Document ID: SEC-2008-0124-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-01-24T05:00Z

[Federal Register: January 24, 2008 (Volume 73, Number 16)]
[Notices]               
[Page 4295-4297]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ja08-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57164; File No. SR-FINRA-2007-041]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
NASD Rule 7001B To Adjust the Percentage of Market Data Revenue Shared 
With NASD/Nasdaq TRF Participants

January 17, 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 December 21, 2007, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a 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 prepared substantially by FINRA. 
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 Substance 
of the Proposed Rule Change

    FINRA is proposing to amend NASD Rule 7001B (Securities Transaction 
Credit) to modify the percentage of New York Stock Exchange (``Tape 
A''), American Stock Exchange and regional exchange (``Tape B''), and 
Nasdaq Exchange (``Tape C'') market data revenue shared with FINRA 
members reporting trades to the NASD/Nasdaq Trade Reporting Facility 
(the ``NASD/Nasdaq TRF'').\3\ The text of the proposed rule change is 
available at http://www.finra.org, the principal offices of FINRA, and 

the Commission's Public Reference Room.
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    \3\ Effective July 30, 2007, FINRA was formed through the 
consolidation of NASD and the member regulatory functions of NYSE 
Regulation. Accordingly, the NASD/Nasdaq TRF is now doing business 
as the FINRA/Nasdaq TRF. The formal name change of each Trade 
Reporting Facility (``TRF'') is pending and once completed, FINRA 
will file a separate proposed rule change to reflect those changes 
in the Manual.
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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
Background
    The NASD/Nasdaq TRF provides FINRA members a mechanism for 
reporting locked-in transactions in exchange-listed securities effected 
otherwise than on an exchange. In connection with the establishment of 
the NASD/Nasdaq TRF, FINRA and The Nasdaq Stock Market, Inc. 
(``Nasdaq'') entered into the Limited Liability Company Agreement of 
the Trade Reporting Facility LLC (``the NASD/Nasdaq TRF LLC 
Agreement''), a copy of which appears in the NASD Manual. Under the 
NASD/Nasdaq TRF LLC Agreement, FINRA, the ``SRO Member,'' has sole 
regulatory responsibility for the NASD/Nasdaq TRF. Nasdaq, the 
``Business Member,'' is primarily responsible for the management of the 
NASD/Nasdaq TRF's business affairs to the extent those activities are 
not inconsistent with the regulatory and oversight functions of FINRA. 
Additionally, the Business Member is obligated to pay the cost of 
regulation and is entitled to the profits and losses, if any, derived 
from the operation of the NASD/Nasdaq TRF.
    On July 21, 2006, FINRA filed a proposed rule change for immediate 
effectiveness to adopt a new NASD Rule 7000B Series relating to fees 
and credits applicable to the NASD/Nasdaq TRF.\4\

[[Page 4296]]

