
[Federal Register Volume 77, Number 125 (Thursday, June 28, 2012)]
[Notices]
[Pages 38690-38692]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15806]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67242; File No. SR-FINRA-2012-023]


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

June 22, 2012.

I. Introduction

    On May 2, 2012, 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 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to FINRA's Trading Activity Fee (``TAF'') 
rate for transactions in covered equity securities. The proposed rule 
change was published for comment in the Federal Register on May 10, 
2012.\3\ The Commission received four comments on the proposal.\4\ On 
June 19, FINRA responded to the comments.\5\ This order approves 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. 66924 (May 4, 2012), 
77 FR 27527.
    \4\ See Letters to the Commission from Leonard J. Amoruso, 
General Counsel, Knight Capital Group, Inc., dated June 4, 2012 
(``Knight Letter''); Kimberly Unger, Executive Director, The 
Security Traders Association of New York, Inc., dated June 11, 2012 
(``STANY Letter''); Daniel Keegan, Managing Director, Citigroup 
Global Markets Inc., dated June 13, 2012 (``Citi Letter''); and John 
C. Nagel, Managing Director and General Counsel, Citadel Securities, 
dated June 13, 2012 (``Citadel Letter'').
    \5\ See Letter to the Commission from Brant K. Brown, Associate 
General Counsel, The Financial Industry Regulatory Authority, Inc., 
dated June 19, 2012 (``FINRA Response Letter'').
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II. Description of the Proposal

    FINRA's proposal would amend Section 1 of Schedule A to the FINRA 
By-Laws to adjust the rate of FINRA's TAF for transactions in Covered 
Securities that are equity securities.\6\ The TAF, along with the 
Personnel Assessment and the Gross Income Assessment fees, is used to 
fund FINRA's regulatory activities.\7\
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    \6\ Covered Securities are defined in Section 1 of Schedule A to 
the FINRA By-Laws as: exchange-registered securities wherever 
executed (except debt securities that are not TRACE-Eligible 
Securities); OTC 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 reporting requirements. The rules 
governing the TAF also include a list of exempt transactions. See 
FINRA By-Laws, Schedule A, Sec.  1(b)(2).
    \7\ See FINRA By-Laws, Schedule A, Sec.  1(a).
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    The current TAF rate is $0.000095 per share for each sale of a 
Covered Security that is an equity security, with a maximum charge of 
$4.75 per trade. This rate, which was implemented by FINRA on March 1, 
2012, represented a $0.000005 per share increase over the previously 
effective rate of $0.000090 per share, while the per-transaction cap 
for Covered Securities that are equity securities increased by $0.25, 
from $4.50 to $4.75.\8\
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    \8\ See Securities Exchange Act Release No. 66287 (February 1, 
2012), 77 FR 6161 (February 7, 2012); Securities Exchange Act 
Release No. 66276 (January 30, 2012), 77 FR 5613 (February 3, 2012).
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    Under the current proposal, FINRA would increase the TAF rate by an 
additional $0.000024 per share, from $0.000095 per share to $0.000119 
per share, while the per-transaction cap for transactions in Covered 
Securities that are equity securities would increase by $1.20, from 
$4.75 to $5.95. FINRA intends to make the proposal effective on July 1, 
2012.
    Additionally, FINRA seeks approval to submit future filings related 
to the TAF rate under Section 19(b)(3)(A) of the Act \9\ and Rule 19b-
4(f)(2) thereunder,\10\ rather than under Section 19(b)(2) of the 
Act.\11\ When the TAF was first proposed in 2002 to replace the former 
NASD Regulatory Fee, several commenters at the time expressed concern 
that the TAF rate could be raised at any time without notice and 
comment and Commission approval.\12\ The Commission approved the TAF in 
part based on representations by NASD that all future changes to the 
TAF would

[[Page 38691]]

be filed under Section 19(b)(2) of the Act and thus subject to approval 
by the Commission.\13\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(2).
    \11\ 15 U.S.C. 78s(b)(2).
    \12\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003).
    \13\ See id. at 34024.
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III. Summary of Comments and FINRA's Response to Comments

