Document ID: SEC-2012-0339-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-02-29T05:00Z

[Federal Register Volume 77, Number 40 (Wednesday, February 29, 2012)]
[Notices]
[Pages 12340-12345]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-4767]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66454; File No. SR-FINRA-2011-073]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change 
Relating to Establishing a Governmental Accounting Standards Board 
Accounting Support Fee

February 23, 2012.

I. Introduction

    On December 20, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt Section 14 to Schedule A of the FINRA By-
Laws to establish an accounting support fee to adequately fund the 
annual budget of the Governmental Accounting Standards Board 
(``GASB''). The proposed rule change was published for comment in the 
Federal Register on January 9, 2012.\3\ The Commission received nine 
comment letters on the proposed rule change.\4\ On February 13, 2012, 
FINRA submitted a response letter to the comments.\5\ This order grants 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66080 (January 3, 
2012), 77 FR 1119 (``Notice'').
    \4\ See letters to Elizabeth M. Murphy, Secretary, Commission, 
from David T. Bellaire, Esq., General Counsel and Director of 
Government Affairs, Financial Services Institute, dated January 30, 
2012 (``FSI Letter''); Eric Berman, CPA--Chair, Financial Management 
Standards Board, Association of Government Accountants, dated 
January 30, 2012 (``AGA Letter''); David L. Cohen, Managing 
Director, Associate General Counsel, Securities Industry and 
Financial Markets Association, dated January 30, 2012 (``SIFMA 
Letter''); Jeffrey L. Esser, Executive Director and Chief Executive 
Officer, Government Finance Officers Association, Robert O'Neill, 
Executive Director, International City/County Management 
Association, Larry E. Naake, Executive Director, National 
Association of Counties, Donald J. Borut, Executive Director, 
National League of Cities, and Tom Cochran, CEO and Executive 
Director, United States Conference of Mayors, dated January 30, 2012 
(``Associations Letter''); John T. Hicks, President, National 
Association of State Budget Officers, dated January 30, 2012 
(``NASBO Letter''); Ronald L. Jones, President, National Association 
of State Auditors, Comptrollers and Treasurers, dated January 30, 
2012 (``NASACT Letter''); Michael Nicholas, Chief Executive Officer, 
Bond Dealers of America, dated January 30, 2012 (``BDA Letter''); 
Martin J. Benison, Comptroller, Office of the Comptroller, 
Commonwealth of Massachusetts, dated January 24, 2012 
(``Massachusetts Letter''); and Chris Melton, Sr., dated January 19, 
2012 (``Melton Letter'').
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Brant K. Brown, Associate General Counsel, FINRA, dated 
February 13, 2012 (``FINRA Response Letter'').
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II. Description of the Proposed Rule Change

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') was signed into law by President Obama on July 21, 
2010.\6\ As added by Section 978 of the Dodd-Frank Act, Section 19(g) 
of the Securities Act of 1933 (``Securities Act'') gives the Commission 
the authority to require a national securities association to establish 
a reasonable annual accounting support fee to adequately fund the 
annual budget of the GASB (``GASB Accounting Support Fee''), and rules 
and procedures to provide for the equitable allocation, assessment, and 
collection of the GASB Accounting Support Fee from the association's 
members.\7\ On May 11, 2011, the Commission exercised this authority 
and issued an order requiring FINRA to establish (a) a reasonable 
annual accounting support fee to adequately fund the annual budget of 
the GASB; and (b) rules and procedures, in consultation with the 
principal organizations representing State governors, legislators, 
local elected officials, and State and local finance officers, to 
provide for the equitable allocation, assessment, and collection of the 
accounting support fee from its members, and the remittance of all such 
accounting support fees to the FAF.\8\
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    \6\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
    \7\ See 15 U.S.C. 77s(g). For purposes of the GASB Accounting 
Support Fee, the annual budget of the GASB is the annual budget 
reviewed and approved according to the internal procedures of the 
Financial Accounting Foundation (``FAF''). See 15 U.S.C. 77s(g)(2). 
FINRA stated that it anticipates that the GASB's annual budget will 
include an administrative fee to FINRA. The administrative fee is 
intended to cover FINRA's costs associated with calculating, 
assessing, and collecting the GASB Accounting Support Fee, and the 
amount will be negotiated with the FAF each year. For the initial 
year, the administrative fee will be $50,000.
    \8\ See Securities Exchange Act Release No. 64462 (May 11, 
2011), 76 FR 28247 (May 16, 2011).
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    In response to the Commission's order of May 11, 2011, FINRA 
proposed new Section 14 (Accounting Support Fee for Governmental 
Accounting Standards Board) to Schedule A of the FINRA By-Laws to 
establish the GASB Accounting Support Fee. The proposed rule change 
would assess the fee based on FINRA members' municipal securities 
trading volume reported to the Municipal Securities Rulemaking Board 
(``MSRB''). FINRA stated its belief that basing the GASB Accounting 
Support Fee on reliable and timely reporting data will ensure the 
accuracy of the fee and that using transaction data to apportion the

