Document ID: SEC-2012-0848-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2012-05-30T04:00Z

[Federal Register Volume 77, Number 104 (Wednesday, May 30, 2012)]
[Notices]
[Pages 31906-31909]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12997]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67046; File No. SR-BX-2012-031]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Eliminate 
the Fees Under Rule 7003(b) and Adopt a New Equities Regulatory Fee

May 23, 2012.
    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 May 16, 2012 NASDAQ OMX BX, Inc. (``BX'' or ``Exchange''), 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 prepared by the Exchange. 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to eliminate the fees under Rule 7003(b) and 
replace them with a new Equities Regulatory Fee. The Exchange will 
implement the fee effective June 1, 2012.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

7003. Regulatory, Registration and Processing Fees

    (a) No change.
    (b) [The following fees will be collected via the Web CRD 
registration system for the registration of associated persons of 
Exchange members:
    (1) $60 for each initial Form U4 filed for the registration of a 
representative or principal. This fee shall be waived for initial 
registrations occurring between January 1, 2009 and October 1, 2009.
    (2) $40 for each registration U4 transfer or re-licensing of a 
representative or principal. This fee shall be waived for transfers 
or re-licensings occurring between January 1, 2009 and October 1, 
2009.
    (3) $50 annually for each of the member's registered 
representatives and principals for system processing. This fee shall 
be waived for the period from January 1, 2009 until such time as the 
Exchange submits a proposed rule change to reinstate it.]
    The Equities Regulatory Fee is a fee assessed to member firms to 
offset the cost of regulating member firms' activity on the 
Exchange. The fee is assessed on a member firm annually based on 
historical daily average orders entered on the Exchange in the prior 
calendar year by a member firm, according to the following table:

------------------------------------------------------------------------
                                                              Pro-rated
                                                   Annual      equities
               Daily order tiers                  equities    regulatory
                                                 regulatory     fee (7
                                                    fee        months)
------------------------------------------------------------------------
> = 50,000 orders                                    $4,000       $2,333
> = 1,000 orders, but < 50,000 orders                 2,500        1,458
< 1,000 orders                                            0            0
------------------------------------------------------------------------

* * * * *

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

    In its filing with the Commission, the Exchange 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. The Exchange 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
    The Exchange is proposing to eliminate the fees found under Rule 
7003(b) (``Registration Fees'') and adopt a new Equities Regulatory 
Fee. Currently, the Exchange assesses a member firm the following 
Registration Fees: $60 fee for each initial Form U4 filed for the 
registration of a representative or principal; $40 fee for each 
registration U4 transfer or re-licensing of a representative or 
principal; and $50 for each of the member firm's registered 
representatives and principals for system processing (this fee is 
currently waived). The Exchange is proposing to eliminate these fees 
and introduce a new Equities Regulatory Fee (``ERF''), which is a tier-
based fee assessed annually at the beginning of the calendar year that 
covers, in part, the regulatory costs of the Exchange. The ERF uses a 
member firm's historical average daily orders entered on the Exchange 
over the prior calendar year as a measure of the member's expected 
current year's Exchange activity.
    Registration Fees, as well as other membership fees collected by 
the Exchange, are intended to cover a portion of the cost of the 
Exchange's regulatory program. The Exchange's regulatory program 
consists of, among other things, surveillance, analysis and 
investigation of trading occurring on the Exchange conducted by the 
NASDAQ OMX Group's Market Watch group. The Exchange also has certain 
fixed costs associated with running its regulatory program. In addition 
to the costs incurred by the regulatory program effectuated by the 
Exchange, it also incurs regulatory costs associated with a regulatory 
services agreement with the Financial Industry Regulatory Authority, 
Inc. (``FINRA''), whereby FINRA performs certain regulatory functions 
on behalf of the Exchange for a fee.\3\
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    \3\ Rule 1001.
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    Exchange rules require that every qualified registered 
representative and principal of a member firm be registered with, and 
approved by, the Exchange.\4\ The Exchange believes that Registration

[[Page 31907]]

