Document ID: SEC-2008-0207-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-02-07T05:00Z

[Federal Register: February 7, 2008 (Volume 73, Number 26)]
[Notices]               
[Page 7340-7343]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07fe08-104]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57259; File No. SR-FINRA-2008-001]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amendments to FINRA's Gross Income Assessment and Technical Changes to 
Schedule A to FINRA's By-Laws

February 1, 2008.
    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, 2008, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'') 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 substantially prepared by 
FINRA.\3\ 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.
    \3\ 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 the 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 Securities Exchange Act Release No. 56145 (July 26, 2007), 
72 FR 42169 (August 1, 2007).
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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 Schedule A to the FINRA By-Laws to 
amend the Gross Income Assessment (``GIA'') paid by each FINRA member 
and to update the references to NASD that appear in Schedule A to the 
FINRA By-Laws. The text of the proposed rule change is available at 
NASD, the Commission's Public Reference Room, and http://www.finra.org.

[[Page 7341]]

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
    On July 30, 2007, NASD and the New York Stock Exchange (``NYSE'') 
consolidated their member firm regulation operations into a combined 
organization, FINRA. The proposed rule change seeks to consolidate 
certain regulatory fees imposed by NASD and NYSE Regulation, Inc. 
(``NYSE Regulation'') to develop a single fee structure for FINRA that 
avoids duplicating fees charged by the two organizations.
    FINRA's member regulatory pricing structure currently consists 
primarily of the following fees: the GIA; the Trading Activity Fee 
(``TAF''); the Personnel Assessment (``PA''); and the Branch Office 
Assessment (``BOA''). As part of the consolidation, NYSE committed to 
transfer to FINRA certain regulatory revenues for the remainder of 
2007.\4\ NYSE fees subject to the transfer agreement include a gross 
FOCUS (Financial and Operational Combined Uniform Single Report) fee 
(``GFF'')\5\ (comparable to NASD's GIA)\6\ and registration fees for 
branch offices\7\ (comparable to NASD's Branch Office System Processing 
Fee)\8\ and registered representatives\9\ (comparable to NASD's 
registration fees for the registration of representatives or 
principals).\10\
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    \4\ See Securities Exchange Act Release No. 56145 (July 26, 
2007); 72 FR 42169 (August 1, 2007) (Order Approving SR-NASD-2007-
023).
    \5\ See Securities Exchange Act Release No. 56181 (August 1, 
2007), 72 FR 44206 (August 7, 2007) (Notice of Filing and Immediate 
Effectiveness of SR-NYSE-2007-70).
    \6\ See Section 1(c) of Schedule A.
    \7\ See NYSE Rule 342, Supplementary Material .11.
    \8\ See Section 4(a) of Schedule A.
    \9\ See NYSE Rule 345, Supplementary Material .14.
    \10\ See Section 4(b) of Schedule A.
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    In anticipation of the termination of the agreement to remit fees 
collected by NYSE, FINRA evaluated whether to consolidate or eliminate 
any duplicative fees, as well as whether to maintain or increase any 
non-duplicative fees. FINRA undertook its regulatory pricing review 
with the objectives of maintaining a fair assessment level for firms 
and of preserving revenue levels necessary to fund FINRA's member 
regulatory activities, including the regulation of members through 
examination, policymaking, rulemaking and enforcement activities.
    To achieve these objectives, FINRA determined that the most 
appropriate regulatory pricing structure would be to: (1) Eliminate 
NYSE Regulation's legacy registration fees for branch offices and 
registered representatives, which totals approximately $18.6 million in 
fee reductions;\11\ (2) maintain NASD's fee structures and levels for 
the TAF, the BOA and the PA; and (3) consolidate, with certain 
adjustments, NASD's GIA rate structure with NYSE Regulation's GFF rate 
structure.\12\
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    \11\ See Securities Exchange Act Release No. 57093 (January 3, 
2008), 73 FR 1654 (January 9, 2008) (Notice of Filing and Immediate 
Effectiveness of SR-NYSE-2007-127).
    \12\ The NYSE will continue to charge its member organizations 
an annual gross FOCUS fee; however, the fee was reduced by 75 
percent beginning in 2008. See Securities Exchange Act Release No. 
56181 (August 1, 2007), 72 FR 44206 (August 7, 2007) (Notice of 
Filing and Immediate Effectiveness of SR-NYSE-2007-70). The reduced 
gross FOCUS fee charged by NYSE will be retained by NYSE and will 
not be forwarded to FINRA.
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    The GIA is currently assessed through a three-tier rate structure 
with a minimum GIA of $1,200.00. Under the current GIA, members are 
required to pay an annual GIA equal to the greater of $1,200.00 or the 
total of:
    (1) 0.125% of annual gross revenue less than or equal to $100 
million;
    (2) 0.029% of annual gross revenue greater than $100 million up to 
$1 billion; and
    (3) 0.014% of annual gross revenue greater than $1 billion.\13\
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    \13\ 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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    In contrast, the legacy GFF was assessed at a flat rate of $0.42 
per $1,000 of gross FOCUS revenue (or 0.042%).
    To consolidate these two legacy fees, FINRA proposes that the 
minimum assessment under the GIA of $1,200.00 will remain, with the 
ceiling increased from $960,000.00 to $1 million of annual assessable 
revenue. Because FINRA has committed to reduce the GIA by $1,200.00 per 
year for five years, subject to annual Board approval, this will 
effectively reduce the GIA to $0 for the first $1 million of annual 
assessable revenue. FINRA proposes that for annual gross revenue over 
$1 million, the regressive rate structure of the legacy GIA and the 
flat rate structure of the legacy GFF be combined into a new rate 
structure. Specifically, FINRA proposes to create a seven-tiered rate 
structure that balances the legacy GIA tiered rate structure with the 
legacy GFF flat rate structure.
    Under the proposed rule change, members will be assessed a GIA of:
    (1) $1,200 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.
    FINRA estimates that the proposed rule change will result in 
aggregate fee reductions of approximately $25 million dollars in 2008 
and forward, approximately $18.6 million of which relates to the 
elimination of NYSE Regulation's legacy registration fees and 
approximately $6.4 million for GIA rebates given to all FINRA member 
firms. FINRA estimates that, under the proposed rate structure 
described above, 93 percent of member firms will have either no change 
to their GIA or a reduced GIA due to this new rate structure. Certain 
firms with annual gross revenue exceeding $35 million dollars, however, 
will have an increase to their GIA under the proposed rate structure.
    To minimize the impact on members, the new rate structure will be 
implemented over a three-year period beginning in 2008. During this 
period, the change in the GIA paid to FINRA by each member will be 
subject to a cap based on the fees that the member would have paid 
under the prior NASD and NYSE rate structures. In 2008, a member's GIA 
will not be impacted by the new rate structure. In 2009, any increase 
or decrease to the member's GIA resulting from the new rate structure 
will be capped at a five percent increase or decrease. In 2010, any 
increase or decrease to the member's GIA resulting from the new rate 
structure will be capped at a ten percent increase or decrease. During 
this implementation period, a firm's GIA