[[Page 12341]]

fee will result in a fair and equitable assessment across FINRA 
members. FINRA stated, however, that because it is statutorily 
prohibited from collecting amounts in excess of GASB's recoverable 
annual budgeted expenses and because a transaction-based fee is 
inherently variable due to the unpredictability of transaction volume, 
it proposed a quarterly assessment based on GASB's annual budget.\9\ 
Under proposed Section 14, the GASB Accounting Support Fee would be 
allocated among FINRA members on a quarterly basis based on municipal 
securities transactions reported to the MSRB. Specifically, each 
calendar quarter, each FINRA member would be required to pay an 
assessment to FINRA of its portion of one quarter of the annual GASB 
Accounting Support Fee amount that reflects the member's portion of the 
total par value of municipal securities transactions reported by FINRA 
members to the MSRB under MSRB Rule G-14(b) \10\ in the previous 
calendar quarter. For example, if GASB's recoverable annual budgeted 
expenses for a given year were $10 million, FINRA would collect $2.5 
million from its members each quarter. Each member's fee would be based 
on the member's proportion of municipal securities transactions (based 
on the par value of reported transactions, not their price) reported by 
all FINRA members to the MSRB in the previous calendar quarter.\11\ 
Thus, for example, if a member reported transactions to the MSRB in a 
given quarter that accounted for 10% of the total par value amount of 
transactions reported by all FINRA members during the quarter, the 
member's assessment would be 10% of one quarter of GASB's annual budget 
(in the above example, the member's quarterly assessment would be 
$250,000 (i.e., 10% of $2.5 million)).
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    \9\ Section 19(g)(4) of the Securities Act prohibits FINRA from 
collecting GASB Accounting Support Fees for a fiscal year in excess 
of GASB's recoverable annual budgeted expenses. See 15 U.S.C. 
77s(g)(4).
    \10\ MSRB Rule G-14(b) sets out municipal securities transaction 
reporting requirements.
    \11\ If a member does not engage in reportable municipal 
securities transactions during a particular calendar quarter, the 
member would not be subject to the GASB Accounting Support Fee for 
that quarter.
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    To exclude members with de minimis transactions in municipal 
securities in a given quarter from being assessed the fee, FINRA 
proposed that members with a quarterly assessment of less than $25 
would not be charged the fee for that quarter. Any amounts originally 
assessed to those members would be reallocated among the members with 
an assessment that quarter of $25 or more based on each member's 
portion of the total par value of municipal securities transactions 
reported by FINRA members to the MSRB.
    As required by Section 19(g) of the Securities Act, any GASB 
Accounting Support Fees collected by FINRA would be remitted to the FAF 
\12\ and used to support the efforts of the GASB to establish standards 
of financial accounting and reporting applicable to state and local 
governments.\13\ In accordance with Section 19(g)(5)(B) of the 
Securities Act, collection of the GASB Accounting Support Fee shall not 
be construed to provide the Commission or FINRA direct or indirect 
oversight of the budget or technical agenda of the GASB or to affect 
the setting of generally accepted accounting principles by the 
GASB.\14\
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    \12\ See 15 U.S.C. 77s(g)(1).
    \13\ See 15 U.S.C. 77s(g)(3). Specifically, FINRA stated that it 
anticipates establishing a separate bank account specifically for 
the GASB Accounting Support Fee and would coordinate with the FAF to 
establish a process by which FINRA would wire the funds into the FAF 
account for the GASB Accounting Support Fee. Further, given the 
separate bank account, FINRA would provide monthly account 
reconciliations and accounts receivable aging reports, which would 
be reviewed by FINRA management each month and would be available 
for review by FAF and GASB management upon request.
    \14\ See 15 U.S.C. 77s(g)(5)(B).
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    Because some firms may seek to pass the GASB Accounting Support Fee 
onto customers engaged in municipal securities transactions, FINRA 
proposed to publish a Regulatory Notice each year disclosing the total 
annual GASB Accounting Support Fee that FINRA would collect for that 
year. In this annual Regulatory Notice, FINRA also anticipates setting 
out an estimated fee rate (per $1,000 par value) based on the GASB 
recoverable annual budgeted expenses reported to FINRA for that year 
and historical municipal security trade reporting volumes so that firms 
would have some basis on which to establish a fee should they choose to 
do so. FINRA's Regulatory Notice would also remind any firms choosing 
to pass along the fee of the need for proper disclosure of the GASB 
Accounting Support Fee, including, if applicable, the fact that the fee 
is an estimate and that the firm ultimately may pay more or less than 
the fee charged to the customer. In addition, any disclosure used by 
the firm cannot be misleading and must comport with FINRA rules, 
including just and equitable principles of trade, as well as any 
applicable MSRB rules.
    As proposed, the effective date of the proposed rule change would 
be the date of Commission approval. The initial fees assessed on 
members would be based on trading activity reported in the calendar 
quarter during which the Commission approves the proposed rule change. 
As a result, the proposed GASB Accounting Support Fee may only cover a 
portion of the 2012 GASB budget.

