Document ID: SEC-2012-0030-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-01-09T05:00Z

[Federal Register Volume 77, Number 5 (Monday, January 9, 2012)]
[Notices]
[Pages 1119-1124]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-84]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66080; File No. SR-FINRA-2011-073]

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

 January 3, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 19, 2011, 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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[[Page 1120]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing 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 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 GASB was established in 1984 by agreement of the Financial 
Accounting Foundation (``FAF'') and ten national associations of state 
and local government officials as an independent organization that 
establishes and improves standards of accounting and financial 
reporting for U.S. state and local governments.\3\ The GASB is 
recognized by governments, the accounting industry, and the capital 
markets as the source for the development and publication of the 
generally accepted accounting principles (``GAAP'') for state and local 
governments.
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    \3\ The GASB is not a government entity. It is an operating 
component of the FAF, which is a private-sector, not-for-profit 
entity. Funding for the GASB comes in part from sales of 
publications and in part from state and local governments and the 
municipal bond community. Its standards are not Federal laws or 
regulations, and the GASB does not have enforcement authority. See 
Facts About GASB, http://gasb.org.
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    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') was signed into law by President Obama on July 21, 
2010.\4\ As added by Section 978 of the Dodd-Frank Act, Section 19(g) 
of the Securities Act of 1933 (``Securities Act'') gives the SEC 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 to draft the 
rules and procedures necessary to equitably assess the GASB Accounting 
Support Fee on the association's members.\5\ On May 11, 2011, the SEC 
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.\6\
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    \4\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
    \5\ 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 
FAF. See 15 U.S.C. 77s(g)(2). FINRA 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.
    \6\ Securities Exchange Act Release No. 64462 (May 11, 2011), 76 
FR 28247 (May 16, 2011).
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    In response to the SEC's order of May 11, 2011, FINRA is proposing 
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. After considering multiple ways to assess 
the GASB Accounting Support Fee on its members and issuing Regulatory 
Notice 11-28 requesting comment on the GASB Accounting Support Fee, the 
proposed rule change assesses the fee based on members' municipal 
securities trading volume reported to the Municipal Securities 
Rulemaking Board (``MSRB''). FINRA believes 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 fee will result in a fair and equitable assessment across 
FINRA members. However, because FINRA 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, FINRA is proposing a 
quarterly assessment based on GASB's annual budget.\7\ Under proposed 
Section 14, the GASB Accounting Support Fee will 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) \8\ 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.\9\ 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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    \7\ Section 19(g)(4) of the Securities Act, as added by the 
Dodd-Frank 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).
    \8\ MSRB Rule G-14(b) sets out municipal securities transaction 
reporting requirements.
    \9\ 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 is 
proposing 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 the 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 will be remitted to the FAF 
\10\ and used to

[[Page 1121]]

support the efforts of the GASB to establish standards of financial 
accounting and reporting applicable to state and local governments.\11\ 
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 SEC or FINRA direct or indirect oversight of the budget or 
technical agenda of the GASB or to affect the setting of GAAP by the 
GASB.\12\
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    \10\ See 15 U.S.C. 77s(g)(1).
    \11\ See 15 U.S.C. 77s(g)(3). Specifically, FINRA anticipates 
establishing a separate bank account specifically for the GASB 
Accounting Support Fee and will coordinate with the FAF to establish 
a process by which FINRA will wire the funds into the FAF account 
for the GASB Accounting Support Fee. Given the separate bank 
account, FINRA will provide monthly account reconciliations and 
accounts receivable aging reports, which will be reviewed by FINRA 
management each month and will be available for review by FAF and 
GASB management upon request.
    \12\ See 15 U.S.C. 77s(g)(5)(B).
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    As FINRA noted in Regulatory Notice 11-28, because some firms may 
seek to pass the GASB Accounting Support Fee onto customers engaged in 
municipal securities transactions, FINRA proposes to publish a 
Regulatory Notice each year disclosing the total annual GASB Accounting 
Support Fee FINRA will collect for that year. In this annual 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 will have some basis on which to 
establish a fee should they choose to do so. The Notice will 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.
    The effective date of the proposed rule change will be the date of 
SEC approval. The initial fees assessed on members will be based on 
trading activity reported in the calendar quarter during which the SEC 
approves the proposed rule change. For example, if the proposed rule 
change is approved on February 1, 2012, FINRA will bill members based 
on trading activity from January 1, 2012, to March 31, 2012, to cover 
one quarter of GASB's 2012 budget. As a result, depending on the date 
of SEC approval, the proposed GASB fee may only cover a portion of the 
2012 GASB budget.
2. Statutory Basis
    The proposed rule change is being filed in response to the SEC's 
order of May 11, 2011, which was issued pursuant to Section 19(g) of 
the Securities Act. Section 19(g) gives the SEC 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 and to draft the rules and procedures necessary to equitably 
assess the GASB Accounting Support Fee on the association's members. On 
May 11, 2011, the SEC 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.
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\13\ 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, given the restrictions in Section 19(g) 
of the Securities Act regarding the specific amount FINRA must collect, 
a quarterly transaction-based assessment with a limited exception for 
firms with a de minimis amount of reportable municipal securities 
transactions is a fair and equitable manner to assess the fee. FINRA 
also believes that the $25 per quarter exemption threshold strikes an 
appropriate balance between exempting those firms with truly de minimis 
transactions and not imposing an undue burden on other firms to recover 
the amount that would be assessed on the exempt firms.
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    \13\ 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

