Document ID: SEC-2010-1673-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-11-02T04:00Z

[Federal Register: November 2, 2010 (Volume 75, Number 211)]
[Notices]               
[Page 67421-67422]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02no10-112]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63196; File No. SR-FINRA-2010-046]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Remove the 
Exemption From the Trading Activity Fee for Transactions in Exchange 
Listed Options Effected by a Member When FINRA Is Not the Designated 
Options Examining Authority for That Member

October 27, 2010.

I. Introduction

    On September 7, 2010, 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 amend its By-Laws to remove the exemption from 
the trading activity fee (``TAF'') for transactions in exchange listed 
options effected by a member when FINRA is not the designated options 
examining authority (``DOEA'') for that member. The proposed rule 
change was published for comment in the Federal Register on September 
23, 2010.\3\ The Commission received no comment letters on the 
proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62927 (September 17, 
2010), 75 FR 58004.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    In its proposal, FINRA sought to amend Section 1(b) of Schedule A 
to the FINRA By-Laws to remove the exemption from the TAF for 
transactions in exchange listed options effected by a member for whom 
FINRA is not the DOEA. The TAF is one of three member regulatory fees 
FINRA uses to fund its member regulation activities.\4\ Because the TAF 
funds FINRA's member regulation functions, it is intended to apply to 
transactions in a way that corresponds to FINRA's regulatory 
responsibilities.\5\ In general, the TAF is assessed for the sale of 
all exchange registered securities wherever executed (except debt 
securities that are not TRACE-eligible), over-the-counter equity 
securities, security futures, TRACE-Eligible Securities (provided that 
the transaction is a Reportable TRACE Transaction), and all municipal 
securities subject to the reporting requirements of the Municipal 
Securities Rulemaking Board.\6\ The TAF rules also include numerous 
exemptions for certain types of transactions.\7\
---------------------------------------------------------------------------

    \4\ See FINRA By-Laws, Schedule A, Sec.  1(b). In addition to 
the TAF, the other member regulatory fees are the Gross Income 
Assessment and the Personnel Assessment. See id. Sec. Sec.  1(c), 
(d).
    \5\ See Securities Exchange Act Release No. 50485 (October 1, 
2004), 69 FR 60445 (October 8, 2004) (SR-NASD-2003-201).
    \6\ See FINRA By-Laws, Schedule A, Sec.  1(b)(1).
    \7\ See FINRA By-Laws, Schedule A, Sec.  1(b)(2).
---------------------------------------------------------------------------

    In 2003, FINRA exempted from the TAF ``[t]ransactions in exchange 
listed options effected by a member when FINRA is not the designated 
options examining authority for that member.'' \8\ FINRA represented 
that the exemption was added to reflect the fact that FINRA's 
regulatory responsibilities with respect to such activities were 
somewhat alleviated by its participation in a plan filed with the 
Commission under Rule 17d-2 of the Act \9\ (``17d-2 Agreement'') in 
which regulatory responsibilities for certain FINRA members that 
conducted a public options business were assumed by other self 
regulatory organizations (``SROs'') that would act as the members' 
DOEA.\10\ In view of the fact that another SRO performed certain 
regulatory responsibilities with respect to the options activities of 
some of its members, FINRA decided to exempt transactions in exchange 
listed options by such members from the TAF.\11\ The exemption was also 
based on the fact that certain other SROs were assessing or preparing 
to assess specific regulatory fees for acting as DOEA,\12\ which FINRA 
believed made its TAF on options transactions appear redundant. 
However, subsequent amendments to the 17d-2 Agreement have consolidated 
within FINRA sole regulatory responsibility for the public options 
activities of all of its members \13\ and FINRA assumed all regulatory 
responsibility for FINRA members under the 17d-2 Agreement.\14\ As a 
result of this increase in regulatory responsibility, FINRA filed the 
instant proposed rule change to delete the exemption from the TAF.\15\
---------------------------------------------------------------------------

