[Federal Register Volume 85, Number 203 (Tuesday, October 20, 2020)]
[Notices]
[Pages 66592-66607]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23141]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90176; File No. SR-FINRA-2020-032]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Adjust FINRA Fees To Provide Sustainable 
Funding for FINRA's Regulatory Mission

October 14, 2020.
    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 October 2, 2020, 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, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as ``establishing or changing a 
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\ 
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon receipt of this filing by the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adjust FINRA fees to provide sustainable 
funding for FINRA's regulatory mission.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

[[Page 66593]]

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
Overview
    FINRA is submitting this proposed rule change to increase the 
revenues that FINRA, as a not-for-profit self-regulatory organization 
(``SRO''), relies upon to fund its regulatory mission. The proposed fee 
increases are designed to better align FINRA's revenues with its costs 
while preserving the existing equitable allocation of fees among FINRA 
members. FINRA has not raised its core member regulatory fees since 
2013, even though the overall costs of FINRA's operations have exceeded 
its total revenues for most of the last decade.
    Although the proposed fee increases will not begin to take effect 
until 2022, FINRA is submitting this proposed rule change now so that 
it can: (1) Provide significant advance notice of the proposed fee 
increases to member firms; (2) permit the proposed fee increases to be 
phased in over multiple years; and (3) continue to strategically 
``spend down'' financial reserves over the next several years, to allow 
the proposed increases to be gradually phased in as much as possible. 
The proposed fee increases are intended to provide responsible and 
sustainable longer-term funding to enable FINRA to accomplish its 
regulatory mission in a manner consistent with FINRA's public Financial 
Guiding Principles (``Guiding Principles'').\5\
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    \5\ See FINRA's Financial Guiding Principles, available at 
https://www.finra.org/sites/default/files/finra_financial_guiding_principles_0.pdf.
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Background
    Over the last decade, FINRA's regulatory responsibilities have 
grown significantly, driven by the proliferation of new investment 
products and services, the increase in the number of trading venues and 
trading volumes, the adoption by the SEC of important new rules that 
FINRA is charged with overseeing, and other regulatory mandates and 
market developments.
    For example, FINRA must supervise an increasingly complex array of 
broker-dealer services provided by member firms in the context of a 
constantly evolving securities market structure. New financial 
products, such as digital assets and increasingly intricate exchange-
traded products, and new trading venues, coupled with pronounced growth 
in trading volume, require increased examination and surveillance by 
FINRA staff. In addition, FINRA has made substantial investments in 
technology and staff to supervise or comply with significant new rules 
adopted by the SEC, such as the Consolidated Audit Trail, Regulation 
Best Interest, the Market Access Rule, Regulation Systems Compliance 
and Integrity, Regulation Crowdfunding, rules concerning the oversight 
of municipal advisors and security-based swap activities, and 
amendments to Regulation ATS, Regulation SHO, and Rule 606 of 
Regulation NMS, among others.
    During this time, FINRA has also committed significant resources to 
support the SEC's increasing reliance on, and oversight of, FINRA as a 
first-line supervisor of broker-dealers.\6\ For example, in 2019, the 
SEC's Office of Compliance Inspections and Examinations conducted more 
than 160 examinations of FINRA, including examinations of critical 
FINRA program areas as well as oversight reviews of FINRA 
examinations.\7\
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    \6\ See Inside the National Exam Program in 2016, Marc Wyatt, 
Director, Office of Compliance Inspections and Examinations, 
available at https://www.sec.gov/news/speech/inside-the-national-exam-program-in-2016.html.
    \7\ See 2020 Examination Priorities, SEC Office of Compliance 
Inspections and Examinations, available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf, 