    The proposed rule change was published for comment in Regulatory 
Notice 11-28 (June 2011). A copy of the Regulatory Notice is attached 
as Exhibit 2a to the proposed rule change. The comment period expired 
on August 1, 2011. FINRA received eleven comment letters in response to 
the Regulatory Notice.\14\ A list of the comment letters received in 
response to the Regulatory Notice is attached as Exhibit 2b to the 
proposed rule change. Copies of the comment letters received in 
response to the Regulatory Notice are attached as Exhibit 2c to the 
proposed rule change. Of the eleven comment letters received, five were 
generally in favor of the proposed rule change and six were generally 
opposed.
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    \14\ See Letter from Brown & Brown Financial Services, Inc., 
dated July 5, 2011 (``B&B''); letter from Third Party Marketers 
Association, dated July 26, 2011 (``3PM''); letter from NPB 
Financial Group, LLC, dated July 27, 2011 (``NPB''); letter from 
City of Bay City, Michigan, dated July 28, 2011 (``Bay City''); 
letter from Bond Dealers of America, dated August 1, 2011 (``BDA''); 
letter from Government Finance Officers Association, dated August 1, 
2011 (``GFOA''); letter from National Association of State Auditors, 
Comptrollers and Treasurers, dated August 1, 2011 (``NASACT''); 
letter from Roosevelt & Cross Incorporated, dated August 1, 2011 
(``R&C''); letter from Securities Industry and Financial Markets 
Association, dated August 1, 2011 (``SIFMA''); letter from National 
Association of Independent Broker/Dealers, dated August 2, 2011 
(``NAIBD''); letter from Hartfield Titus & Donnelly, LLC, dated 
August 11, 2011 (``HT&D'').
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    Several commenters expressed the view that broker-dealers, and 
specifically FINRA members, should not be forced to shoulder the entire 
burden of funding the GASB because many other market participants, 
issuers, and other people who benefit from GASB accounting standards 
are not registered broker-dealers or FINRA members.\15\ For example, 
one commenter stated that ``many other end users of GASB's accounting 
and financial reporting standards * * * get a `free ride' under FINRA's 
proposed methodology.'' \16\ Another commenter suggested that a 
proportionate share of the revenue necessary to fund the GASB come from 
municipal financial advisors, which are registered with the SEC and the 
MSRB, although not always with FINRA.\17\ Another commenter suggested 
that the MSRB, rather than FINRA, should

[[Page 1122]]