III. Comment Letters

    As noted above, the Commission received nine comment letters on the 
proposed rule change.\15\ Four commenters generally supported the 
proposed rule change.\16\ Three commenters expressed objections to the 
proposed rule change and urged the Commission to disapprove it.\17\ 
Five commenters, including three commenters who supported the proposed 
rule change, expressed concerns regarding various aspects of the 
proposal.\18\ Also, as noted above, FINRA submitted a response letter 
to the comments.\19\
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    \15\ See supra note 4.
    \16\ See AGA Letter; NASBO Letter; NASACT Letter; and 
Massachusetts Letter.
    \17\ See SIFMA Letter; BDA Letter; and Melton Letter.
    \18\ See FSI Letter; AGA Letter; Associations Letter; NASBO 
Letter; and NASACT Letter.
    \19\ See supra note 5. Prior to filing this proposed rule 
change, FINRA issued Regulatory Notice 11-28 requesting comment on 
the proposal. See FINRA Regulatory Notice 11-28 (June 2011). In the 
Notice, FINRA addressed the comments it received in response to the 
Regulatory Notice.
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    As noted above, four commenters generally supported the proposed 
rule change.\20\ One commenter stated that it strongly supports the 
proposal, and that the proposed rule change represents a very positive 
and long overdue step to provide the GASB, in its role as an 
independent standards setting body, with reliable funding.\21\ While 
this commenter pointed out several potential concerns with the proposed 
rule change, the commenter stated that ``any concerns regarding the 
proposal were outweighed by the positive effects of FINRA's proposal.'' 
\22\ This commenter further stated that the proposed rule change is 
consistent with the Dodd-Frank Act, and will ``provide GASB with a 
stable funding source for its work,'' ``strengthen GASB's 
independence,'' ``eliminate the risk that financial support could be 
lost if an unpopular course of action is pursued by GASB,'' and ``allow 
GASB to better plan its research work on important topics.'' \23\
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    \20\ See supra note 16.
    \21\ See AGA Letter at 1.
    \22\ Id. at 2.
    \23\ Id.
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    Another commenter who supported the proposal urged the Commission 
to approve it, stating that the proposed

[[Page 12342]]