at 2.
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    Despite these increasing responsibilities, FINRA has not increased 
its core regulatory fees materially since 2010 and has not raised these 
fees at all since 2013. As described more fully below, FINRA has been 
able to defer fee increases for so long by (1) strategically spending 
down its financial reserves, and (2) carefully managing its expenses.
    As discussed in the Guiding Principles, FINRA has relied on its 
financial reserves, which originally derived from the sale of Nasdaq, 
to help support its regulatory mission. From 2010 through 2019, FINRA 
used over $600 million of its financial reserves to fund operating 
losses and defer fee increases. On average, this support from FINRA's 
financial reserves amounted to 6.6% of FINRA's operating budget per 
year. Information about FINRA's financial reserves is provided each 
year in FINRA's published annual financial reports.\8\
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    \8\ See infra note 45 and accompanying discussion of the reports 
FINRA publishes and maintains on its website.
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    Careful expense management is another key element of the Guiding 
Principles. Over the last decade, FINRA has managed its expenses 
responsibly, controlling costs through various initiatives to enhance 
efficiency and effectiveness. One critical component of FINRA's success 
in meeting its expanding regulatory responsibilities while exercising 
careful expense management is the FINRA360 initiative, which launched 
in 2017 as a comprehensive self-evaluation to identify opportunities 
for improvement in FINRA's effectiveness and efficiency.\9\ FINRA has 
also made significant investments in technology, including cloud 
computing and data science, to enhance regulatory effectiveness with 
cost-effective tools.
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    \9\ Detailed information about the FINRA360 initiative is 
available at https://www.finra.org/about/finra-360.
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    As a result of these efforts, FINRA's expense growth rate from 2010 
through 2019 was less than the rate of inflation and significantly 
lower than expense growth at member firms.\10\ Specifically, FINRA's 
costs increased by 16% cumulatively during the period compared with 42% 
for the industry, while U.S. core inflation grew by 19%. FINRA's 
restrained expense growth is the result of careful management of both 
compensation costs, the largest driver of FINRA's budget, and non-
compensation costs. FINRA has been able to maintain relatively flat 
staffing levels over the last decade and low cumulative compensation 
growth when compared with average U.S. employee wage growth over the 
period. FINRA has further been successful in reducing its non-
compensation related expenses in recent years, with significant 
reductions in the last five years across operating expenses (excluding 
technology) and non-recurring expenses.\11\
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    \10\ FINRA recognizes that firms' expense growth, like that of 
FINRA, has been driven in part by their increased compliance 
responsibilities.
    \11\ See infra notes 48 through 50 and 53 through 54 and 
associated discussion for more detailed analysis of the figures 
discussed in this paragraph and supporting sources. In this 
paragraph and where noted below, FINRA's discussion of its expenses 
and revenues over the past decade draw from the figures that FINRA 
publishes each year in its Annual Financial Report. Because FINRA's 
Annual Financial Reports present audited financials on a 
consolidated basis, these figures include the expenses and revenues 
for FINRA subsidiaries. Over the last decade, there have been three 
primary subsidiaries in addition to FINRA Regulation, FINRA's 
regulatory subsidiary: FINRA Dispute Resolution, the FINRA Investor 
Education Foundation, and FINRA CAT, LLC. FINRA Dispute Resolution 
was merged into FINRA Regulation at the end of 2015; the FINRA 
Investor Education Foundation has existed throughout the last 
decade, and FINRA CAT, LLC was formed in 2019. While the costs and 
revenues for these subsidiaries are included where historic expense 
and revenue figures are drawn from FINRA's consolidated Annual 
Financial Reports, the FINRA Investor Education Foundation and FINRA 
CAT, LLC subsidiaries are budgeted for separately and not included 
in FINRA's public budget summaries; accordingly, where budget 
projections are discussed in this filing, they do not include the 
expenses or revenues of FINRA subsidiaries other than FINRA 
Regulation.

