Document ID: SEC-2014-1970-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-11-24T05:00Z

[Federal Register Volume 79, Number 226 (Monday, November 24, 2014)]
[Notices]
[Pages 69937-69939]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27708]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73632; File No. SR-FINRA-2014-046]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Modify the Gross Income Assessment Pricing 
Structure

November 18, 2014.
    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 November 7, 2014, 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. FINRA has 
designated the proposed rule change as ``establishing or changing a 
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\ 
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon receipt of this filing by the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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II. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to modify the Gross Income Assessment pricing 
structure in Section 1(c) of Schedule A to the FINRA By-Laws.
    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 proposed rule change is intended to provide limited relief from 
the Gross Income Assessment (``GIA'') for some smaller FINRA members 
due to the unanticipated effect of a 2009 change to the method of 
calculating the assessment. The GIA is one of a few primary revenue 
sources that funds FINRA's regulatory operations \5\ and is based on a 
firm's annual gross revenue.\6\ In 2008, FINRA established a seven-tier 
rate structure to assess the GIA, with a minimum assessment of $1,200. 
The tiered rates, which have remained unchanged, are as follows:
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    \5\ FINRA's primary member regulatory pricing structure also 
includes the Trading Activity Fee, the Personnel Assessment (``PA'') 
and the Branch Office Assessment, as well as the processing of new 
and continuing membership applications.
    \6\ Schedule A to the FINRA By-Laws defines gross revenue for 
assessment purposes as total income as reported on FOCUS form Part 
II or IIA, excluding commodities income.
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    (1) $1,200.00 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.
    As a result of this structure, GIA revenues are derived 
overwhelmingly from medium-sized and larger firms. Due to rebates, 
firms with revenues of $1 million or less effectively have paid no GIA 
since 2008.
    In November 2009, the Commission approved changes to the GIA and PA 
intended to help FINRA achieve a more consistent and predictable 
funding stream to carry out its regulatory mandate.\7\ The economic and 
industry downturns in 2008 and 2009 had exposed FINRA's vulnerability 
to year-to-year volatility in members' gross revenues. GIA revenues in 
2009 dropped precipitously due to write-offs

[[Page 69938]]

taken in late 2008, particularly by the largest securities firms.
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    \7\ See Securities Exchange Act Release No. 61042 (November 20, 
2009), 74 FR 62616 (November 30, 2009) (Order Approving File No. SR-
FINRA-2009-057).
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    To ameliorate this vulnerability and smooth out the volatility 
inherent in the GIA, FINRA amended Schedule A to base the GIA on the 
greater of (1) the tier rate applied to a member's annual gross revenue 
from the preceding calendar year (``current year GIA'') or (2) a three-
year average of GIA to be calculated by adding the current year GIA to 
the GIA assessed on the member in the previous two calendar years and 
dividing by three (``averaged GIA'') (together ``the reformulated 
calculation''). Thus, the change was intended to maintain the GIA rate 
structure, while building a buffer against industry downturns.
    While the reformulated calculation has been effective in 
stabilizing FINRA's GIA revenues, an unanticipated impact of the new 
structure has been that firms can be locked in to a higher GIA as the 
result of a spike in gross revenue during a single year. The following 
example of a hypothetical Tier 2 firm illustrates the effect:

----------------------------------------------------------------------------------------------------------------
                                                                                     GIA based
                                          Prior year assessable    GIA based on    reformulated     Variance in
                 Year                      gross FOCUS revenue      prior year      calculation       GIA fee
                                                                   revenue only   (current rule)
----------------------------------------------------------------------------------------------------------------
2008..................................  $4 million..............          $4,860             n/a             n/a
2009..................................  $4 million..............           4,860             n/a             n/a
2010..................................  $4 million..............           4,860          $4,860              $0
2011..................................  $10 million.............          12,150          12,150               0
2012..................................  $6 million..............           7,290           8,100             810
2013..................................  $4 million..............           4,860           8,370           3,510
2014..................................  $3 million..............           3,645           6,705           3,060
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    Thus, in years 2012 through 2014, the firm would be assessed an 
amount based on the average GIA that is significantly greater than the 
current GIA calculation, despite declining or flattening revenues 
during those years. This is due to the knock-on effect that the higher 
GIA fee in 2011 has created on the rolling three-year average 
calculations.
    The original purpose of the previous rule change was to minimize 
the impact on FINRA revenues of down years suffered by mid-sized and 
large firms. FINRA had not contemplated the effect that intermittent 
significant increases in gross revenue could have on the GIA in 
subsequent years for smaller firms, where the relative impact can be 
greater. Accordingly, the proposed rule change would eliminate the 
averaged GIA component of the assessment calculation where a firm's 
prior year gross revenue does not exceed $25 million; i.e., those firms 
that fall within the lowest two tiers. In those circumstances, the firm 
would be assessed the current year GIA.
    Based on 2013 FOCUS revenues, FINRA estimates that 87% (1,365) of 
the firms with revenues of $25 million or less would benefit from the 
pricing change. FINRA further estimates that the change would result in 
savings to those firms of approximately $3.5 million, or approximately 
2.0% of total GIA revenue. FINRA found that the proposed assessment 
approach would have had similar impacts as applied to firm revenues in 
2011 and 2012; in other words, the back tested impact is generally 
consistent for the past three years' worth of FOCUS data for active 
firms. FINRA notes that no firms would be worse off due to the pricing 
change. Since the current reformulated calculation assesses the greater 
of current year GIA or averaged GIA, the firms that would benefit from 
the change are those firms that have been subject to the higher 
averaged GIA. The remaining firms have paid only the current year GIA, 
which would continue under the proposed rule change, even if their 
revenues decrease.
    FINRA recognizes this effect of averaging potentially affects all 
firms, so FINRA also considered the impact of eliminating the averaging 
component from the remaining tiers. Based on an analysis, FINRA found 
that a significantly lower number of firms with revenues in these 
higher revenue tiers were impacted by the averaging calculation. 
However, extending this pricing change to these firms would have a 
material financial impact on the funding of FINRA's regulatory program.
    Therefore, FINRA is proposing to apply the modified pricing 
structure to firms that do not exceed the $25 million tier. The 
relative negative impact of the current calculation falls 
disproportionately on those firms with gross revenues of $25 million or 
less, while the revenue impact on FINRA would be less at that 
threshold. At the same time, with a $25 million threshold, the 
reformulated calculation that includes the averaged GIA would continue 
to apply to the largest concentration of firms with potentially 
significant year-to-year volatility in gross revenues.
    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA is proposing that the implementation date of the 
proposed rule change will be January 1, 2015.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\8\ 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. The Commission previously found both the current year GIA and 
the reformulated calculation to be an equitable allocation of 
reasonable fees.\9\ FINRA believes the proposed modification to the GIA 
pricing structure remains reasonable, since it continues to apply 
either the current year GIA or the averaged GIA to all members and does 
not increase the assessment rates. FINRA also believes the proposed 
rule change retains an equitable allocation of fees, as it would 
continue to apply the reformulated calculation on members that 
accounted for approximately 98% of the revenue from GIA in 2013, while 
potentially lessening, under very particular circumstances, the 
assessment on members that accounted for only about 2% of revenue from 
the GIA. Furthermore, the proposed rule change is both reasonable and 
equitable with respect to the firms in the $25 million tier, as no firm 
within that tier would be worse off. Instead, the proposed rule change 
would align those firms that have had to pay the higher averaged GIA

[[Page 69939]]

with those firms that have only paid the current year GIA.
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    \8\ 15 U.S.C. 78o-3(b)(5).
    \9\ See Securities Exchange Release No. 57474 (March 11, 2008), 
73 FR 14517 (March 18, 2008) (Order Approving File No. SR-FINRA-
2008-001) and Securities Exchange Act Release No. 61042 (November 
20, 2009), 74 FR 62616 (November 30, 2009) (Order Approving File No. 
SR-FINRA-2009-057).
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    The GIA is predicated on the fact that larger firms individually 
require greater regulatory resources. The proposed rule change largely 
keeps in place a GIA pricing structure that, as the Commission noted in 
approving the reformulated calculation in SR-FINRA-2009-057, ``is 
reasonable in that it achieves a generally equitable impact across 
FINRA's membership and correlates the fees assessed to the regulatory 
services provided by FINRA.'' \10\
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    \10\ See supra note 9.
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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. The proposed rule change would 
reduce the costs of approximately one-third of FINRA members. As 
described in Item II.A. above, FINRA considered various thresholds for 
applying the modified GIA pricing structure to strike the appropriate 
balance between providing limited relief to smaller firms negatively 
impacted by the current GIA calculation, while maintaining a pricing 
structure that adequately supports its regulatory programs and 
minimizes revenue volatility.

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) of the Act \11\ and paragraph (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).
    \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-FINRA-2014-046 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.

All submissions should refer to File Number SR-FINRA-2014-046. 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 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 available publicly. All 
submissions should refer to File Number SR-FINRA-2014-046 and should be 
submitted on or before December 15, 2014.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-27708 Filed 11-21-14; 8:45 am]
BILLING CODE 8011-01-P