rule change ``represents the best compromise identified through a 
deliberative open process and represents a long-term solution to GASB 
funding needs.'' \24\ Another commenter stated that ``allocating the 
support fee among FINRA member firms based on municipal securities 
transactions appears to be a reasonable way to provide GASB with a 
steady source of independent funding'' and that ``[t]he methodology 
seems fair and equitable.'' \25\ The final commenter that generally 
supported the proposal stated that it agreed with most of the proposed 
changes, but was concerned the proposal did not specifically state that 
the GASB Accounting Support Fee could not be passed on to issuers of 
municipal debt.\26\
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    \24\ Massachusetts Letter.
    \25\ NASACT Letter.
    \26\ See NASBO Letter at 1.
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    Several commenters who opposed the proposed rule change expressed 
the belief that the proposed GASB Accounting Support Fee is not 
equitable because it is imposed only on broker-dealers.\27\ One 
commenter stated that charges to the broker-dealer community should be 
restricted ``to those items that are directly connected to broker-
dealers,'' and that ``the connection to the broker-dealer community in 
this case is tenuous.'' \28\ One commenter stated that GASB's 
activities benefit many participants in the municipal market other than 
broker-dealers, so the fee should be shared broadly by those who 
benefit.\29\ Another commenter stated that the proposed rule change is 
an ``unfair tax'' on broker-dealers.\30\ This commenter stated that the 
true beneficiaries of GASB's work are state and local governments, 
investors, rating agencies, and auditors, and they should directly fund 
GASB's operations.\31\ Further, this commenter stated that, under the 
proposed rule, many diverse end users of GASB's accounting and 
financial reporting standards would get a ``free ride.'' \32\ In 
addition, this commenter stated that numerous state and local 
governments and other municipal bond obligors do not follow GASB 
standards, so there is ``no reasonable basis, nexus, or justification 
for the bondholders of these entities (or even the entities themselves) 
to financially support the activities of GASB,'' and that ``[i]f 
dealers are required to fund GASB, they should enjoy some certainty 
that GASB's work product will be adhered to.'' \33\ This commenter also 
stated that bank dealers are not subject to FINRA regulation, so they 
would not be covered under the proposed rule change.\34\ Further, this 
commenter stated that each broker-dealer counterparty to a trade 
reports the trade under MSRB Rule G-14(b), resulting in a multiple 
assessment for a single purchase and sale.\35\ Lastly, this commenter 
suggested structuring the fee as an underwriting assessment on all 
municipal securities (or potentially just on bonds with GASB reporting 
obligors) purchased by a dealer from an issuer as part of a primary 
offering.\36\
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    \27\ See Melton Letter; BDA Letter; and SIFMA Letter.
    \28\ Melton Letter (stating that ``[r]egistered broker-dealers 
are neither governmental entities nor accountants'').
    \29\ See BDA Letter at 1 (stating that activities of GASB 
benefit issuers, financial advisors, investors, and citizens).
    \30\ See SIFMA Letter at 3.
    \31\ See id. at 3-4.
    \32\ See id. at 4.
    \33\ Id.
    \34\ See id. at 6.
    \35\ See id.
    \36\ See id. at 7.
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    One of the commenters who supported the proposed rule change also 
noted that there could be a potential ``unintended negative effect from 
assessing GASB's costs across only a portion of the stakeholders that 
benefit from GASB's work,'' and that relying on a single constituency 
could have an unintended negative consequence.\37\ This commenter also 
stated, however, that it believes that the proposed rule change could 
create a ``healthy segregation'' for organizations that currently both 
collect sums from states and local governments for the funding of GASB 
and also participate heavily in commenting on the policy decisions 
developed by the GASB, by eliminating any potential conflicts between 
these two interests.\38\
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    \37\ See AGA Letter at 1-2. The commenter also pointed out that 
state and local governments vary as to how often and to what extent 
they enter the municipal securities market, but stated that, even 
considering the current GASB funding mechanism, it is unaware of any 
link between a state or local government's decision to allocate 
funds to support GASB and its subsequent decision to follow GASB 
standards. See id.
    \38\ See id. at 2.
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    In response to comments regarding who should be required to pay the 
GASB Accounting Support Fee, FINRA reaffirmed its statements in the 
Notice that Section 19(g) of the Securities Act substantially limited 
the parameters of the GASB Accounting Support Fee and that FINRA has no 
authority to collect the fee from non-FINRA members.\39\ In the Notice, 
FINRA also stated that because the goal of the assessment is to 
equitably allocate the GASB Accounting Support Fee among participants 
in the municipal securities market, it is appropriate that both brokers 
in a broker-to-broker transaction be considered as participating in 
that market with respect to the transaction, rather than using only one 
side of the trade in calculating the fee.\40\ FINRA further stated its 
belief that the proposed fee would accurately reflect firms' 
participation in the municipal securities markets, whether those firms 
act as underwriters, brokers' brokers, or simply as buyers or sellers 
of municipal securities.\41\ Lastly, in the Notice, FINRA declined to 
distinguish between issues depending on whether the obligor has 
followed Financial Accounting Standards Board (``FASB'') standards, 
GASB standards, or neither.\42\ FINRA stated that this information is 
not required to be reported to the MSRB, is not available on an 
automated basis, and that it would be impractical for FINRA to attempt 
to maintain a comprehensive and accurate list of issues where the 
obligor has followed GASB standards.\43\ In its response letter, FINRA 
also stated its belief that the issue of who should pay the GASB 
Accounting Support Fee is more properly resolved by the Commission, and 
that unless the Commission rescinds its order, FINRA must proceed with 
the rulemaking pursuant to Section 19(g) and the Commission's 
order.\44\
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    \39\ See FINRA Response Letter at 3 and Notice, 77 FR at 1122.
    \40\ See Notice, 77 FR at 1123.
    \41\ See id. FINRA also noted that basing the GASB Accounting 
Support Fee on underwriting, rather than transactions, would 
increase the burden on lead underwriters and would 
disproportionately affect market participants engaged in 
underwriting activities rather than in trading in the secondary 
market. Further, FINRA stated that basing the fee on underwriting 
would wholly exempt secondary market participants from paying the 
fee and the fee would be assessed only on future municipal issues 
and would ``grandfather'' in previous issues. See id. at note 42.
    \42\ See id. at 1123.
    \43\ See id.
    \44\ See FINRA Response Letter at 5.
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    Several commenters representative of state and local officials 
stated that the proposed rule change would allow FINRA members to pass 
the GASB Accounting Support Fee on to the members' customers, which 
would be inconsistent with the Dodd-Frank Act.\45\ One commenter who 
stated that the proposed fee is a reasonable way to provide GASB with a 
steady source of independent funding and that the methodology is fair 
and equitable expressed concern that the fee could be passed along to 
customers, particularly municipal issuers.\46\ This commenter stated 
that the Dodd-Frank Act specifically provides that the fee is to be 
paid by members of a national securities

