Document ID: SEC-2007-0819-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-06-14T04:00Z

[Federal Register: June 14, 2007 (Volume 72, Number 114)]
[Notices]               
[Page 32935-32936]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn07-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55886; File No. SR-NASD-2007-027]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to SEC 
Section 31-Related Fees

June 8, 2007.
    On April 17, 2007, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with 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 proposal to allow member firms to voluntarily submit, 
within six months of the effective date of the proposal, funds 
previously accumulated by member firms to satisfy their, and 
subsequently NASD's, obligation to remit SEC Section 31-related fees, 
to NASD. The proposed rule change was published for comment in the 
Federal Register on May 9, 2007.\3\ The Commission received one comment 
letter regarding the proposal.\4\ This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 55697 (May 2, 2007), 72 
FR 26432 (May 9, 2007).
    \4\ See Letter from Mary Yeager, Assistant Secretary, New York 
Stock Exchange LLC (``NYSE'') to Nancy M. Morris, Secretary, 
Commission, dated June 5, 2007 (``NYSE Comment'').
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    Pursuant to Section 31 of the Act \5\ and SEC Rule 31,\6\ NASD and 
the national securities exchanges (collectively ``SROs'') are required 
to pay a transaction fee to the SEC that is designed to recover the 
costs related to the government's supervision and regulation of the 
securities markets and securities professionals. To offset this 
obligation, NASD assesses its clearing and self-clearing members a 
regulatory fee in accordance with Section 3 of Schedule A of the NASD 
By-Laws, which mirrors the SEC Section 31 fee in scope and amount. 
Clearing members may in turn seek to charge a fee to their customers or 
correspondent firms. Any allocation of the fee between a clearing 
member and its correspondent firm or customer is the responsibility of 
the clearing member.
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    \5\ 15 U.S.C. 78ee.
    \6\ 17 CFR 240.31.
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    NASD states that reconciling the amounts billed by NASD to member 
firms and the amounts collected by member firms from their customers 
historically has been difficult, causing surpluses to accumulate at 
some member firms (referred to as ``accumulated funds''). These 
accumulated funds were not remitted to NASD, despite the fact that 
these charges may have been previously identified as ``Section 31 
Fees'' or ``SEC Fees'' by certain firms.\7\
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    \7\ NASD's rule also previously referred to this fee as an ``SEC 
Transaction Fee.'' The SEC stated in its release adopting new Rule 
31 and Rule 31T that ``it is misleading to suggest that a customer 
or [self-regulatory organization] member incurs an obligation to the 
Commission under Section 31.'' Securities Exchange Act Release No. 
49928 (June 28, 2004), 69 FR 41060, 41072 (July 7, 2004). In 
response to this statement, NASD amended its rule to refer to this 
fee as a ``Regulatory Transaction Fee.'' See Securities Exchange Act 
Release No. 50274 (August 26, 2004), 69 FR 53757 (September 2, 2004) 
(SR-NASD-2004-129). Further, NASD issued guidance to ensure there is 
no confusion in the marketplace regarding NASD's ``Regulatory 
Transaction Fee'' and the ``SEC's Section 31 Fee.'' See Notice to 
Members 05-11 (February 2005) and Notice to Members 04-63 (August 
2004).
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    Prompted by a November 2004 Commission letter requesting an NASD 
analysis of and plan for addressing the accumulated funds issue, NASD 
surveyed 240 member clearing and self-

[[Page 32936]]

clearing firms to review their practices regarding the collection of 
such fees from customers, discovering that over half of the firms 
surveyed did not have an accumulated funds balance. NASD worked with 
the other SROs to recommend a potential solution to allow NASD member 
firms to resolve title to the accumulated funds and, in the process, 
concluded that it would be virtually impossible to return customer-
related accumulated funds to the customers that had paid these funds to 
the firms.\8\
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    \8\ NASD had asked all surveyed firms whether they could 
``identify and relate the funds to specific customers on a 
transaction by transaction basis.'' The surveyed firms universally 
stated that tracking fractions of a penny to individual customers 
would be impossible and any over-collections could not be passed 
back at the customer level.
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    Consequently, NASD has proposed interpretive material (``IM'') that 
will allow firms, on a one-time-only basis, voluntarily to remit 
historically accumulated funds (collected for purposes of paying an 
``SEC Fee'' or ``Section 31 Fee'') to NASD. These funds then would be 
used to pay NASD's current Section 31 fees in conformity with prior 
representations made by member firms. To the extent the payment of 
these historically accumulated funds is in excess of the fees due the 
SEC from NASD under Section 31 of the Act, such surplus would be used 
by NASD to offset other NASD regulatory costs. The effective date of 
the proposed rule change is December 8, 2007, six months following the 
date of this approval order. Moreover, the IM will automatically sunset 
on June 8, 2008, six months after the effective date.
    The Commission received one comment letter regarding the proposed 
rule change, from NYSE. NYSE acknowledged that the proposal provides 
``member firms a ready and efficient means'' for dealing with 
accumulated funds but questioned ``whether there is a nexus between 
amounts accumulated by NASD member firms and sales effected through 
facilities of the NASD or Nasdaq (prior to the separation of NASD from 
Nasdaq and Nasdaq's registration as an exchange)'' and whether it would 
be feasible for member firms to correlate each execution market with a 
specific portion of the accumulated funds held by the firm.\9\ As a 
result, NYSE argued that ``the fairest way to address this issue is for 
all exchanges to adopt procedures similar to those in the [NASD 
proposal], and to allow a member firm to remit accumulated funds to any 
SRO of which it is a member'' and indicated its intention to submit a 
proposed rule change similar to the NASD proposal that would allow NYSE 
members and member organizations to remit all or a portion of their 
accumulated funds to the NYSE to permit the Exchange to make payments 
required by Section 31.\10\
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    \9\ See NYSE Comment at 1.
    \10\ Id. at 2.
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    After carefully considering the proposal and the comment submitted, 
the Commission finds that the proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association.\11\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\12\ which requires, among other things, 
that NASD rules must be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
and, in general, to protect investors and the public interest.
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    \11\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that this NASD program will provide a 
reasonable means for member firms to dispose of any accumulated funds 
they may have in their possession.\13\ The Commission notes that, 
because the program is voluntary, it imposes no obligation on any NASD 
member that believes that accumulated funds should be retained or 
disposed of in another manner. The NYSE Comment does not raise any 
issue that would preclude approval of the NASD proposal.
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    \13\ The Commission notes that it has previously issued guidance 
that any fee collected by broker-dealers from their customers should 
not be referred to as an ``SEC Fee'' or ``Section 31 Fee.'' See 
Securities Exchange Act Release No. 49928 (June 28, 2004), 69 FR 
41060, 41072 (July 7, 2004). If broker-dealers adhere to this 
guidance, issues related to accumulated funds should not recur.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-NASD-2007-027) be, 
and hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E7-11504 Filed 6-13-07; 8:45 am]

BILLING CODE 8010-01-P