[[Page 7342]]

may increase or decrease due to a change in the member's assessable 
revenue from year to year; however, any changes to the firm's GIA that 
result from the change in rate structure will be subject to the cap.
    For firms that were members of NASD only (not NYSE) as of July 30, 
2007, the cap will be calculated based upon the GIA that the member 
firm would have paid under the prior NASD GIA rate structure. For firms 
that became, or become, FINRA members on or after July 30, 2007 
(excluding those firms that were members of NYSE only as of July 30, 
2007 and were subsequently required to become FINRA members pursuant to 
NYSE Rule 2), the cap will be calculated based upon the GIA that the 
member firm would have paid under the prior NASD GIA rate structure. 
For firms that were members of the NYSE only (not NASD) as of July 30, 
2007, the cap will be calculated based upon the NYSE GFF that the 
member would have paid under the prior NYSE GFF rate structure.\14\ For 
firms that were members of both NASD and the NYSE as of July 30, 2007 
(``Dual Members''), the cap will be calculated based upon the GIA and 
the GFF that the member would have paid under the prior NASD GIA rate 
structure and the prior NYSE GFF rate structure.\15\
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    \14\ In calculating the cap based upon the GFF that a member 
would have paid under the prior NYSE GFF rate structure, FINRA will 
use only that portion of the GFF that would have been transferred by 
the NYSE to FINRA (i.e., 75 percent of the GFF paid by the member 
firm).
    \15\ For example, assume that a Dual Member has gross revenue of 
$5 billion and assessable revenue (based on the prior year) of $4.95 
billion for each of the first three years of the new fee rate 
structure. Under the legacy rate structures, the firm would have 
paid income assessments to FINRA of $2,512,800 each year (a legacy 
GFF of $1,575,000 transferred to FINRA (i.e., 75 percent of the 
firm's GFF); a legacy GIA to FINRA of $939,000; and net of a $1,200 
rebate). Under the new rate structure in the proposed rule filing, 
the total income assessment charged by FINRA to the firm, without 
the cap, would be $1,892,224 (a GIA of $1,893,424 net of a $1,200 
rebate). This would represent a decrease of $620,576. However, 
because the change is capped at zero percent in 2008, the firm would 
be assessed a GIA under the new rate structure of $2,512,800 (i.e., 
the same amount as what the firm would have paid under the two 
legacy rate structures). In 2009, the firm would pay a GIA of 
$2,387,160 (reflecting the maximum five percent change), and in 
2010, the firm would pay a GIA of $2,261,520 (reflecting the maximum 
ten percent change). As discussed in footnote 12 above, Dual Members 
will also be subject to a reduced GFF charged by NYSE. Telephone 
conference between Kathleen O'Mara, Associate General Counsel, 
FINRA; Carrie DiValerio, Senior Director, FINRA; Nancy Burke-Sanow, 
Assistant Director, Division of Trading and Markets (``Division''), 
Commission; and Jan Woo, Special Counsel, Division, Commission, on 
January 31, 2008.
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    Despite the reduction in revenue that will result from the new rate 
structure, FINRA believes that the revenue collected under the pricing 
proposal will fund its member regulatory programs. The integration of 
the member firm regulation operations of NASD and NYSE into FINRA 
should take up to three years, given FINRA's need to establish a new 
examination and enforcement program under a consolidated rule book. A 
new cost structure and revised pricing structure will be evaluated once 
the integration is complete.
    FINRA is proposing that the effective date of the proposed rule 
change will be retroactive to January 1, 2008. FINRA will announce the 
proposed rule change and subsequent approval in a Regulatory Notice.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(5) of the Act,\16\ 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 balances NASD 
and NYSE Regulation legacy fees in a manner that is consistent with 
FINRA's statutory obligation under section 15A(b)(5) of the Act \17\ to 
ensure that its fees are reasonable and equitably allocated. FINRA 
believes that the modified rates and the introduction of additional 
tiers appropriately balance the legacy fees. Moreover, FINRA has sought 
to minimize the impact that the proposed rule change will have on its 
members by phasing-in the proposed changes so that the changes will 
have minimal impact on members for the first three years.
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    \16\ 15 U.S.C. 78o-3(b)(5).
    \17\ 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 NASD 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-2008-001 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2008-001. 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.

[[Page 7343]]

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-2008-001 and should be submitted on or before 
February 28, 2008.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-2182 Filed 2-6-08; 8:45 am]

BILLING CODE 8011-01-P