Document ID: SEC-2007-0652-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-05-09T04:00Z

[Federal Register: May 9, 2007 (Volume 72, Number 89)]
[Notices]               
[Page 26432-26433]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09my07-130]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55697; File No. SR-NASD-2007-027]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change to NASD By-Laws 
Relating to SEC Section 31--Related Fees

May 2, 2007.
    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 April 17, 2007, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by NASD. 
The Commission is publishing this notice to solicit comments on the 
proposal 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

    NASD is proposing to allow member firms to voluntarily submit, 
within six months of the effective date of this rule proposal, funds 
previously accumulated by member firms to satisfy their, and 
subsequently NASD's, obligation to remit SEC Section 31-related fees, 
to NASD. Below is the text of the proposed rule change. Proposed new 
language is in italics.
* * * * *
SCHEDULE A TO NASD BY-LAWS
    Assessments and fees pursuant to the provisions of Article VI of 
the By-Laws of NASD shall be determined on the following basis.
* * * * *
Section 3--Regulatory Transaction Fee
    Each member shall be assessed a regulatory transaction fee. The 
amount shall be determined periodically in accordance with Section 31 
of the Act. Transactions assessable under this Section 3 that must be 
reported to NASD shall be reported in an automated manner.

IM-Section 3--Temporary Program to Address Accumulated Funds

    Pursuant to Section 3 of Schedule A, NASD makes an assessment on 
member firms that NASD uses to pay fees owing to the SEC in accordance 
with Section 31 of the Act (``the Section 3 assessment''). The Section 
31 fees payable by NASD to the SEC is determined based on the aggregate 
dollar amount of ``covered sales,'' as defined by SEC Rule 31, effected 
otherwise than on an exchange by or through any member of the NASD. 
Members, in many cases, have passed along the Section 3 assessment on a 
trade-by-trade basis to their customers or correspondent firms. For 
certain reasons, including the difference between the calculation of 
the Section 3 assessment on an aggregate basis and its collection by 
member firms from customers or correspondent firms on a disaggregated 
trade-by-trade basis, there has been an historical accumulation of 
funds collected by members that are in excess of their Section 3 
assessment. Consequently, these funds were not remitted to NASD.
    NASD has determined that it is appropriate for these accumulated 
funds, if remitted to the NASD, to be used to pay NASD's current 
Section 31 fees, which conforms the use of those funds with the stated 
purpose for which they were collected. Consequently, members may 
voluntarily remit all or part of historically accumulated funds that 
were collected and are in surplus to the Section 3 assessment of such 
firms in accordance with the terms of this Interpretive Material.
    This temporary program will automatically sunset six months after 
the effective date, and thereafter may not be utilized by members after 
a date certain. Members are reminded that 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] member incurs an obligation to the 
Commission under Section 31.'' Further, NASD has issued guidance to 
members in the form of two Notices to Members to ensure there is no 
confusion in the marketplace between NASD's ``Regulatory Transaction 
Fee'' and the ``SEC's Section 31 Fee.''
* * * * *

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

    In its filing with the Commission, NASD 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. NASD 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Pursuant to Section 31 of the Act \3\ and SEC Rule 31, 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 the clearing 
member and its correspondent firm or customer is the responsibility of 
the clearing member.
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    \3\ 15 U.S.C. 78ee.
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    Reconciling the amounts billed by NASD and the amounts collected 
from the customers historically had been difficult for member firms, 
causing surpluses to accumulate at some broker-dealer 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.\4\
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    \4\ 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.'' See 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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[[Page 26433]]

    In November 2004, NASD received a letter from the SEC's Division of 
Market Regulation requesting, among other things, that NASD conduct an 
analysis to ascertain the amount of accumulated funds and present a 
plan for broker-dealers to dispose of or otherwise resolve title to 
such accumulated funds. Accordingly, in an effort to ascertain the 
amount of accumulated funds, NASD surveyed 240 member clearing and 
self-clearing firms to review their practices regarding the collection 
of such fees from customers. After compiling and analyzing the data 
provided by member firms, NASD staff found 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. It was determined, 
based upon information provided in connection with NASD's survey, that 
it would be virtually impossible to return customer-related accumulated 
funds to the customers that had paid these funds to the firms.\5\
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    \5\ 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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    The current proposed rule change is aimed at enabling those fees 
that may have been collected for purposes of paying an ``SEC Fee'' or 
``Section 31 Fee'' to be used to pay such fees. NASD is proposing new 
interpretive material (``IM'') that will allow firms, on a one-time-
only basis, voluntarily to remit historically accumulated funds to 
NASD. These funds then would be used to pay the SRO's current Section 
31 fees in conformity with prior representations made by member firms. 
Finally, 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 shall be used by NASD to offset other NASD 
regulatory costs.
    As stated above in Item 2, the effective date of the proposed rule 
change would be six months following Commission approval, if the 
Commission grants approval. In addition, the IM would automatically 
sunset six months after the effective date.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\6\ 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. NASD believes that the proposed rule change will 
provide a transparent way of addressing the issue of accumulated funds. 
As this proposed rule change would automatically sunset, it will be of 
a limited duration. Moreover, based on the reminder set forth in the IM 
and the issuance of prior Notices to Members on this matter, the 
accumulation of funds that are collected and disclosed as ``Section 31 
Fees'' or ``SEC Fees'' should not reoccur.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change would 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 the 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-NASD-2007-027 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities andExchange Commission, 100 F Street, NE, 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2007-027. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal offices of NASD. 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-NASD-2007-027 and should be submitted on or before May 30, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-8813 Filed 5-8-07; 8:45 am]

BILLING CODE 8010-01-P