[[Page 12343]]

association.\47\ Another commenter stated that ``[t]he proposed rule 
does not adhere to the statutory language because it does not specify 
that the Fee must be paid by the members of the association, and in 
fact leaves open the possibility that the Fee may be passed along to 
customers, which might include state and local governments who issue 
municipal securities.'' \48\ This commenter also stated that, without 
language that would prevent FINRA members from passing the fee to 
issuers of municipal securities, ``there will be nothing to ensure that 
the law is correctly implemented, and that state and local 
governments--and ultimately tax payers--will not be unnecessarily 
burdened with additional fees.'' \49\ One more commenter expressed 
concern that the proposed rule change is inconsistent with the 
statutory language of the Dodd-Frank Act ``because it does not specify 
that the fee be paid by the members of the association, and leaves open 
the possibility that the fee may be passed along to customers which 
includes state and local governments who issue municipal securities.'' 
\50\
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    \45\ See Associations Letter; NASBO Letter; and NASACT Letter.
    \46\ See NASACT Letter.
    \47\ See id.
    \48\ Associations Letter at 1.
    \49\ Id. at 2.
    \50\ NASBO Letter at 1-2.
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    On the other hand, commenters representing broker-dealers stated 
that the proposal should allow broker-dealers to pass on the GASB 
Accounting Support Fee to customers engaged in municipal securities 
transactions.\51\ One commenter stated that dealers should be allowed 
to pass the fee to municipal issuers instead of or in addition to 
investors, and that this would more closely follow how FASB is 
funded.\52\ Another commenter suggested that broker-dealers should be 
allowed to share the burden of the fee and pass through the fee.\53\
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    \51\ See SIFMA Letter and BDA Letter.
    \52\ See SIFMA Letter at 6. This commenter further stated that 
the proposed fee unfairly burdens certain dealers because many 
transactions reported to the MSRB pursuant to Rule G-14(b) do not 
involve customers, which means some dealers cannot pass through the 
fee to customers. See id. at 5.
    \53\ See BDA Letter at 2.
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    In response to comments regarding whether FINRA members could pass 
through the GASB Accounting Support Fee, FINRA reaffirmed its views as 
expressed in the Notice,\54\ and responded that Section 19(g) of the 
Securities Act ``does not, in fact, require that the fee be `paid' by 
FINRA members, much less `specifically state' such a requirement.'' 
\55\ FINRA stated that the proposed rule change ``does precisely what 
the statute and the SEC GASB Order require: It proposes a rule to 
allocate, assess, and collect the GASB Accounting Support Fee from 
FINRA members, and only from FINRA members.'' \56\ FINRA further stated 
that the manner by which its members choose to recoup the expenditure 
is not addressed by Section 19(g) of the Securities Act, the 
Commission's order, or FINRA's proposed rule.\57\
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    \54\ See Notice, 77 FR at 1124. FINRA stated that it ``has long 
recognized that members pass fees through to the customers whose 
transactions generate those fees, and FINRA rules generally do not 
address the commercial allocation of fees between members and their 
customers, provided such fees are fair, reasonable, and disclosed.'' 
Id. FINRA also declined to give a blanket exemption for issuers of 
municipal securities, and noted that transactions from a municipal 
securities issuer to an underwriter are not reported to the MSRB and 
would not generally be counted toward a member's quarterly 
assessment. See id.
    \55\ FINRA Response Letter at 4.
    \56\ Id.
    \57\ See id. at note 16. FINRA also stated that it has no rule 
dictating how its member firms cover expenditures, and does not 
believe that any such provision is required by Section 19(g) or the 
Commission's order. See id.
