Document ID: SEC-2010-1454-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-09-23T04:00Z

[Federal Register: September 23, 2010 (Volume 75, Number 184)]
[Notices]               
[Page 58004-58006]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23se10-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62927; File No. SR-FINRA-2010-046]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Exemptions from the Trading Activity Fee

September 17, 2010.
    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 September 7, 2010, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared 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 [sic] amend Section 1(b) of Schedule A to the 
FINRA By-Laws to remove the exemption from the trading activity fee 
(``TAF'') for transactions in exchange-listed options effected by a 
member when FINRA is not the designated options examining authority 
(``DOEA'') for that member.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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
    The TAF is one of three member regulatory fees FINRA uses to fund 
its member regulation activities, which include examinations, financial 
monitoring, and FINRA's policymaking, rulemaking, and enforcement 
activities.\3\ FINRA initially adopted the TAF in 2002 as a replacement 
for an earlier regulatory fee based on trades reported to Nasdaq's 
Automated Confirmation Transaction system then in place.\4\ Because the 
TAF funds FINRA's member regulation functions, it is intended to apply 
to transactions in a way that corresponds with FINRA's regulatory 
responsibilities.\5\ In general, the TAF is assessed for the sale of 
all exchange registered securities wherever executed (except debt 
securities that are not TRACE-eligible), over-the-counter equity 
securities, security futures, TRACE-Eligible Securities (provided that 
the transaction is a Reportable TRACE Transaction), and all municipal 
securities subject to the reporting requirements of the Municipal 
Securities Rulemaking Board.\6\ The TAF rules also include numerous 
exemptions for certain types of transactions.\7\ The proposed rule 
change would eliminate the exemption from the TAF for transactions in 
exchange-listed options when FINRA is not the DOEA for that member.\8\
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    \3\ See FINRA By-Laws, Schedule A, Sec.  1(b). In addition to 
the TAF, the other member regulatory fees are the Gross Income 
Assessment and the Personnel Assessment. See id. Sec. Sec.  1(c), 
(d).
    \4\ See Securities Exchange Act Release No. 46416 (August 23, 
2002), 67 FR 55901 (August 30, 2002) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
National Association of Securities Dealers, Inc. to Eliminate the 
Regulatory Fee and Institute a New Transaction-Based Trading 
Activity Fee); see also NASD Notice to Members 02-63 (September 
2002); NASD Notice to Members 02-41 (July 2002). The TAF was 
originally approved on a pilot basis; the SEC approved the TAF on a 
permanent basis in 2003. See Securities Exchange Act Release No. 
47946 (May 30, 2003), 68 FR 34021 (June 6, 2003); see also NASD 
Notice to Members 03-30 (June 2003).
    \5\ See Securities Exchange Act Release No. 50485 (October 1, 
2004), 69 FR 60445 (October 8, 2004).
    \6\ See FINRA By-Laws, Schedule A, Sec.  1(b)(1).
    \7\ See FINRA By-Laws, Schedule A, Sec.  1(b)(2).
    \8\ See FINRA By-Laws, Schedule A, Sec.  1(b)(2)(K).
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    In 2003, FINRA exempted from the TAF ``[t]ransactions in exchange 
listed options effected by a member when FINRA is not the designated 
options examining authority for that member.'' \9\ The exemption was 
added to reflect the

[[Page 58005]]