administer the fee because bank dealers are members of the MSRB but are 
not members of FINRA.\18\
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    \15\ See BDA, HT&D, NAIBD, SIFMA, R&C.
    \16\ See SIFMA. The commenter specifically identified non-debt 
issuing municipalities, financial advisors, banks, bank dealers, 
insurance companies, rating agencies, mutual funds, legislative/
governmental staff, and taxpayer organizations. See also HT&D.
    \17\ See NAIBD.
    \18\ See SIFMA.
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    Although FINRA recognizes the concerns raised by the commenters 
regarding the specification of FINRA members as the funding source for 
the GASB, Section 19(g) of the Securities Act, under which the SEC 
issued its order, substantially limits the parameters of the GASB 
Accounting Support Fee. Section 19(g)(1)(B) of the Securities Act 
provides that the SEC may require a registered national securities 
association \19\ to assess and collect the accounting support fee 
``from the members of the association.'' \20\ Consequently, the order 
issued by the SEC pursuant to Section 19(g) of the Securities Act 
requires FINRA to collect the GASB Accounting Support Fee from its 
members, and FINRA has no authority to collect the fee from non-FINRA 
members.\21\
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    \19\ FINRA is the only national securities association 
registered with the Commission.
    \20\ 15 U.S.C. 77s (g)(1)(B).
    \21\ FINRA estimates that over 95 percent of municipal 
transactions reported to the MSRB are reported by FINRA members.
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    Three commenters expressed concern that there was no independent 
oversight of the GASB's annual budget and asserted that this lack of 
oversight provides no incentive for transparency or fiscal 
discipline.\22\ One commenter noted that the recent Government 
Accountability Office report on the GASB \23\ observed that some 
stakeholders ``were concerned with the level and nature of GASB's 
expenditures--such as the amounts spent on staff salaries and office 
space--as well as a perceived lack of transparency associated with its 
budget process.'' \24\
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    \22\ See BDA, HT&D, SIFMA.
    \23\ See Report of the United States Government Accountability 
Office, Dodd-Frank Wall Street Reform Act: Role of the Governmental 
Accounting Standards Board in Municipal Securities Markets and its 
Past Funding (January 18, 2011), available at http://www.gao.gov/new.items/d11267r.pdf.
    \24\ See SIFMA.
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    The commenters are correct that although FINRA has been ordered to 
assess and collect the GASB Accounting Support Fee, FINRA has no 
authority under Section 19(g) of the Securities Act to review the 
GASB's budget. In fact, Section 19(g)(5)(B)(i) of the Securities Act 
specifically provides that 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.\25\
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    \25\ See 15 U.S.C. 77s(g)(5)(B)(i).
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    One commenter \26\ suggested that FINRA has not met the statutory 
requirement in Section 19(g)(1)(B) of the Securities Act that it 
consult with certain groups when establishing the rules and procedures 
regarding the GASB Accounting Support Fee.\27\ The commenter claims 
that ``FINRA did not consult with any state and local government 
associations before submitting a notice for public comment regarding 
the rules and procedures for establishing the GASB fee.'' The commenter 
also asserts that ``Section 978 of the [Dodd-Frank Act] expressly 
requires prior consultation with the `principal organizations 
representing State governors, legislators, local elected officials, and 
State and local finance officers.' ''
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    \26\ See GFOA.
    \27\ Section 19(g)(1)(B) of the Securities Act states that the 
Commission may require FINRA to ``establish * * * 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 [GASB Accounting 
Support Fee].'' 15 U.S.C. 77s(g)(1)(B).
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    Contrary to the commenter's conclusion that FINRA failed to consult 
