Document ID: SEC-2011-0612-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-05-03T04:00Z

[Federal Register Volume 76, Number 85 (Tuesday, May 3, 2011)]
[Notices]
[Pages 24942-24943]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10716]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64353; File No. SR-FINRA-2011-020]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
FINRA's Trading Activity Fee Rate for Transactions in Covered Equity 
Securities

April 27, 2011.
    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 April 26, 2011, the 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 and 
II below, which Items have been prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Section 1 of Schedule A to the FINRA 
By-Laws to adjust the rate of FINRA's Trading Activity Fee (``TAF'') 
for transactions in covered equity securities.
    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
    FINRA's primary member regulatory pricing structure consists of the 
following fees: The Personnel Assessment (PA); the Gross Income 
Assessment (GIA); and the Trading Activity Fee (TAF). These fees are 
used to fund FINRA's regulatory activities, including examinations; 
financial monitoring; and FINRA's policymaking, rulemaking, and 
enforcement activities.\3\ Because the proceeds from these fees are 
used to fund FINRA's regulatory mandate, Section 1 of Schedule A to 
FINRA's By-Laws notes that ``FINRA shall periodically review these 
revenues in conjunction with costs to determine the applicable rate.'' 
\4\
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    \3\ See FINRA By-Laws, Schedule A, Sec.  1(a).
    \4\ Id.
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    FINRA initially adopted the TAF in 2002 as a replacement for an 
earlier regulatory fee based on trades reported to Nasdaq's Automated 
Confirmation Transaction system then in place.\5\ Currently, the TAF is 
generally assessed on the sale of all exchange registered securities 
wherever executed (except debt securities that are not TRACE-Eligible 
Securities), over-the-counter equity securities, security futures, 
TRACE-Eligible Securities (provided that the transaction is a 
Reportable TRACE Transaction), and all municipal securities subject to 
Municipal Securities Rulemaking Board (``MSRB'') reporting 
requirements. The rules governing the TAF also include a list of 
transactions exempt from the TAF.\6\
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    \5\ See Securities Exchange Act Release No. 46416 (August 23, 
2002), 67 FR 55901 (August 30, 2002).
    \6\ See FINRA By-Laws, Schedule A, Sec.  1(b)(2).
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    The current TAF rates are $0.000075 per share for each sale of a 
covered equity security, with a maximum charge of $3.75 per trade; 
$0.002 per contract for each sale of an option; $0.04 per contract for 
each round turn transaction of a security future; and $0.00075 per bond 
for each sale of a covered TRACE-Eligible Security and/or municipal 
security, with a maximum charge of $0.75 per trade. In addition, if the 
execution price for a covered security is less than the TAF rate on a 
per share, per contract, or round turn transaction basis, then no TAF 
is assessed.
    The current TAF rate for covered equity securities of $0.000075 per 
share has been in place for over six years.\7\ Over that time period, 
FINRA has proposed the restructuring of both the GIA and the PA. For 
example, effective January 1, 2010, the GIA and PA were restructured to 
stabilize cash flows by shifting a greater portion of the regulatory 
fees from the GIA, which is based on industry revenue, to the PA, which 
is based on the more constant figure of registered persons, while 
seeking to remain revenue neutral to FINRA.\8\
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    \7\ See Securities Exchange Act Release No. 50485 (October 1, 
2004), 69 FR 60445 (October 8, 2004); NASD Notice to Members 04-84 
(November 2004).
    \8\ See Securities Exchange Act Release No. 61042 (November 20, 
2009), 74 FR 62616 (November 30, 2009); see also Regulatory Notice 
09-68 (November 2009).
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    As FINRA noted when it restructured the GIA and the PA, because the 
GIA is assessed based on a member's annual gross revenue for the 
preceding calendar year, FINRA's revenues derived from the GIA are 
subject to the year-to-year volatility of members' revenues. A similar 
unpredictability of revenue flows exists with the TAF. The TAF 
generally is assessed on sales of securities by members and is 
collected from clearing firms on a monthly basis. Although the TAF is 
generally charged on transactions in equity securities, TRACE-
reportable securities, options, and futures, over 95% of TAF revenue is 
generated by transactions in covered equity securities. Thus, FINRA's 
revenue from the TAF is substantially affected by changes in trading 
volume in the equities markets. Because of the substantial decrease in 
average daily share volumes (ADSV) since 2009, FINRA has seen a 
commensurate substantial decline in revenue from the TAF.
    To stabilize revenue flows necessary to support FINRA's regulatory 
mission, FINRA is proposing an increase to the

[[Page 24943]]

TAF rate for covered equity securities from $0.000075 per share to 
$0.000090 per share, with a corresponding increase to the per-
transaction cap for covered equity securities from $3.75 to $4.50.\9\ 
As noted above, FINRA has not adjusted the TAF rate for covered equity 
securities in over six years,\10\ and FINRA believes that increasing 
the TAF rate on these securities by $0.000015 per share is the minimum 
increase necessary to bring the revenue from the TAF to its needed 
levels to adequately fund FINRA's member regulatory obligations. As 
with the prior restructuring of the GIA and PA described above, the 
proposed increase to the TAF rate on transactions in covered equity 
securities seeks to remain revenue neutral to FINRA (i.e., as adjusted, 
FINRA would aim to receive a substantially similar amount in revenue 
from the TAF as the TAF has generated in prior years).
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    \9\ Because, as noted above, transactions in covered equity 
securities account for over 95% of TAF revenues, FINRA is not 
proposing adjustments to the TAF rates for other types of 
securities.
    \10\ In 2004, FINRA decreased the TAF rate for covered equity 
securities. Before the adjustment, the TAF rate for covered equity 
securities was $0.0001 per share with a maximum charge of $10 per 
trade. In 2004, FINRA also expanded the scope of the TAF to cover 
transactions in corporate debt securities reportable to TRACE and 
transactions in municipal securities subject to the MSRB reporting 
requirements. See NASD Notice to Members 04-84 (November 2004).
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    The effective date of the proposed rule change will be July 1, 
2011. FINRA will announce the effective date of the proposed rule 
change in a Regulatory Notice.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\11\ 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. As noted above, FINRA has not adjusted the TAF rate for 
transactions in covered equity securities for over six years. Because 
of the recent decrease in trading volumes in the equity markets, FINRA 
believes that the proposed rate change to the TAF is now necessary to 
ensure that FINRA can continue to maintain a robust regulatory program 
and meet its regulatory obligations effectively while attempting to 
remain revenue neutral.
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    \11\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-020 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-2011-020. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for website 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of FINRA. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File No. SR-FINRA-2011-020 
and should be submitted on or before May 24, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10716 Filed 5-2-11; 8:45 am]
BILLING CODE 8011-01-P