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[[Page 66594]]

    FINRA will continue to carefully manage costs and strategically 
spend down reserves in the years ahead, but these steps alone are not a 
sustainable financial strategy in the long term, particularly in the 
context of FINRA's increasing regulatory responsibilities and finite 
reserves. Accordingly, consistent with the Guiding Principles, FINRA 
proposes at this time to adopt a schedule of future fee increases to 
address the structural deficit in FINRA's budget and provide 
sustainable funding to carry out its regulatory mission. This proposal 
is designed around several core elements: (1) Significant advance 
notice to members before increases take effect, with continued 
reasonable reliance on FINRA's financial reserves to allow the proposed 
fee increases to be deferred and gradually phased-in as much as 
possible; \12\ (2) proportional fee increases that largely preserve the 
existing allocation of fees among members; and (3) FINRA's ongoing 
commitment to reasonable cost management and rebates to members where 
revenues exceed costs. These elements are discussed in detail below.
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    \12\ As discussed further below, consistent with the Guiding 
Principles, FINRA strives to maintain an appropriate level of 
reserves, which the FINRA Board of Governors has determined to be at 
least one year of expenditures.
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FINRA's Current Fee Structure
    As a not-for-profit self-regulatory organization, FINRA relies on a 
mix of fees that are intended to cover the overall costs of FINRA's 
operations. The most significant sources of FINRA's funding are three 
core regulatory fees: The Gross Income Assessment (``GIA''); the 
Trading Activity Fee (``TAF''); and the Personnel Assessment (``PA''). 
These fees are used to substantially fund FINRA's regulatory 
activities, including examinations, financial monitoring, and FINRA's 
policymaking, rulemaking, and enforcement activities.\13\ Where 
appropriate, FINRA also employs use-based fees for some of the specific 
services and data it provides to members and the public in support of 
its regulatory mission.\14\
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    \13\ See, e.g., Securities Exchange Act Release No. 61042 
(November 20, 2009), 74 FR 62616 (November 30, 2009) (Order 
Approving File No. SR-FINRA-2009-057).
    \14\ The services covered by these fees currently include 
initial and annual member registrations, qualification examinations, 
reviews of corporate filings, review of advertisements and 
disclosures, and transparency and dispute resolution services. While 
each of these services has unique attributes, fees for these 
services generally are based on the use of a particular service. 
When applying use-based fees, FINRA takes into account three 
associated types of costs: Direct costs for the program associated 
with the use-based fee, such as program building and operating 
expenses, and reinvestments and enhancements; indirect costs for the 
program, including supporting services necessary for the program's 
associated regulatory activity; and a contribution to FINRA's 
overall regulatory operations. See, e.g., Securities Exchange Act 
Release No. 67247 (June 25, 2012), 77 FR 38866 (June 29, 2012) 
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2012-030) (discussing how registration fees contribute to FINRA's 
overall regulatory funding).
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    As FINRA has explained in connection with prior filings to the 
Commission, because FINRA is a not-for-profit entity it employs this 
mix of fees to seek recovery of its overall costs in a manner that is 
fair, reasonable, and equitably allocated among FINRA's member firms. 
Broadly speaking, each of FINRA's core regulatory fees reflects one of 
the critical components driving FINRA's regulatory costs with respect 
to a particular member firm: The size of the firm (measured by 
revenue), the firm's trading activity; and the number and role of 
persons registered with the firm.\15\
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    \15\ The number and role of registered persons also correlates 
with FINRA's registration, and qualification examination fees, so 
increases in these fees are also used to equitably allocate the fees 
across these components of FINRA's costs.
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    However, FINRA has addressed in prior filings how, in light of its 
diverse membership of firms that vary greatly in size and business 
model, it is impossible to develop a comprehensive pricing scheme that 
precisely accounts for the particulars of each member.\16\ Because it 
is not feasible to associate a direct affiliated revenue stream for 
each of FINRA's programs--for example, examinations of member firms do 
not have an associated revenue stream--FINRA has explained that 
numerous operations and services must be funded by general revenue 
sources, which include both regulatory assessments and use-based 
fees.\17\ Similarly, there is no one consistent driver of costs of a 
particular regulatory program. Even where one cost driver may, at 
times, align with a particular revenue stream (e.g., as trading 
activity increases, certain Market Regulation costs may increase), the 
relationship is not uniform or linear. For instance, novel trading 
patterns in single or multiple securities may not be associated with 
significant volume but may require disproportionately large regulatory 
investment. Likewise, periods of intense market volatility may 
influence regulatory costs independent of the change in trading volume. 
As such, FINRA must ensure sufficient funding to meet all of its 
regulatory obligations notwithstanding the fluctuations in different 
revenue streams and cost drivers that are naturally expected to occur.
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    \16\ See Letter to Elizabeth M. Murphy, Secretary, SEC, from 
Brant Brown, Associate General Counsel, FINRA, dated June 19, 2012 
(FINRA Response to Comments on File No. SR-FINRA-2012-023).
    \17\ See Letter to Elizabeth M. Murphy, Secretary, SEC, from 
Philip Shaikun, Associate Vice President and Associate General 
Counsel, FINRA, dated August 3, 2012 (FINRA Response to Comments on 
File Nos. SR-FINRA-2012-028; SR-FINRA-2012-029; SR-FINRA-2012-030; 
and SR-FINRA-2012-031).
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    Consistent with this framework, FINRA uses an overall cost-based 
pricing structure designed to be reasonable, achieve general equity 
across its membership, and correlate fees with regulatory costs to the 
extent feasible. Notably, the Commission has approved FINRA's approach 
to this overall pricing structure and agreed that it ``is reasonable in 
that it achieves a generally equitable impact across FINRA's membership 
and correlates the fees assessed to the regulatory services provided by 
FINRA.'' \18\ FINRA continues to believe that this approved approach to 
overall pricing is the most feasible and equitable way to provide 
sufficient funding to meet its regulatory obligations given its role as 
a not-for-profit national securities association and its broad, diverse 
membership.
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    \18\ See Order Approving SR-FINRA-2009-057, supra note 13, 74 FR 
at 62620.
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    FINRA has long used rebates to support its commitment to 
reasonable, cost-based fee assessments in instances where revenues 
significantly exceed expenditures. For example, FINRA distributed 
rebates to members each year from 2000 to 2014. In these years, FINRA 
generally first distributed to all active members in good standing an 
initial amount intended to offset their minimum GIA fee,\19\ and 
additional rebates were then provided based on these members' prorated 
share of