a. Summary of Comments

    The Commission received four comments on the proposal, all of which 
objected to both the proposed increase in the TAF and FINRA's intention 
to file future TAF adjustments under Section 19(b)(3)(A) of the Act.
    The commenters shared concern that the proposed increase to the TAF 
would disproportionately harm FINRA members that provide liquidity in 
covered equity securities.\14\ One of these commenters observed that 
the proposed new TAF rate would represent a 138% increase over the rate 
that was first implemented in 2002.\15\ This commenter argued that, 
because the fee is based on share transaction volume, liquidity 
providers are assessed the greatest amount of fees.\16\ Furthermore, 
this commenter expressed concern that the proposal would result in an 
inequitable allocation of fees among FINRA members and therefore run 
afoul of Section 15A(b)(5) of the Act.\17\ Specifically, the commenter 
contended that, because 95% of the TAF is generated by transactions in 
equity securities, the net result of the TAF is that liquidity 
providers that deal in covered equity securities end up funding aspects 
of FINRA's regulatory that do not apply to them.\18\
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    \14\ See Knight Letter at 2-3; STANY Letter at 2 (expressing 
particular concern about FINRA members that make markets in OTC 
equities securities); Citi and Citadel Letters (joining the Knight 
and STANY Letters).
    \15\ See Knight Letter at 2.
    \16\ See id.
    \17\ 15 U.S.C. 78o-3(b)(5).
    \18\ See Knight Letter at 2-3. See also STANY Letter at 2 
(expressing a similar concern); Citi and Citadel Letters (joining 
the Knight and STANY Letters).
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    The commenters also questioned the structure of FINRA's funding. 
One commenter noted that the revenues FINRA derives from the TAF are 
subject to the volatility of trading in the equity markets; as a 
result, according to this commenter, adequate funding for FINRA's 
regulatory program is dependent on FINRA's transaction volume 
projections.\19\ Additionally, this commenter believed increasing the 
TAF at a time when transaction volume decreases places an especially 
difficult burden on trading firms, which operate on thin margins and 
are themselves dependent on volume.\20\ Thus, the commenter suggested 
that FINRA consider alternatives to the TAF that would be more stable 
and equitably apportioned among FINRA members.\21\ Another commenter 
also suggested that FINRA consider a funding scheme for its regulatory 
programs that more fairly allocates the financial burden of regulation 
across asset classes and regulated members.\22\
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    \19\ See Knight Letter at 2.
    \20\ See id. See also STANY Letter at 2 (stating that ``[a]t a 
time when trading desks are seeing a marked decline in revenue due 
to the decline in volume, we are concerned that an increase in there 
[sic] per share fees may cause some firms to go out of business and 
will serve as a further disincentive to other firms to continue 
making markets or providing liquidity in the markets for OTC equity 
securities'').
    \21\ See Knight Letter at 3.
    \22\ See STANY Letter at 2.
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    Finally, the commenters objected to FINRA's proposal to file future 
adjustments to the TAF under Section 19(b)(3)(A) of the Act, as opposed 
to Section 19(b)(2). According to the commenters, allowing FINRA to do 
so would limit or eliminate the opportunity for public comment on such 
future adjustments.\23\ One commenter stated that those most affected 
by adjustments to the TAF rely on the opportunity for public comment as 
an appropriate check on FINRA's rate-setting.\24\ Another commenter 
contended that transparency is necessary in this context because FINRA 
has no competitors and the TAF is not subject to competitive 
forces.\25\ Thus, both commenters expressed their belief that a 
reasonable period for notice and comment is important to allow FINRA 
members the chance for meaningful input.\26\
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    \23\ See Knight Letter at 3-4; STANY Letter at 2.
    \24\ See Knight Letter at 3-4.
    \25\ See STANY Letter at 2.
    \26\ See also Citi and Citadel Letters (joining the Knight and 
STANY Letters).
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b. FINRA's Response to Comments

    FINRA responded that the proposed adjustment to the TAF is 
necessary, reasonable, and equitably allocated among its members, and 
by explaining its rationale for the TAF structure.
    With respect to the commenters' concerns about the TAF's 
disproportionate impact on covered equity security liquidity providers, 
FINRA noted that there are three critical factors that it uses to 
measure regulatory costs for a member firm: the overall size of the 
firm, the level of a firm's trading activity, and the firm's number of 
registered representatives. FINRA stated that it has sought to measure 
these factors and assess fees accordingly by implementing regulatory 
fees that line up with each factor: the Gross Income Assessment Fee, 
the TAF, and Personnel Assessment Fee, respectively. According to 
FINRA, trading in the equity markets drives a significant portion of 
its regulatory costs, and therefore it is equitable to recover some of 
those costs from fees generated from equity trading activity.\27\ FINRA 
also noted that the TAF rate for other types of securities, like TRACE-
reportable debt securities, is similarly calibrated to be equitably 
allocated in a way that corresponds to the costs of FINRA's regulatory 
efforts.\28\
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    \27\ See FINRA Response Letter at 4. FINRA also stated that it 
is cognizant of the fact that its member firms may be experiencing 
lower revenues themselves as a result of the decrease in volume, but 
its statutory obligations continue to exist in difficult financial 
and market environments and it needs adequate resources to 
effectively carry out its responsibilities. See id. at 3.
    \28\ FINRA noted that when the TAF was expanded to TRACE-
reportable debt securities, it set the rate so that the portion of 
TAF revenue received on debt transactions reflected FINRA's 
regulatory efforts in the fixed income market. See id. at 4-5.
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    Second, with respect to the structure of FINRA's funding, FINRA 
noted that the TAF is one of three types of assessments--the other two 
are the Gross Income Assessment and the Personnel Assessment. According 
to FINRA, the Gross Income Assessment, which is not dependent on market 
activity, is the most important component of FINRA's regulatory 
funding, and in 2011 the TAF represented only 33% of FINRA's total 
member regulatory fees and assessments.\29\
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    \29\ See id. at 2-3.
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    FINRA stated that it strives to operate on a cash-flow-neutral 
basis \30\ and routinely reexamines its fee structure to consider 
alternative means to reasonably and equitably allocate fees in a method 
that is efficient, sustainable, and predictable.\31\ FINRA stated that 
in 2009, for example, it increased the Personnel Assessment fee and 
revised its calculation of the Gross Income Assessment to achieve a 
more consistent and predictable funding scheme, while also engaging in 
cost-control measures.\32\ According to FINRA, the currently proposed 
adjustment--an increase to the TAF--is necessary in light of current 
market conditions so that FINRA can properly fund its regulatory 
mission.\33\ FINRA represents, however, that if market volume were to 
increase, it would decrease the TAF rate accordingly.\34\
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    \30\ See id. at 3.
    \31\ See id. at 6.
    \32\ See id.
    \33\ See id. at 3.
    \34\ See id. at 3, 7-8.