Fees are no longer the best means to assess regulatory fees because 
they are based on the number of registered associated persons of 
Exchange members. The Exchange has found that the number of registered 
associated persons employed by a member firm is not the most accurate 
measure of regulatory cost incurred by the Exchange. Specifically, the 
regulatory effort expended by the Exchange is largely related to the 
number of orders entered into the Exchange, and is not necessarily 
commensurate with the total number of registered associated persons 
employed by a member firm. In this regard, the Exchange notes that 
member firms must comply with, among other things, the order protection 
requirements of Regulation NMS,\5\ which effectively means that an 
order of a registered representative's customer will not necessarily be 
executed on BX, but rather on a venue at which it will receive the best 
price for its customer. As a consequence of the current Registration 
Fee structure, a majority of these fees are paid by member firms with 
comparatively large groups of registered representatives that do not 
necessarily trade on the Exchange, and therefore are not a significant 
part of the regulatory expense incurred by the Exchange. 
Notwithstanding, under the current Registration Fee structure, such 
member firms are assessed greater regulatory fees as compared to a 
member firm with few registered representatives, but a large number of 
orders (and therefore greater regulatory cost) entered into the 
Exchange.
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    \4\ Rule 1030 series.
    \5\ 17 CFR 242.600, et seq.
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    The proposed ERF is designed to more closely allocate the 
regulatory expenses incurred by the Exchange to the member firms 
responsible for those expenses. In lieu of assessing fees based on the 
number of Exchange-registered associated persons, the Exchange is 
proposing to assess a fee on the number of orders entered into the 
Exchange by a member firm. The Exchange will assess the ERF annually at 
the beginning of the calendar year based on a member firm's historical 
average daily orders entered into the Exchange over the prior calendar 
year.\6\ The Exchange is using a member firm's average daily orders 
entered into the Exchange in the prior calendar year as a measure of 
such firm's anticipated order activity in the current year. The 
Exchange believes that using such a measure will more closely tie the 
member firm's Exchange order activity in the current year to the 
projected regulatory costs incurred by the Exchange for such member's 
Exchange activity in that same year. The ERF is tiered so that member 
firms that enter what is essentially an immaterial number of orders 
into the Exchange will not be assessed an ERF. Member firms that 
qualify under the mid-level tier of the ERF will be assessed a fee of 
$2,500 annually, and member firms that qualify for the top tier of the 
ERF will be assessed $4,000 annually. The Exchange selected the tiers 
so that an approximately equal number of member firms would fall under 
each tier. Member firms that fall under the first tier represent a 
relatively small regulatory cost to the Exchange, the sum of which is 
covered by other regulatory fees paid by these members. The Exchange 
allocated the total of fees assessed annually under the current 
Registration Fees among the remaining two tiers so that the fees 
collected would closely approximate the Registration Fees assessed 
annually, with the member firms that fall under the top tier paying a 
larger fee than those under the mid-level tier. As such, the Exchange 
believes that the order-based tier structure of the ERF is a more fair 
allocation of fees assessed for regulatory expenses. Because the 
Exchange is implementing the ERF mid-calendar year, it will prorate the 
annual fee for each member firm from June 1, 2012 through December 31, 
2012 and use the average daily order for calendar year 2011 for 
purposes of calculating its ERF obligation for calendar year 2012.
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    \6\ The calculation of a member firm's average daily orders in 
any given calendar year is based only on the trading days during the 
year that it was a member of the Exchange. For example, if a member 
firm was approved by the Exchange on October 10, 2013, only the 
trading days from that date through the end of the year would be 
used for purposes of calculating the firm's average daily orders, 
which would be done in early 2014.
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    As noted above, the Exchange believes that the ERF is a better 
means of allocating the regulatory costs incurred by the Exchange than 
the current Registration Fees, and it does not anticipate the ERF will 
result in an increase or decrease in total fees assessed to cover 
regulatory costs. Rather, the Exchange believes that the ERF will 
result in a more equitable allocation of the fees assessed for this 
purpose. In this regard, the Exchange will evaluate annually, at the 
close of the calendar year, the amount of revenue collected from the 
ERF to ensure that the fees collected are commensurate with the 
projected needs of the Exchange's regulatory program as represented by 
the regulatory costs incurred during that year. If the Exchange 
determines regulatory revenues would exceed regulatory costs, it would 
adjust the ERF to bring the fees in line with such costs and use the 
adjusted ERF in the calculation of member firm fees due in the next 
annual ERF assessment.\7\ If the Exchange determines that the fees 
collected under the ERF are commensurate with regulatory costs, the 
Exchange would not adjust the ERF.
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    \7\ The Exchange will conduct and complete this assessment in 
January of each year. If an adjustment to the ERF is warranted, the 
Exchange would submit a proposed rule change to the Commission to 
amend the ERF fee schedule. Shortly thereafter, the Exchange would 
assess the ERF on its member firms based on the new fee and members' 
average daily orders in the prior year. If no change in the ERF is 
warranted, the Exchange would use the existing ERF fee schedule as a 
basis for assessing the fee.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(4) of the Act \8\ 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 
which the Exchange operates or controls, and it does not unfairly 
discriminate between customers, issuers, brokers or dealers. The 
Exchange believes that the new ERF is a more equitable allocation of 
fees as compared to the current Registration Fees, in that the ERF is 
tied to the use of, and hence regulatory cost incurred by, the 
Exchange. The Exchange determined to have three tiers under the ERF, 
with each tier representing a near equal number of Exchange member 
firms. In selecting the proposed fees under each of the tiers of the 
ERF, the Exchange first analyzed the distribution of Registration Fees 
among member firms in comparison to the distribution among member firms 
under various potential fees under the tiers of the ERF. The Exchange 
elected to assess the ERF based on the proposed tiers because the 
Exchange found these tiers to correlate the closest to the regulatory 
costs incurred by the Exchange, as offset by the other regulatory fees 
collected. In this regard, the Exchange notes that certain member firms 
that have historical average daily orders of less than 1,000 are not 
assessed a fee under proposed Rule 7003(b) because such members [sic] 
firms represent a much smaller regulatory cost to the Exchange relative 
to member firms that enter a greater number of orders and the sum of 
such costs is generally met by other regulatory fees assessed these 
member firms.\9\ As the goal of the ERF is to more