with the specified organizations, FINRA departed from its standard 
practice and provided nineteen different organizations representing 
State governors, legislators, local elected officials, and State and 
local finance officers with a draft of Regulatory Notice 11-28 before 
the Notice was published for public comment.\28\ In addition, after 
receipt of the GFOA comment letter, FINRA participated in a conference 
call with representatives of GFOA, NASACT, NASBO, and the NGA where 
those groups reiterated the issues set forth in the GFOA and NASACT 
comment letters. Moreover, FINRA's publication of a Regulatory Notice 
requesting comment on a proposal before it is filed with the SEC is 
itself an additional form of consultation. Indeed, two organizations 
representing state and local finance officers submitted formal comment 
letters expressing their views on the proposal.\29\ To provide a 
further opportunity for all interested parties (including those 
organizations specified in Section 19(g) of the Securities Act) to 
raise any concerns and express their views, FINRA has elected to file 
the proposed rule change for full notice and comment under Section 
19(b) of the Act.\30\ Given the multiple forms of consultation that 
have taken place regarding the proposed rule change, FINRA has met the 
consultation requirements set forth in Section 19(g) of the Securities 
Act.
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    \28\ Specifically, on Thursday, June 9, 2011, FINRA provided a 
draft of the Regulatory Notice to representatives of the National 
Governors Association (``NGA''); the Council of State Governments; 
the National Conference of State Legislatures; the National 
Association of Counties; the U.S. Conference of Mayors; the National 
League of Cities; the Association of Government Accountants; the 
Government Finance Officers Association; the International City/
County Management Association; the National Association of State 
Auditors, Comptrollers and Treasurers (``NASACT''); the National 
Association of State Budget Officers (``NASBO''); the National 
Association of State Retirement Administrators; the Native American 
Finance Officers Association; the National Federation of Municipal 
Analysts; the Association of Local Government Auditors; the National 
Association of State Treasurers; the National Council of State 
Housing Agencies; the National Association of Local Housing 
Financing Agencies; and the Council of Infrastructure Financing 
Authorities. The Notice was posted publicly on June 16, 2011.
    \29\ See GFOA, NASACT.
    \30\ Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(2) 
thereunder permit FINRA to file a proposed rule change for immediate 
effectiveness if the proposed rule change establishes or changes a 
due, fee, or other charge. See 15 U.S.C. 78s(b)(3)(A); 17 CFR 
240.19b-4(f)(2).
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    One commenter questioned the administrative fee GASB will pay to 
FINRA for calculating, assessing, and collected the GASB Accounting 
Support Fee.\31\ As FINRA noted in Regulatory Notice 11-28, FINRA has 
negotiated an administrative fee with the FAF of $50,000 for the 
initial year that the GASB Accounting Support Fee is in place that is 
intended to cover FINRA's estimated costs associated with calculating, 
assessing, and collecting the GASB Accounting Support Fee. The 
commenter asserted that the fee was ``unwarranted'' because ``FINRA 
already has a process for collecting its own Trading Activity Fee from 
broker dealers, and could easily amend this process to include the GASB 
Accounting Support Fee.'' \32\ The commenter also suggested that the 
MSRB could administer the fee for minimal costs if FINRA moves forward 
with a fee based on underwritings or transactions.
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    \31\ See SIFMA.
    \32\ See SIFMA.
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    The commenter's statements are misplaced, and FINRA disagrees that 
the fee is unwarranted. The commenter's analogy to FINRA's Trading 
Activity Fee (``TAF'') is inappropriate for several reasons.
    First, FINRA does not believe that the use of a self-reporting 
model like the TAF is appropriate for the GASB Accounting Support 
Fee.\33\ FINRA believes that the transaction information available 
through the MSRB serves as a