Pursuant to NASD Rule 7001B, FINRA members reporting trades in Tape A, 
Tape B \5\ and Tape C securities to the NASD/Nasdaq TRF currently 
receive a 50% pro rata credit on market data revenue earned by the 
NASD/Nasdaq TRF. At present, the revenue eligible for sharing is the 
revenue received by the NASD/Nasdaq TRF from the three tape 
associations after deducting the amount, if any, that the NASD/Nasdaq 
TRF pays to the Consolidated Tape Association or the Nasdaq Securities 
Information Processor for capacity usage.\6\
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    \4\ See Securities Exchange Act Release No. 54353 (August 23, 
2006), 71 FR 51255 (August 29, 2006) (SR-NASD-2006-090).
    \5\ The proposed rule change would clarify an ambiguity in the 
current rule. Both Rule 7001B and the predecessor rule in effect 
prior to Nasdaq's separation from FINRA referred to ``Amex'' and 
``Tape B'' as synonymous, but in fact the Tape B revenue sharing 
program has always been interpreted to include stocks listed on 
regional exchanges, such as NYSE Arca, because transactions in such 
stocks are reported to Tape B.
    This ambiguity also exists in the market data revenue sharing 
rules relating to the other TRFs, which FINRA will propose to 
clarify in a separate filing.
    \6\ The proposed rule change would eliminate the deduction for 
capacity usage. Nasdaq, as the Business Member, believes that the 
amount of the deduction is small and needlessly complicates the 
administration of the revenue sharing program.
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Proposal to Adjust Securities Transaction Credit
    FINRA is proposing to amend Rule 7001B to base the percentage of 
market data revenue shared with a FINRA member reporting trades to the 
NASD/Nasdaq TRF on the member's ``Market Share.'' FINRA proposes to 
define ``Market Share'' in Rule 7001B as the percentage calculated by 
dividing the total number of shares represented by trades reported by a 
member to the NASD/Nasdaq TRF during a given calendar quarter by the 
total number of shares represented by all trades reported to the 
Consolidated Tape Association or the Nasdaq Securities Information 
Processor, as applicable, during that quarter. Market Share will be 
calculated separately for each tape.
    Pursuant to the proposed rule change, the percentage of Market 
Share required to receive particular percentages of revenue will vary 
among the three tapes. Thus, for example, a member whose trade reports 
in NYSE-listed stocks constitute 0.25% or more of the total 
consolidated volume in those stocks would receive 100% of the 
attributable market data revenue, a member with less than 0.25% but at 
least 0.15% would receive 80% of the attributable market data revenue, 
a member with less than 0.15% but at least 0.10% would receive 50%, and 
a member with less than 0.1% would not be eligible for the market data 
revenue sharing program. For Tape B stocks, a member whose trade 
reports constitute 0.5% or more of the total consolidated volume in 
those stocks would receive 100% of the attributable market data 
revenue, a member with less than 0.5% but at least 0.25% would receive 
80% of the attributable market data revenue, a member with less than 
0.25% but at least 0.10% would receive 50%, and a member with less than 
0.1% would not be eligible for the program. For Tape C stocks, a member 
whose trade reports constitute 0.75% or more of the total consolidated 
volume in those stocks would receive 100% of the attributable market 
data revenue, a member with less than 0.75% but at least 0.25% would 
receive 80% of the attributable market data revenue, a member with less 
than 0.25% but at least 0.10% would receive 50%, and a member with less 
than 0.1% would not be eligible for the program. According to Nasdaq, 
as the Business Member under the NASD/Nasdaq TRF LLC Agreement, the 
different percentages required for different tapes reflect the current 
extent to which participants use the NASD/Nasdaq TRF to report trades 
in different stocks, i.e., comparatively higher volumes of trades in 
Tape C stocks are reported through the NASD/Nasdaq TRF than in Tape B 
or Tape A stocks, and thus for Tape C, the levels of revenue sharing 
are tied to higher market share levels.
    As the Business Member, Nasdaq has determined that the proposed 
changes in the percentage of market data revenue shared with NASD/
Nasdaq TRF participants may be necessary for competitive reasons. FINRA 
recently filed proposed rule changes to share 100% and 75% of the 
revenues paid with respect to trades reported to the NASD/NYSE TRF and 
the NASD/NSX TRF, respectively.\7\ Nasdaq believes that market data 
revenue associated with over-the-counter trade reporting should 
continue to serve its traditional function of defraying at least a 
portion of the regulatory costs associated with the activity and is 
reluctant to impose the regulatory costs of the NASD/Nasdaq TRF 
exclusively on customers that lack a nexus to its operations. Even with 
50% revenue sharing, however, the amount of remaining market data 
revenue is not sufficient to defray the regulatory costs of the NASD/
Nasdaq TRF. Without a significant pricing change, Nasdaq believes that 
the NASD/Nasdaq TRF would have greater difficulty competing. Nasdaq 
believes that the proposed tiered revenue sharing program, in which 
market participants that make the most use of the NASD/Nasdaq TRF are 
eligible for the highest level of revenue sharing with others receiving 
progressively lower percentages, will allow the NASD/Nasdaq TRF to 
remain competitive while still funding a portion of its regulatory 
costs out of market data revenue. Nevertheless, Nasdaq will be required 
to fund a portion of the regulatory costs associated with the NASD/
Nasdaq TRF from Nasdaq's general revenues.
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    \7\ See Securities Exchange Act Release No. 56754 (November 6, 
2007), 72 FR 64101 (November 14, 2007) (SR-NASD-2007-031); 
Securities Exchange Act Release No. 56752 (November 6, 2007), 72 FR 
64099 (November 14, 2007) (SR-NASD-2007-043).
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    FINRA is proposing that the implementation date of the proposed 
rule change shall be retroactive to January 1, 2008.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act,\8\ in general, and with Section 
15A(b)(5) of the Act,\9\ in particular, 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 is a reasonable 
and equitable credit structure in that it bases the percentage of 
revenue shared on members' respective contributions to the revenues of 
the NASD/Nasdaq TRF, and further Nasdaq has indicated that all 
regulatory costs owed by Nasdaq as the Business Member related to the 
NASD/Nasdaq TRF that are not funded out of market data revenue or trade 
reporting fees will be funded by Nasdaq general revenues.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 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 impose 
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

[[Page 4297]]

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 FINRA 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-2007-041 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2007-041. 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. 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 publicly available. All 
submissions should refer to File Number SR-FINRA-2007-041 and should be 
submitted on or before February 14, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-1156 Filed 1-23-08; 8:45 am]

BILLING CODE 8011-01-P