fact that FINRA's regulatory responsibilities with respect to such 
activity were alleviated somewhat by its participation in a plan filed 
with the SEC under Rule 17d-2 of the Act \10\ (``17d-2 Agreement'') in 
which regulatory responsibilities for certain FINRA members that 
conducted a public options business were assumed by other self 
regulatory organizations (``SROs'') that would act as the member's 
DOEA.\11\ At that time, of the approximately 450 member firms covered 
by the 17d-2 Agreement, FINRA assumed regulatory responsibilities 
(i.e., was the DOEA) for about 300 firms, and the remaining firms were 
divided among six other SROs. Thus, in view of the fact that another 
SRO performed certain regulatory responsibilities with respect to the 
options activities of these members, FINRA decided to exempt 
transactions in exchange listed options by such firms from the TAF.\12\
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    \9\ FINRA By-Laws, Schedule A, Sec.  1(b)(2)(K). See Securities 
Exchange Act Release No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 
2003).
    \10\ 17 CFR 240.17d-2.
    \11\ See Securities Exchange Act Release No. 46800 (November 8, 
2002), 67 FR 69774 (November 19, 2002).
    \12\ Transactions in over-the-counter (``conventional'') options 
are exempted from the TAF with respect to all FINRA members. See 
FINRA By-Laws, Schedule A, Sec.  1(b)(2)(H).
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    The exemption was also based on the fact that certain other SROs 
were assessing or preparing to assess specific regulatory fees for 
acting as DOEA.\13\ To the extent that other SROs assessed specific 
fees on firms to fund the SRO's DOEA responsibilities with respect to 
those firms, FINRA's TAF on options transactions appeared redundant.
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    \13\ See, e.g., Securities Exchange Act Release No. 47577 (March 
26, 2003), 68 FR 16109 (April 2, 2003) (SR-PCX-2003-03) (PCX rule 
filing establishing a DOEA fee).
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    Subsequent amendments to the 17d-2 Agreement have consolidated 
within FINRA sole regulatory responsibility for the public options 
activities of all of its members.\14\ Consequently, FINRA assumes all 
regulatory responsibility for FINRA members under the 17d-2 
Agreement.\15\ Based on the foregoing, FINRA is proposing to delete the 
exemption from the TAF.\16\
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    \14\ See Securities Exchange Act Release No. 57987 (June 18, 
2008), 73 FR 36156 (June 25, 2008) (Notice of Filing and Order 
Approving and Declaring Effective an Amendment to the Plan for the 
Allocation of Regulatory Responsibilities Among the American Stock 
Exchange LLC, the Boston Stock Exchange, Inc., the Chicago Board 
Options Exchange, Inc., the International Securities Exchange, LLC, 
Financial Industry Regulatory Authority, Inc., The New York Stock 
Exchange, LLC, the NYSE Arca, Inc., The NASDAQ Stock Market LLC, and 
the Philadelphia Stock Exchange, Inc.).
    \15\ Following the consolidation of NASD and NYSE member 
regulation operations in 2007, FINRA announced that it serves as the 
DOEA for all FINRA member firms. See Regulatory Notice 08-37 (July 
2008). FINRA had previously published a list of firms that had a 
DOEA other than FINRA and, consequently, were exempt from the TAF 
for transactions in exchange listed options. See NASD Notice to 
Members 05-03 (January 2005).
    \16\ At the time FINRA (then NASD) proposed the exemption in 
Amendment No. 4 to SR-NASD-2002-148, it noted that ``NASD does not 
believe it is precluded from seeking further amendments to the TAF 
with respect to the reduction or elimination of the proposed 
exemption * * * in the event of a change of factors surrounding its 
sales practice and other regulatory responsibilities.''
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    Deleting this exemption also will remove any ambiguities over 
whether FINRA should collect the TAF on sole-FINRA members or with 
respect to FINRA members that conduct only a proprietary options 
business. The existing language exempting transactions in exchange 
listed options from the TAF when FINRA is not the DOEA for the member 
does not properly align with those situations where FINRA has 
regulatory responsibility over the member firm. First, the DOEA 
designation is established only under the 17d-2 Agreement, which by its 
own terms applies only with respect to firms that are members of more 
than one SRO. Thus, while FINRA has regulatory responsibility for the 
options business of its sole members, FINRA is not technically the DOEA 
for such firms. Second, the 17d-2 Agreement addresses only a firm's 
public options business. As such, a firm that conducts only a 
proprietary options business, irrespective of whether such firm is a 
member of FINRA and another SRO, would not be covered by the 17d-2 
Agreement, and FINRA would not technically be the DOEA. Although 
FINRA's regulatory responsibilities are more limited for a firm that 
does not conduct a public options business, FINRA still retains 
regulatory responsibilities over the firm's options activities.
    The effective date of the proposed rule change will be the first 
day of the month following Commission approval. FINRA will announce the 
effective date of the proposed rule change in a Regulatory Notice to be 
published no later than 30 days following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\17\ 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 because it maintains regulatory 
responsibility over its members' transactions in exchange listed 
options, the exemption from the TAF for transactions in exchange listed 
options when FINRA is not the DOEA for that member is no longer 
necessary. Eliminating the exemption will also ensure that the TAF more 
accurately reflects the current allocation of regulatory 
responsibilities to FINRA of its members' transactions in exchange 
listed options.
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    \17\ 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 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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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-2010-046 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.

[[Page 58006]]

All submissions should refer to File Number SR-FINRA-2010-046. 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 website 
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 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-2010-
046 and should be submitted on or before October 14, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-23773 Filed 9-22-10; 8:45 am]
BILLING CODE 8010-01-P