[[Page 1123]]

more timely and reliable source of transaction information than self-
reported aggregate quarterly data calculated by the various members 
subject to the fee. Moreover, FINRA believes that requiring self-
reporting could increase compliance costs for firms and increase costs 
to FINRA. As proposed, FINRA will rely on transaction data that is 
already reported by members to the MSRB (i.e., there will be no 
increased compliance efforts necessary for members since, as discussed 
below, FINRA does not believe that the calculations members currently 
undertake for reporting the TAF would be the same as those for the GASB 
Accounting Support Fee). For FINRA, a self-reporting model raises two 
primary complications. First, FINRA would need to audit members to 
ensure that their self-reporting was accurate and timely, which could 
increase FINRA's costs in administering the fee. Second, Section 19(g) 
of the Securities Act requires FINRA to collect exact amounts, thus 
creating an inability to remedy potential over- or under-payments by 
members that self-report erroneous data.
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    \33\ The TAF is self-reported to FINRA by members on a monthly 
basis on the clearing firm level. See Trading Activity Fee FAQ 
Q100.5, available at http://www.finra.org/taf/faq.
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    Second, FINRA does not believe that the exceptions from the TAF 
should apply to the assessment of the GASB Accounting Support Fee, and 
the TAF is currently charged only to the sell side of a transaction. 
Although municipal securities subject to MSRB reporting requirements 
are generally subject to the TAF, the TAF rules contain exceptions for 
certain transactions (e.g., primary market transactions). The goal of 
the GASB Accounting Support Fee assessment is to equitably allocate a 
specific amount of money among participants in the municipal securities 
market; consequently, FINRA believes it is not appropriate to exclude 
any subset of reportable transactions from factoring into the fee 
assessment for purposes of allocating the GASB Accounting Support 
Fee.\34\ In addition, and as discussed below, FINRA does not believe it 
is appropriate to charge only one side of a transaction when two 
members are involved and are required to report the transaction to the 
MSRB.
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    \34\ See Schedule A to the FINRA By-Laws Sec.  1(b).
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    For the foregoing reasons, FINRA does not believe that the TAF 
would serve as an appropriate model in assessing the GASB Accounting 
Support Fee. In addition, the amount of the administrative fee to FINRA 
was negotiated with the FAF and based on estimated costs to FINRA, 
including initial start-up technology costs, administrative costs, and 
the costs of personnel and other resources needed to process and 
implement the fee. FINRA anticipates that the amount of the 
administrative fee will be reviewed and evaluated each year by FINRA 
and by the FAF in light of FINRA's experience in assessing and 
collecting the GASB Accounting Support Fee and in the context of actual 
costs incurred by FINRA. Following the review, the amount of the 
administrative fee will be increased or decreased if necessary.
    Commenters expressed opposing views on FINRA's proposal to base the 
GASB Accounting Support Fee on transactions in municipal securities 
reported to the MSRB. Although several commenters believed the proposed 
assessment method was reasonable and equitable,\35\ other commenters 
opposed a transaction-based assessment.\36\ Among the objections to the 
proposal, commenters stated that an assessment based on trade reporting 
volume would disproportionately affect lead underwriters \37\ and 
brokers' brokers \38\ and would result in broker-to-broker transactions 
being assessed multiple times.\39\ In addition, one commenter noted 
that the proposal ``makes no distinction between bonds issued by GASB 
obligors, bonds issued by FASB obligors and bonds with obligors who 
follow neither set of standards.'' \40\
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    \35\ See 3PM, NASACT, Bay City.
    \36\ See HT&D, R&C, SIFMA.
    \37\ See R&C.
    \38\ See HT&D, SIFMA.
    \39\ See SIFMA. The commenter noted that in broker-to-broker 
transactions, both brokers report the trade to the MSRB.
    \40\ SIFMA.
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    After considering the objections raised by the commenters, FINRA 
continues to believe that a proportionate fee based on reported trading 
volume remains a reasonable and fair method to allocate the GASB 
Accounting Support Fee. As noted above, FINRA believes that using 
reported transaction data to calculate the fee ensures that the fee is 
based on accurate, reliable information. Because the fee is assessed on 
a proportionate basis, rather than being assessed each time a 
transaction is reported to the MSRB (e.g., a fixed fee charged on each 
reported transaction like those charged in connection with reporting 
trades to a FINRA trade reporting facility \41\), there are not 
multiple assessments on broker-to-broker transactions. Rather, both 
brokers reporting the same trade will have the volume of that trade 
factored into their share of total trade reporting volume for that 
quarter. The goal of the assessment is to equitably allocate a specific 
amount of money among participants in the municipal securities market; 
consequently, FINRA believes it is appropriate that both brokers in a 
broker-to-broker transaction be considered as participating in that 
market with respect to such a transaction, rather than only use one 
side of the trade in calculating the fee (e.g., charging only the 
broker on the sell side). For similar reasons, FINRA also believes that 
the proposal does not disproportionately affect lead underwriters or 
brokers' brokers; to the extent such firms have high trading volumes 
reported to the MSRB under applicable reporting rules, FINRA believes 
that this accurately reflects those firms' participation in the 
municipal securities markets, whether those firms act as underwriters, 
brokers' brokers, or simply as buyers or sellers of municipal 
securities.\42\
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    \41\ See, e.g., FINRA Rules 7620A, 7710.
    \42\ FINRA notes that basing the GASB Accounting Support Fee on 
underwriting, rather than transactions, would increase the burden on 
lead underwriters and would disproportionately affect those market 
participants engaged in underwriting activities rather than in 
trading in the secondary market. Moreover, basing the fee on 
underwriting would wholly exempt secondary market participants from 
paying the fee and would be assessed only on future municipal issues 
and would ``grandfather'' in previous issues. FINRA does not believe 
this is a more equitable way to assess the fee than a transaction-
based approach.
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    FINRA also declines to distinguish between issues based on whether 
the obligor has followed FASB standards, GASB standards, or neither. 
This information is not required to be reported to the MSRB, is not 
available on an automated basis, and it would be impractical for FINRA 
to attempt to maintain a comprehensive and accurate listing of those 
issues where the obligor has followed GASB standards.
    Several commenters expressed views concerning the application of 
the GASB Accounting Support Fee to small firms and the exemption 
proposed in Regulatory Notice 11-28 for firms with a quarterly 
assessment of less than $25. Two commenters suggested that FINRA 
increase the quarterly threshold from $25 to $1,000,\43\ and one 
commenter suggested that ``smaller firms'' be exempt from the fee.\44\ 
In contrast, one FINRA member suggested that any firm with a stake in 
GASB accounting standards should be charged a small assessment, even if 
the firm had no assessable transactions in a given quarter.\45\
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    \43\ See 3PM, NAIBD.
    \44\ See BDA. The commenter did not define ``smaller firms'' and 
stated that it was not in a position to recommend a figure for the 
exemption because it did not have trading data available to it.
    \45\ See NPB.
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    FINRA proposed a quarterly minimum threshold of $25 in order to 
exempt from the GASB Accounting