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    Two commenters expressed concerns with respect to the proposed de 
minimis exemption for FINRA members whose GASB Accounting Support Fee 
assessment is less than $25 per quarter.\58\ One commenter urged FINRA 
to increase the threshold for the exemption to $250 because ``it would 
provide relief to a greater number of member firms with de minimis 
involvement in municipal trading'' and ``would appropriately place the 
burden of supporting the annual budget of the GASB primarily on those 
firms that are substantially involved in municipal trading.'' \59\ In 
the alternative, this commenter urged FINRA to ``provide clarification 
as to why alternative threshold levels between $25 and $1000 were not 
considered or discussed in the Proposed Rule.'' \60\ Another commenter 
stated that the exemption threshold should be increased to $1000 
because of the concentration of trading and because of problems passing 
through the fee.\61\ This commenter stated that there are problems with 
passing the fee through because a firm would not know its liability 
until after the close of the quarter and, therefore, it cannot 
determine the amount allocable to a given trade at the time of the 
trade.\62\ As such, any attempt to pass on the fee would ``necessarily 
be an estimate, and one that would surely be either too much or too 
little.'' \63\ Because ``[s]etting up a system to track these charges 
would disproportionately burden smaller firms, as would the alternative 
of the broker-dealer accepting the entire burden of the GASB fee,'' the 
commenter requested that the exemption threshold be increased to 
$1000.\64\ This commenter also stated that a threshold of $1000 would 
capture ``90 percent of the par volume,'' and that ``[b]ecause of the 
concentration of trading, we believe the focus should not be on the 
number of dealers included or excluded, but on the proportion of the 
par value of the market included or excluded.'' \65\
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    \58\ See FSI Letter and BDA Letter.
    \59\ FSI Letter at 3.
    \60\ Id.
    \61\ See BDA Letter at 2.
    \62\ See id.
    \63\ Id.
    \64\ Id.
    \65\ Id.
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    In response to comments regarding the threshold for the de minimis 
exemption, FINRA stated that it considered other dollar levels before 
proposing the $25 threshold.\66\ In the FINRA Response Letter, FINRA 
reaffirmed its statements in the Notice, and stressed that any amount 
that one member is not assessed because of the de minimis exemption 
must be assessed to another member, so it believes that the threshold 
should be relatively low to avoid the cumulative effect that the 
exemption would have on those members above the threshold in a given 
quarter.\67\ Further, FINRA stated that any concern about 
proportionality is addressed in the fee assessment itself because firms 
with a higher proportional volume of reported sales will pay more than 
members with a smaller volume, and that the exemption was intended to 
exempt members with truly de minimis trading activity in a given 
quarter.\68\
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    \66\ See FINRA Response Letter at 6. In the Notice, FINRA stated 
that a de minimis threshold of $25 per quarter would exempt 
approximately 55% of the firms per quarter, and raising the 
threshold to $1000 would exempt approximately 90% of the firms. See 
Notice, 77 FR at 1124.
    \67\ See FINRA Response Letter at 5. See also Notice, 77 FR at 
1124. FINRA further stressed that it estimates that a $25 threshold 
would exempt over half of its members reporting trades to the MSRB 
in a given quarter. See FINRA Response Letter at 6.
    \68\ See FINRA Response Letter at 6.
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    Several commenters expressed concern that there would be no 
oversight of the amount of GASB Accounting Support Fees to be 
collected, and that the Commission and FINRA do not have the authority 
to oversee the amount of the fees or the uses of the fees.\69\ One 
commenter stated that ``[s]eparating the authority to spend the money 
from the responsibility for collecting it--and accountability to those 
who pay it--is extremely bad

