46828-46829]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11se09-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60624; File No. SR-FINRA-2009-057]

 
 Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Section 1(c) of Schedule A to the FINRA By-Laws To Amend the Personnel 
Assessment and Gross Income Assessment

September 3, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 20, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to change Section 1(c) of Schedule A to the 
FINRA By-Laws (``Schedule A'') to amend the Personnel Assessment and 
Gross Income Assessment paid by each FINRA member.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA's primary member regulatory pricing structure consists of the 
following fees: the Personnel Assessment (``PA''); the Gross Income 
Assessment (``GIA''); the Trading Activity Fee; and the Branch Office 
Assessment. These fees are used to fund FINRA's regulatory activities, 
including rulemaking and FINRA's examination and enforcement programs.
    The proposed rule change would amend the PA and GIA to achieve a 
more consistent and predictable funding stream to carry out FINRA's 
regulatory mandate. The economic and industry downturns experienced in 
2008 and 2009 have strained FINRA's resources, yet its regulatory 
responsibilities remain constant and its programs robust. FINRA 
believes the proposed rule change is needed to stabilize its revenues 
and provide protection against future industry downturns.
    To those ends, the proposed rule change first would increase the PA 
for all members. The PA is currently assessed on a three-tiered rate 
structure: members with one to five registered representatives and 
principals are assessed $75 for each such registered person; 6-25 
registered persons, $70 each; and 26 or more registered persons, $65 
each. The proposed rule change would increase those rates to $150, $140 
and $130, respectively, based on the same tiered structure. This 
proposal would represent the first PA rate increase in over five years. 
Moreover, given the correlation between the cost of FINRA's regulatory 
programs and the number of registered persons within a firm, FINRA 
notes that the population of registered persons has remained fairly 
stable, even throughout the recent economic downturn.\3\ Accordingly, 
FINRA believes an increase of the PA is both a fair and appropriate 
means to achieve a more consistent and reliable foundation to fund its 
regulatory operations.
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    \3\ For example, FINRA records show that since 2000, the average 
number of registered persons per year has been approximately 667,680 
and that for each of the past three years the population has been 
669,626 (2009), 676,927 (2008) and 662,742 (2007) (based on numbers 
at the end of the preceding calendar year).
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    Even with the proposed increase of the PA, the GIA remains the most 
important component of FINRA's regulatory funding. The GIA is currently 
assessed through a seven-tier rate structure with a minimum GIA of 
$1,200.00. Under the existing GIA rate structure, members are required 
to pay an annual GIA as follows:
    (1) $1,200.00 on annual gross revenue up to $1 million;
    (2) 0.1215% of annual gross revenue greater than $1 million up to 
$25 million;
    (3) 0.2599% of annual gross revenue greater than $25 million up to 
$50 million;
    (4) 0.0518% of annual gross revenue greater than $50 million up to 
$100 million;
    (5) 0.0365% of annual gross revenue greater than $100 million up to 
$5 billion;
    (6) 0.0397% of annual gross revenue greater than $5 billion up to 
$25 billion; and
    (7) 0.0855% of annual gross revenue greater than $25 billion.
    For 2010, the current year GIA would be subject to the cap set 
forth in Regulatory Notice 08-07 (February 2008), which describes the 
new funding structure that resulted from the consolidation of NASD's 
and the New York Stock Exchange's member regulation operations. FINRA 
states in the Notice that it will apply a ten-percent cap on any 
increase or decrease to a firm's 2010 current year GIA resulting from 
the new pricing structure implemented in January 2008.

[[Page 46829]]

    Since the GIA is assessed based on a member's annual gross revenue 
for the preceding calendar year,\4\ FINRA's revenues derived from the 
GIA are subject to the year-to-year volatility of member revenues. In 
years where industry revenues are significantly down, FINRA's operating 
revenues can drop precipitously: in 2009, for example, GIA revenues are 
down approximately 37 percent due to 2008 fourth quarter write-offs 
taken by members, particularly the largest securities firms.
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    \4\ Gross revenue for assessment purposes is set out in Section 
2 of Schedule A, which defines gross revenue as total income as 
reported on FOCUS form Part II or IIA excluding commodities income.
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    The proposed rule change thus seeks to ameliorate this 
vulnerability by not only shifting some of FINRA's revenue generation 
to the more consistent PA stream, but also by smoothing out the 
volatility inherent in the GIA. To that end, the proposed rule change 
would further amend Schedule A to assess a GIA of the greater of (1) 
the amount that would be the GIA based on the existing rate structure 
(``current year GIA'') or (2) a three-year average of the GIA to be 
calculated by adding the current year GIA plus the GIA assessed on the 
member over the previous two calendar years, divided by three. For a 
newer firm that has only been assessed in the prior year, FINRA would 
compare the current year GIA to the two-year average and assess the 
greater amount. The existing GIA rate structure and phase-in 
implementation through 2010 would remain the same.\5\ Accordingly, the 
proposed rule change would preserve the current rate structure, while 
building a buffer against industry downturns. FINRA notes that it has a 
long history of providing rebates to members when revenues exceed the 
expenditures necessary to discharge its regulatory obligations and is 
committed to continuing that practice in the future.
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    \5\ The actual amount of GIA assessed in any given year--e.g., 
the current year GIA (including a cap, if applicable) or the three-
year average--will be used to calculate subsequent three-year 
average determinations.
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    FINRA believes the proposed rule change will stabilize its 
operating cash flows by augmenting revenues based on the registered 
person population, where FINRA's costs are more closely aligned, and 
reducing dependency on, and exposure to, less predictable industry 
revenues. FINRA estimates that if the proposed rule change had been in 
effect for 2009, it would have replaced about 90% of the revenue 
shortfall that resulted primarily from the significant drop in GIA 
revenues. In general, those replacement revenues would come from 
several larger firms whose steep income declines in 2008 primarily 
account for FINRA's current revenue deficit.
    As noted in Item 2 of this filing, FINRA will announce the proposed 
rule change and subsequent approval in a Regulatory Notice. The 
proposed rule change will become effective January 1, 2010.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\6\ which requires, among 
other things, that FINRA rules provide for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that FINRA operates or 
controls.
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    \6\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-057 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2009-057. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2009-057 and should be 
submitted on or before October 2, 2009.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).

    Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-21885 Filed 9-10-09; 8:45 am]

BILLING CODE 8010-01-P