[[Page 31908]]

equitably assess regulatory fees, the Exchange believes that it is not 
unfairly discriminatory to member firms that fall under the mid-level 
and top tiers to assess no ERF on certain low-order volume member firms 
that already pay other regulatory fees adequate to cover the regulatory 
costs incurred by the Exchange associated with such member firms' 
activities in a given year. The Exchange divided the total fees 
assessed under the Registration Fees among the mid-level and top tiers, 
with 50,000 average daily orders representing the mid-point between 
remaining two thirds of member firms falling under these tiers and the 
top tier paying a greater amount than the mid-level tier based on the 
relative regulatory cost such member firms represent to the Exchange.
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    \8\ 15 U.S.C. 78f(b)(4).
    \9\ For example, BX assesses each member firm an annual 
membership fee of $3,000 and a monthly trading rights fee of $500. 
See Rule 7001(a).
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    The Exchange also believes that the ERF is a reasonable fee as it 
is assessed on member firms based on their usage of the Exchange, and 
the Exchange does not believe that the new fee will result in a net 
increase in fees received compared to the fees currently received 
through assessment of the Registration Fees. Because the Exchange is 
more closely tying regulatory fees with regulatory costs and because 
the Exchange has taken great care in determining the tiers under which 
member firms will fall under the fee, as described above, the Exchange 
does not believe that the proposed fee unfairly discriminates between 
member firms assessed the fee. In addition, because the Exchange is 
implementing the ERF in the middle of a calendar year, it is pro-rating 
the fees assessed to reflect the partial calendar year of the ERF's 
effectiveness and that member firms may have paid Registration Fees 
through the first five months of 2012. The ERF will be applied to all 
member firms equally, based upon the tier under which they fall.
    The Exchange also believes that the proposed rule change is 
consistent with the provisions of Section 6(b)(5) of the Act \10\ 
because it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system. 
As a self-regulatory organization, the Exchange has an obligation to 
regulate its member firms and their associated persons. The regulatory 
fees assessed by the Exchange are designed to cover the expenses 
associated with running an effective regulatory program. Eliminating 
the Registration Fees and implementing the ERF will not negatively 
impact the total fees assessed to help cover the regulatory program 
costs. As discussed, the total fees assessed under Rule 7003(b) will be 
compared annually to the regulatory costs expected to be incurred 
during the same calendar year, and the Exchange will make any 
adjustments to the fee needed to keep it in line with such costs.
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    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. To the contrary, 
the Exchange believes that the new fee is pro-competitive as it will 
more closely align the fee assessed for the Exchange's regulatory 
program with the use of the Exchange, thus allowing member firms to 
compete for order flow on a level playing field in terms of regulatory 
fees assessed as a precondition for participation on the Exchange. The 
Exchange notes a member firm that believes the ERF to be an excessive 
burden may reduce its order flow to the Exchange, thus reducing the 
impact of the ERF, or may withdraw as a member of the Exchange 
altogether.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \11\ and subparagraph (f)(2) of Rule 19b-4 
thereunder.\12\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.
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    \11\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \12\ 17 CFR 240.19b-4(f)(2).
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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 email to rule-comments@sec.gov. Please include 
File Number SR-BX-2012-031 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-BX-2012-031. This file 
number should be included on the subject line if email 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 Web site 
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 10:00 a.m. and 3:00 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Exchange. 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 
publicly available. All submissions should refer to File Number SR-BX-
2012-031, and should be submitted on or before June 20, 2012.

[[Page 31909]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-12997 Filed 5-29-12; 8:45 am]
BILLING CODE 8011-01-P