[[Page 12344]]

public policy.'' \70\ Another commenter pointed out that neither the 
proposed rule change nor the Commission's order directing funding for 
GASB contains a provision for independent direct or indirect oversight 
of GASB's budget, and that this is inconsistent with the Commission's 
oversight and review of FASB's annual budget.\71\ This commenter 
requested that some independent oversight be implemented to encourage 
transparency and fiscal discipline.\72\
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    \69\ See BDA Letter; SIFMA Letter; and AGA Letter.
    \70\ BDA Letter at 2.
    \71\ See SIFMA Letter at 5.
    \72\ See id.
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    Another commenter noted that it initially had been concerned that 
there appeared to be no constraints on GASB's budget and/or limit on 
costs.\73\ However, during its discussion with a FAF Board member, the 
commenter was informed that there are control mechanisms in place, 
including reviews by the Finance Committee of the FAF, and the 
commenter stated that it trusts that these mechanisms will remain in 
place and continue as a meaningful review and restraint on GASB's 
budget and costs.\74\
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    \73\ See AGA Letter at 2.
    \74\ See id.
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    In response to comments regarding oversight of the amounts and uses 
of the GASB Accounting Support Fee, FINRA reaffirmed its statements in 
the Notice that Section 19(g)(5)(B)(i) of the Securities Act provides 
that the collection of the GASB Accounting Support Fee does not provide 
FINRA with any direct or indirect oversight of the budget or technical 
agenda of the GASB.\75\ In its response letter, FINRA stated that the 
issue is more properly resolved by the Commission, and that unless the 
Commission rescinds its order, FINRA must proceed with the rulemaking 
pursuant to Section 19(g) and the Commission's order.\76\
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    \75\ See Notice, 77 FR at 1122.
    \76\ See FINRA Response Letter at 5.
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    Lastly, one commenter stated that the proposed $50,000 fee for 
FINRA to administer the GASB Accounting Support Fee is unwarranted 
because FINRA could easily amend its process for collecting its Trading 
Activity Fee (``TAF'') to include the GASB Accounting Support Fee.\77\ 
Alternatively, this commenter suggested that if FINRA moves forward 
with a fee based on an underwriting assessment or trades submitted to 
the MSRB, the MSRB could administer the fee for minimal costs because 
it already has the staffing and information to calculate, assess, and 
collect underwriting assessments, as well as transaction and technology 
assessments pursuant to MSRB Rule A-13.\78\
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    \77\ See SIFMA Letter at 6.
    \78\ See id.
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    While FINRA did not provide any additional response to the comment 
regarding the administrative fee in its response letter, FINRA stated 
in the Notice that it disagrees that the fee is unwarranted.\79\ In the 
Notice, FINRA stated that use of a self-reporting model like the TAF is 
inappropriate for the GASB Accounting Support Fee because the 
transaction information available through the MSRB would be a more 
timely and reliable source of transaction information than self-
reported data.\80\ FINRA also stated that self-reporting could increase 
costs for firms and FINRA \81\ and that the exceptions from the TAF 
should not apply to the assessment of the GASB Accounting Support 
Fee.\82\ Further, in the Notice, FINRA stated that the amount of the 
administrative fee was negotiated with the FAF and based on estimated 
costs to FINRA, and that it anticipates that the administrative fee 
will be reviewed and evaluated each year by FINRA and FAF in light of 
FINRA's experience in assessing and collecting the GASB Accounting 
Support Fee and the actual costs incurred by FINRA.\83\
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    \79\ See Notice, 77 FR at 1122.
    \80\ See id. at 1122-23.
    \81\ See id. at 1123. FINRA stated that under a self-reporting 
model, FINRA would need to audit its members to ensure that their 
self-reporting was accurate and timely, and that Section 19(g) 
requires FINRA to collect exact amounts, thus creating an inability 
to remedy potential over- or under-payments by members that self-
report erroneous data. See id.
    \82\ See id. For example, FINRA noted that the TAF is currently 
only charged to the sell side of a transaction. See id.
    \83\ See id.
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IV. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with Section 19(g) of the Securities Act \84\ and 
the Commission order directing funding for the GASB,\85\ as well as 
Section 15A(b)(5) of the Exchange Act.\86\ Specifically, the Commission 
finds that the proposed rule change provides for the equitable 
allocation of reasonable dues, fees, and other charges among FINRA 
members. Further, the Commission finds that proposed Section 14 to 
Schedule A of the FINRA By-Laws establishes a reasonable annual 
accounting support fee to adequately fund the annual budget of the 
GASB, as well as rules and procedures that provide for the equitable 
allocation, assessment, and collection of the accounting support fee 
from FINRA members, and the remittance of all such accounting support 
fees to the FAF.\87\
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    \84\ 15 U.S.C. 77s(g).
    \85\ See supra note 8.
    \86\ 15 U.S.C. 78o-3(b)(5).
    \87\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission finds that the proposed GASB Accounting Support Fee 
is reasonable because it is based on the annual GASB budget, which is 
reviewed and approved according to the internal procedures of the 
FAF.\88\ In addition, pursuant to Section 19(g)(4) of the Securities 
Act, the GASB Accounting Support Fee collected for a fiscal year may 
not exceed the recoverable annual budgeted expenses of the GASB.\89\ 
The Commission finds that the proposed GASB Accounting Support Fee is 
equitable because the fee will be proportionally distributed among 
FINRA members based on a member's portion of the total par value of 
municipal securities transactions reported by FINRA members to the MSRB 
under MSRB Rule G-14(b) in the previous calendar quarter.\90\ As such, 
FINRA members who are active participants in the municipal securities 
markets will be assessed a proportionately higher fee than those who 
are less active. The Commission also believes that the transaction 
information reported to the MSRB will serve as an objective, timely, 
and reliable source of transaction information. Further, the Commission 
believes that the de minimis exemption for FINRA members whose 
assessment is less than $25 in a quarter is consistent with the 
equitable allocation of the fee because it will exempt firms who engage 
in a truly de minimis amount of transactions in municipal securities, 
and will not impose an undue burden on other firms that will receive 
allocations of this exempted fee.\91\ The

[[Page 12345]]