[[Page 1124]]

Support Fee those firms that do a de minimis amount of trading activity 
in municipal securities in a given quarter. There are approximately 
1,100 FINRA members eligible to conduct business in municipal 
securities, and FINRA estimates that a de minimis threshold of $25 per 
quarter would eliminate approximately 600 firms--approximately 55 
percent of firms--per quarter from paying the fee. FINRA estimates that 
raising the level to $1,000 per quarter would exempt approximately 90 
percent of the firms reporting transactions to the MSRB from the fee 
each quarter.
    As discussed above, FINRA is required to collect a specific amount 
of money each year to adequately fund the annual budget of the GASB. 
Because of this unique requirement, unlike other fees assessed by 
FINRA, any amount that one member is exempt from paying must be 
assessed on other members so that FINRA can meet its statutory 
obligation and collect the total amount needed to adequately fund the 
GASB's annual budget. Consequently, FINRA believes that a de minimis 
threshold of $25 per quarter achieves a fair and reasonable balance 
between exempting those members that do a small amount of trading in 
municipal securities and ensuring that other members are not 
shouldering a disproportionate amount of the GASB Accounting Support 
Fee and being allocated amounts significantly above their proportion of 
reported trading activity. For the same reasons FINRA is not increasing 
the quarterly exemption amount, FINRA also declines to adopt an across-
the-board ``small firm exemption.''
    In Regulatory Notice 11-28, FINRA noted that ``some firms may seek 
to pass the GASB Accounting Support Fee on to customers engaged in 
municipal securities transactions.'' This was an acknowledgement that, 
in many instances, members pass through FINRA fees and assessments to 
their customers. Some commenters expressed concern that members could 
pass the fee on to issuers of municipal securities and asked FINRA to 
clarify or mandate that members could not pass the fee along to 
issuers.\46\ Other commenters suggested that FINRA make it easier for 
members to pass the fee along to customers, including issuers.\47\ One 
commenter suggested that the GASB Accounting Support Fee should be 
structured as an underwriting assessment because ``[p]rinciples of 
fundamental fairness would dictate dealers be allowed to pass through 
any GASB support fee to municipal bond issuers instead of or in 
addition to investors.'' \48\
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    \46\ See Bay City, GFOA, NASACT.
    \47\ See BDA, SIFMA.
    \48\ SIFMA.
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    As discussed above, FINRA continues to believe that an equitable 
way to structure the fee is through a quarterly assessment based on 
trading volume with an exception for members whose assessment in a 
particular quarter would be less than $25. FINRA 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 accurately disclosed. 
Although FINRA is not encouraging members to pass all or part of the 
GASB Accounting Support Fee to their customers, that decision is 
ultimately one for each member, subject to the conditions and 
requirements noted. FINRA also declines to give a blanket exemption for 
issuers of municipal securities whose transactions may result in an 
increase to a member's allocation of the GASB Accounting Support Fee. 
FINRA notes, however, that transactions from a municipal securities 
issuer to an underwriter are not reported to the MSRB and thus would 
not generally be counted toward a member's quarterly assessment.\49\
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    \49\ To the extent commenters are concerned that FINRA members 
acting as underwriters for municipal securities may increase their 
underwriting fees to recoup part of the assessment, FINRA generally 
considers fee negotiations between an issuer and an underwriter to 
be within each party's business decision-making process.
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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 (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 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-073 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2011-073. 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 
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 available publicly. All 
submissions should refer to File Number SR-FINRA-2011-073 and should be 
submitted on or before January 30, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-84 Filed 1-6-12; 8:45 am]
BILLING CODE 8011-01-P