Document ID: SEC-2008-0423-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-03-18T04:00Z

[Federal Register: March 18, 2008 (Volume 73, Number 53)]
[Notices]               
[Page 14517-14519]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18mr08-128]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57474; File No. SR-FINRA-2008-001]

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

March 11, 2008.

I. Introduction

    On January 10, 2008, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'')) \1\ filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change 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 proposed rule change was published 
for comment in the Federal Register on February 7, 2008.\4\ The 
Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change.
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    \1\ 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 New York Stock 
Exchange Regulation, Inc. (``NYSE''). See Securities Exchange Act 
Release No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 57259 (February 1, 
2008), 73 FR 7340 (``Notice'').
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II. Description of the Proposed Rule Change

    On July 30, 2007, NASD and the 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 that will be applied retroactively to January 1, 2008. 
FINRA will announce this fee change in a Regulatory Notice.
    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.\5\ NYSE fees subject to the transfer agreement include a gross 
FOCUS (Financial and Operational Combined Uniform Single Report) fee 
(``GFF'') \6\

[[Page 14518]]

and registration fees for branch offices\7\ and registered 
representatives.\8\
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    \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\ The GFF is comparable to FINRA's GIA. See Section 1(c) of 
Schedule A of FINRA By-Laws.
    \7\ See NYSE Rule 342, Supplementary Material .11. NYSE's 
registration fee for branch offices is comparable to FINRA's Branch 
Office System Processing Fee. See also Section 4(a) of Schedule A of 
FINRA By-Laws.
    \8\ See NYSE Rule 345, Supplementary Material .14. NYSE's 
registration fee for registered representatives is comparable to 
FINRA's registration fees for the registration of representatives or 
principals. See also Section 4(b) of Schedule A of FINRA By-Laws.
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    FINRA now proposes to: (1) Eliminate NYSE's legacy registration 
fees for branch offices and registered representatives, which totals 
approximately $18.6 million in fee reductions;\9\ (2) maintain FINRA's 
fee structures and levels for the TAF, the BOA and the PA; and (3) 
consolidate, with certain adjustments, FINRA's GIA rate structure with 
NYSE's GFF rate structure.\10\
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    \9\ 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).
    \10\ 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, supra note 5. 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.\11\ In contrast, the legacy GFF was assessed at a flat rate 
of $0.42 per $1,000 of gross FOCUS revenue (or 0.042%).
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    \11\ Gross revenue for assessment purposes is set out in Section 
2 of Schedule A of FINRA's By-Laws, which defines gross revenue as 
total income as reported on FOCUS form Part II or IIA excluding 
commodities income.
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    To consolidate these two legacy fees, FINRA proposes to retain the 
minimum assessment under the GIA of $1,200.00, 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 approval by FINRA's Board of Directors, 
the proposal will effectively reduce the GIA to $0 for the first $1 
million of annual assessable revenue. For annual gross revenue over $1 
million, the regressive rate structure of the legacy GIA and the flat 
rate structure of the legacy GFF will be combined into a new seven-
tiered 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.
    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 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.\12\ 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.\13\
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    \12\ 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).
    \13\ For an example of how the fees are calculated, see Notice, 
supra note 4, at note 15.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities association.\14\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 15A(b)(5) of the Act \15\ in that it provides 
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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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78o-3(b)(5).
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    The proposed rule change creates a single fee structure for FINRA 
that avoids duplicative fees charged by both FINRA and NYSE. 
Specifically, the proposed rule change creates a seven-tiered rate 
structure that balances NASD's legacy GIA tiered rate structure with 
NYSE's legacy GFF flat rate structure. FINRA represents that the 
proposed rule change will result in aggregate fee reductions of 
approximately $25 million dollars in 2008 and forward. FINRA estimates 
that, under the proposed rate structure, 93 percent of member firms 
will have either no change to their GIA or a reduced GIA due to this 
new rate structure. In addition, to minimize the impact on members, the 
new rate structure will be implemented over a three-year period 
beginning in 2008. Despite the reduction in revenue that will result 
from the new rate structure, FINRA also represents that the revenue 
collected under the proposal will adequately fund its member regulatory 
programs, including the regulation of members through examination, 
policymaking, rulemaking and enforcement activities. Accordingly, the 
Commission believes that the proposed rule change is consistent with 
the Act.

[[Page 14519]]

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-FINRA-2008-001), be, and it 
hereby is, approved.
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-5355 Filed 3-17-08; 8:45 am]

BILLING CODE 8011-01-P