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[[Page 38692]]

    Finally, with respect to filing future amendments to the TAF under 
Section 19(b)(3)(A), FINRA stated that Section 19(b)(3)(A) and Rule 
19b-4(f)(2) thereunder specifically contemplate such types of fee 
filings. Furthermore, FINRA noted that filing adjustments to the TAF 
under Section 19(b)(3)(A) would allow it to adjust rates in response to 
market volatility--both up and down--more efficiently, and would not 
run afoul of the rulemaking system's set of checks and balances 
established in the Act and the SEC's rules thereunder.

IV. Discussion and Commission's Findings

    After carefully considering the proposed rule change, the comments 
submitted, and FINRA's response to the comments, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities association.\35\ In particular, the Commission 
finds that the proposal is consistent with Section 15A(b)(5) of the 
Act,\36\ which requires, among other things, that FINRA rules provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among members and issuers and other persons using any facility 
or system that FINRA operates or controls. The Commission believes that 
the proposal is reasonably designed to secure adequate funding to 
support FINRA's regulatory duties.
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    \35\ In approving the proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \36\ 15 U.S.C. 78o-3(b)(5).
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    FINRA has represented that its proposed increases to the TAF rate 
and per-transaction cap are necessary to adequately fund FINRA's member 
regulatory obligations, and that the proposed increase to the TAF, like 
prior adjustments, seeks to remain revenue neutral to FINRA. Although 
commenters argue that the proposal would disproportionately harm firms 
that provide liquidity in covered equity securities and that the TAF is 
subject to volatility in the equity markets, the Commission agrees with 
FINRA that adjusting the TAF rate and the per-transaction cap as 
proposed is warranted. FINRA represented that trading in equity markets 
drives a significant portion of its regulatory costs, and therefore it 
is equitable to recover some of those costs from fees generated from 
equity trading activity. Moreover, as the Commission stated in 2009,

    Adequate regulatory funding is critical to FINRA's ability to 
meet [its] statutory requirements. While some member firms 
understandably question whether it is reasonable for FINRA to 
increase regulatory fees at a time when the securities industry has 
faced declining revenues as a result of the economic downturn, it is 
incumbent on FINRA to continue to support a robust regulatory 
program irrespective of market events.\37\
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    \37\ Securities Exchange Act Release No. 61042 (November 20, 
2009), 74 FR 62616, 62818 (November 30, 2009).

Furthermore, the Commission notes that the TAF constitutes only a 
portion of the fees that FINRA charges members to support its 
regulatory function. FINRA also charges a Gross Income Assessment Fee 
and a Personnel Assessment Fee, which are not directly correlated to 
equity trading volumes.
    Finally, the Commission finds that FINRA may, consistent with the 
Act, submit future filings to adjust the TAF rate and the per-
transaction fee cap for immediate effectiveness under Section 
19(b)(3)(A) of the Act. Section 19(b)(3)(A)(ii) allows an SRO to file 
an immediately effective proposed rule change if such filing is 
designated as ``establishing or changing a due, fee, or other charge 
imposed by the self-regulatory organization.'' \38\ Proposed 
adjustments to the TAF rate and per-transaction fee cap clearly fall 
within the scope of this provision.
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    \38\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    The Commission notes that commenter concerns regarding the 
opportunity to comment on proposed TAF adjustments are mitigated by the 
fact that such filings would still be subject to comment and Commission 
review even when filed under Section 19(b)(3)(A). The Commission 
summarily may temporarily suspend such a proposed rule change within 60 
days of filing ``if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of [the Act].'' 
\39\
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    \39\ 15 U.S.C. 78s(b)(3)(C).
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    For the reasons stated above, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\40\ that the proposed rule change (SR-FINRA-2012-023) be, and 
hereby is, approved.
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    \40\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-15806 Filed 6-27-12; 8:45 am]
BILLING CODE 8011-01-P