Commission notes that FINRA members that do not fall within the de 
minimis exemption will be equitably allocated a portion of the fee 
based on an objective measure of their participation in the municipal 
securities market.\92\
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    \88\ See 15 U.S.C. 77s(g)(2).
    \89\ See 15 U.S.C. 77s(g)(4).
    \90\ The Commission believes that allocating the GASB Accounting 
Support Fee to each counterparty to a trade is consistent with the 
equitable allocation of the fee because each FINRA member is 
assessed a fee based on the level of its activities in the municipal 
securities markets. The Commission further believes that it is 
equitable to allocate the fee to reflect a member's participation in 
the municipal securities market, regardless of whether the member 
acts as an underwriter, broker's broker, or a buyer or seller of 
municipal securities. In addition, the Commission believes that it 
is equitable to not make a distinction, in allocating the fee, 
depending on whether the obligor has followed GASB standards.
    \91\ The Commission notes that FINRA stated that it had 
considered other dollar levels before proposing the $25 threshold. 
See supra note 66 and accompanying text.
    \92\ With respect to the concern that any attempt to pass 
through the fee would be based on estimates, and that setting up a 
system to track charges to customers would disproportionately burden 
small firms, the Commission notes that the proposed rule change does 
not require FINRA members to pass the fee through to their 
customers.
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    With respect to the comments that the proposed GASB Accounting 
Support Fee is inequitable because it is only imposed on broker-
dealers, but not others who may benefit from GASB's activities, the 
Commission notes that Section 19(g) of the Securities Act provides that 
the Commission may require a registered national securities association 
to establish rules and procedures to provide for the equitable 
allocation, assessment, and collection of the GASB Accounting Support 
Fee from its members.\93\ As such, consistent with the statutory 
language, FINRA may only impose the GASB Accounting Support Fee on its 
members, even though other entities may benefit from GASB's activities.
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    \93\ See 15 U.S.C. 77s(g). Further, as discussed above, one 
commenter pointed out that, by allocating the GASB Accounting 
Support Fee among FINRA members, the proposed rule change could 
eliminate conflicts of interest for entities that collect sums from 
state and local governments for the funding of GASB, but that also 
participate in commenting on the policy decisions developed by GASB.
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    Further, in connection with the comments regarding whether FINRA 
members should be allowed to pass through the GASB Accounting Support 
Fee, the Commission notes that how FINRA members recoup their 
expenditures is not the subject of Section 19(g) of the Securities Act 
or FINRA's proposed rule change.\94\ Consistent with Section 19(g)(1) 
of the Securities Act,\95\ the GASB Accounting Support Fee will be 
allocated and assessed to, and collected from, FINRA members.\96\
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    \94\ With respect to the comment that the proposed rule change 
is inconsistent with how FASB is funded, the Commission notes that 
the allocation, assessment, and collection of the GASB Accounting 
Support Fee, unlike the FASB fee, is governed by Section 19(g) of 
the Securities Act.
    \95\ See 15 U.S.C. 77s(g)(1).
    \96\ The Commission notes that FINRA has proposed to publish a 
Regulatory Notice each year disclosing the total annual GASB 
Accounting Support Fee that it would collect for that year and an 
estimated fee rate, and that the Regulatory Notice would remind any 
firms choosing to pass through the fee of the need for proper 
disclosure of the GASB Accounting Support Fee, including, if 
applicable, the fact that the fee is an estimate and that the firm 
ultimately may pay more or less than the fee charged to the 
customer. In addition, FINRA has stated that any disclosure used by 
the firm cannot be misleading and must comport with FINRA rules, 
including just and equitable principles of trade, as well as any 
applicable MSRB rules.
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    With respect to the concerns that there would be no oversight of 
the amount of the GASB Accounting Support Fee to be collected and the 
use of the money, the Commission notes that Section 19(g)(5)(B)(i) of 
the Securities Act specifically states that Section 19 does not provide 
the Commission or any national securities association with direct or 
indirect oversight of the budget or technical agenda of the GASB.\97\
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    \97\ See 15 U.S.C. 77s(g)(5)(B)(i).
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    With respect to comments regarding the $50,000 fee for FINRA to 
administer the GASB Accounting Support Fee, the Commission notes that 
according to FINRA, the fee was negotiated with FAF and is based on 
estimated costs to FINRA. Further, FINRA stated that this fee may 
increase or decrease, if necessary, based on yearly reviews in light of 
FINRA's experience in assessing and collecting the GASB Accounting 
Support Fee and the actual costs incurred by FINRA. As such, the 
Commission believes that the $50,000 administrative fee is not 
unreasonable.\98\
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    \98\ Based on FINRA's response to comments in the Notice and the 
response letter, the Commission believes that it is reasonable for 
FINRA to not amend its process for collecting its TAF to include the 
GASB Accounting Support Fee.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\99\ that the proposed rule change (SR-FINRA-2011-073) be, and it 
hereby is, approved.
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    \99\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\100\
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    \100\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-4767 Filed 2-28-12; 8:45 am]
BILLING CODE 8011-01-P