    \8\ FINRA By-Laws, Schedule A, Sec.  1(b)(2)(K). See Securities 
Exchange Act Release No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 
2003) (SR-NASD-2002-148).
    \9\ 17 CFR 240.17d-2.
    \10\ See Securities Exchange Act Release No. 46800 (November 8, 
2002), 67 FR 69774 (November 19, 2002).
    \11\ Transactions in over-the-counter (``conventional'') options 
are exempted from the TAF with respect to all FINRA members. See 
FINRA By-Laws, Schedule A, Sec.  1(b)(2)(H).
    \12\ See, e.g., Securities Exchange Act Release No. 47577 (March 
26, 2003), 68 FR 16109 (April 2, 2003) (SR-PCX-2003-03) (PCX rule 
filing establishing a DOEA fee).
    \13\ See Securities Exchange Act Release No. 57987 (June 18, 
2008), 73 FR 36156 (June 25, 2008).
    \14\ Following the consolidation of National Association of 
Securities Dealers (``NASD'') and NYSE member regulation operations 
in 2007, FINRA announced that it serves as the DOEA for all FINRA 
member firms. See Regulatory Notice 08-37 (July 2008).
    \15\ At the time FINRA (then NASD) proposed the exemption in 
Amendment No. 4 to SR-NASD-2002-148, it noted that ``NASD does not 
believe it is precluded from seeking further amendments to the TAF 
with respect to the reduction or elimination of the proposed 
exemption * * * in the event of a change of factors surrounding its 
sales practice and other regulatory responsibilities.'' Letter from 
Barbara Z. Sweeney, SVP and Corporate Secretary, NASD, to Katherine 
A. England, Assistant Director, Division of Trading and Markets, 
Commission, dated May 19, 2003.
---------------------------------------------------------------------------

    FINRA represented that deleting this exemption would also remove 
any ambiguities over whether FINRA should collect the TAF from sole-
FINRA members or from FINRA members that conduct only a proprietary 
options business. FINRA stated its belief that the existing language 
exempting a member's transactions in exchange listed options from the 
TAF when FINRA is not the DOEA for the member does not properly align 
with those situations where FINRA has regulatory responsibility over 
the member firm. First, the DOEA designation is established only under 
the 17d-2 Agreement, which by its own terms applies only with respect 
to firms that are members of more than one SRO. Thus, according to 
FINRA, while it has regulatory responsibilities for the

[[Page 67422]]

options business of its sole members, it is not technically the DOEA 
for such firms. Second, the 17d-2 Agreement addresses only a firm's 
public options business. As such, a firm that conducts only a 
proprietary options business, irrespective of whether such firm is a 
member of FINRA and another SRO, would not be covered by the 17d-2 
Agreement, and FINRA would not technically be the DOEA. FINRA stated 
that although its regulatory responsibilities are more limited for a 
firm that does not conduct a public options business, it still retains 
regulatory responsibilities over the firm's options activities.

III. Discussion and Commission Findings

    After carefully reviewing the proposed rule change, the Commission 
finds that the proposal is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities association.\16\ In particular, the Commission finds that 
the proposal is consistent with Section 15A(b)(5) of the Act,\17\ which 
requires that a national securities association have rules that provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its members and other persons using its facilities. 
Further, the Commission finds that the proposal is consistent with 
Section 15A(b)(6) of the Act,\18\ which requires, among other things, 
that FINRA rules be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78o-3(b)(5).
    \18\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission believes that removal of the TAF exemption for 
transactions in exchange listed options effected by members for whom 
FINRA is not the DOEA is consistent with the Act because it more 
properly aligns the imposition of the TAF with those situations where 
FINRA has regulatory responsibility over the member firm.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-FINRA-2010-046) be, and 
hereby is, approved.\20\
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2).
    \20\ FINRA states it will implement the proposed rule change on 
the first day of the month following Commission approval. FINRA will 
announce the implementation of the proposed rule change in a 
Regulatory Notice to be published no later than 30 days following 
Commission approval.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27671 Filed 11-1-10; 8:45 am]
BILLING CODE 8011-01-P