Document ID: SEC-2011-0117-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-01-27T05:00Z

[Federal Register Volume 76, Number 18 (Thursday, January 27, 2011)]
[Notices]
[Pages 4966-4968]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-1727]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63751; File No. SR-FINRA-2011-004]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
the Trading Activity Fee Rate for Transactions in Asset-Backed 
Securities

January 21, 2011.
    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 January 10, 2011, the 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 and 
II 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 amend Section 1 of Schedule A to the FINRA 
By-Laws to provide an alternative method of calculating the Trading 
Activity Fee (``TAF'') for transactions in Asset-Backed Securities.
    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, on the 
Commission's Web site at http://www.sec.gov, 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.

[[Page 4967]]

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

1. Purpose
    The TAF is one of the member regulatory fees FINRA uses to fund its 
member regulation activities, which include examinations; financial 
monitoring; and FINRA's policymaking, rulemaking, and enforcement 
activities.\3\ In general, the TAF is assessed for the sale of all 
exchange registered securities wherever executed (except debt 
securities that are not TRAC-Eligible Securities), over-the-counter 
equity securities, security futures, TRAC-Eligible Securities (provided 
that the transaction is a Reportable TRACE Transaction), and all 
municipal securities subject to MSRB reporting requirements. The rules 
governing the TAF also include a list of transactions exempt from the 
TAF.\4\ The current TAF rates are $0.000075 per share for each sale of 
a covered equity security, with a maximum charge of $3.75 per trade; 
$0.002 per contract for each sale of an option; $0.04 per contract for 
each round turn transaction of a security future; and $0.00075 per bond 
for each sale of a covered TRAC-Eligible Security and/or municipal 
security, with a maximum charge of $0.75 per trade. In addition, if the 
execution price for a covered security is less than the TAF rate on a 
per share, per contract, or round turn transaction basis, then no TAF 
is assessed.
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    \3\ In addition to the TAF, the other member regulatory fees are 
the Gross Income Assessment and the Personnel Assessment.
    \4\ See FINRA By-Laws, Schedule A, Sec.  1(b)(2).
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    Currently, when reporting the size of a corporate bond transaction 
to the Trade Reporting and Compliance Engine (``TRACE''), a member 
reports the number of bonds (e.g., 10 bonds), and the TRACE System, 
which is programmed to reflect that one bond equals $1,000 par value, 
calculates the total dollar volume of the transaction (e.g., 10 bonds x 
$1,000 = $10,000).\5\ Because of this reporting structure, the TAF is 
assessed on a per-bond basis, but the number of bonds is a proxy for 
the size of the total dollar volume of a transaction in $1,000 
increments.
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    \5\ See FINRA Rule 6730(c)(2), (d)(2).
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    Earlier this year, the SEC approved amendments to the TRACE 
reporting requirements to include transactions in Asset-Backed 
Securities.\6\ Under the amendments, Asset-Backed Securities will be 
TRAC-Eligible Securities, and transactions in Asset-Backed Securities 
will generally be reportable to TRACE and, thus, subject to the TAF. 
The effective date of the amendments is May 16, 2011.\7\
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    \6\ See Securities Exchange Act Release No. 61566 (February 22, 
2010), 75 FR 9262 (March 1, 2010). See also Regulatory Notice 10-23 
(April 2010).
    \7\ See Regulatory Notice 10-55 (October 2010). See also 
Securities Exchange Act Release No. 63223 (November 1, 2010), 75 FR 
68654 (November 8, 2010).
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    Although some Asset-Backed Securities are structured like 
conventional corporate bonds (i.e., generally, one bond has a par (or 
principal) value of $1,000), many are structured differently. For 
example, many Asset-Backed Securities are based on financial assets 
that amortize, and the principal (or face) value declines over time. 
Accordingly, transactions in Asset-Backed Securities will not be 
reported to TRACE on a ``per-bond'' basis like conventional corporate 
bonds, but rather will be reported based on the original principal (or 
face) value of the underlying security or the Remaining Principal 
Balance.\8\
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    \8\ FINRA Rule 6710(aa) defines ``Remaining Principal Balance'' 
for an Asset-Backed Security backed by a pool of mortgages or other 
assets that are self-amortizing, as ``the total unpaid principal 
balance of all such mortgages, or the equivalent remaining value of 
such self-amortizing assets held in the asset pool, at a specific 
time, such as the Time of Execution.'' See SR-FINRA-2009-065.
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    FINRA is proposing to conform the TAF rate for sales of Asset-
Backed Securities to make it consistent with how such transactions are 
reported to TRACE rather than use the existing per-bond rate. 
Consequently, FINRA is proposing to base the TAF for sales of Asset-
Backed Securities on the size of the transaction as reported to TRACE 
(i.e., par value, or, where par value is not used to determine the size 
of the transaction, the lesser of original face value or Remaining 
Principal Balance) at a rate of $0.00000075 times the size of the 
transaction as reported to TRACE, with a maximum charge of $0.75 per 
trade. Because, under the per-bond method of calculation, one bond 
represents $1,000 in par value, the TAF rate across all Reportable 
TRACE Transactions subject to the TAF will be the same, regardless of 
whether the transaction is in corporate bonds or Asset-Backed 
Securities.
    In addition to the amendment to the TAF rate, FINRA is proposing 
technical changes to capitalize certain terms in the TAF rule to 
identify terms that are defined elsewhere in the FINRA Rulebook (e.g., 
TRAC-Eligible Security) and to correct one rule cross-reference.
    The effective date of the proposed rule change will be the date the 
proposed rule changes in SR-FINRA-2009-065 become effective, which is 
currently anticipated to be May 16, 2011.\9\
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    \9\ See Regulatory Notice 10-55 (October 2010). See also 
Securities Exchange Act Release No. 63223 (November 1, 2010), 75 FR 
68654 (November 8, 2010); Securities Exchange Act Release No. 61566 
(February 22, 2010), 75 FR 9262 (March 1, 2010); Regulatory Notice 
10-23 (April 2010).
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\10\ 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. FINRA believes that the proposed rule change will clarify the 
application of the TAF to sales of Asset-Backed Securities and will 
ensure these transactions are treated in the same way as transactions 
reported to TRACE in other types of fixed income securities.
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    \10\ 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 45 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 shall: 
(a) By order approve or disapprove 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:

[[Page 4968]]

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-2011-004 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-2011-004. 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 website 
viewing and printing 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 No. SR-FINRA-2011-004 
and should be submitted on or before February 17, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1727 Filed 1-26-11; 8:45 am]
BILLING CODE 8011-01-P