[[Page 66595]]

regulatory fees paid into FINRA.\20\ To maintain equivalence between 
revenues and costs, FINRA will be guided by its historical approach to 
rebates if its revenue in future years exceeds its costs by a material 
amount.\21\ FINRA's commitment to reasonable cost-based fee levels is 
further reinforced by its financial transparency, including the revenue 
and cost information FINRA makes public each year.
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    \19\ As discussed below, the minimum GIA fee is $1,200 per year 
and would remain unchanged by this proposal.
    \20\ See, e.g., FINRA 2014 Annual Financial Report, available at 
https://www.finra.org/sites/default/files/2014_YIR_AFR.pdf, at 9.
    \21\ These rebates are approved by the FINRA Board of Governors. 
A number of factors must be considered when determining whether to 
provide rebates, including the amount of excess revenue for the 
year, whether budget projections anticipate near-term revenue 
shortfalls, and the number of firms that would be eligible to 
receive rebates. As discussed throughout the filing, FINRA makes 
information about these factors transparent to the public each year.
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Proposal
    FINRA is proposing a proportional increase to fees it relies on to 
substantially fund its regulatory mission in a manner that preserves 
equitable fee allocation among FINRA members. Specifically, FINRA is 
proposing increases to its GIA, TAF, PA, member registration, and 
qualification examination fees, phased in over a three-year period 
beginning in 2022, as described in detail below for each specific fee 
change.
    In sum, FINRA is targeting the proposed fee increases to generate 
an additional $225 million annually once fully implemented in 2024. 
This targeted revenue amount is calculated to bring FINRA's revenues in 
line with its anticipated costs, based on FINRA's projected revenue and 
costs.\22\ As FINRA noted recently in its 2020 Annual Budget Summary, 
based on the current fee structure FINRA projected that its overall 
costs will exceed revenues by $210.2 million in 2020.\23\ FINRA 
projects it will need $225 million in additional annual revenue from 
the fee increases proposed in this filing by 2024 to achieve 
sustainable funding for its current regulatory mission, in line with 
its Guiding Principles.\24\
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    \22\ Anticipated costs would not include potential costs 
associated with new services that may be initiated or approved in 
the future. FINRA may submit separate fee filings to cover program 
costs for new services. Similarly, FINRA notes that program costs 
associated with the reporting of transactions in U.S. Treasury 
Securities (``Treasuries'') are not included in the targeted amount 
sought by this proposal; currently, Treasuries transactions are 
exempted from both TRACE transaction reporting fees and from the 
TAF. See Securities Exchange Act Release No. 79116 (October 18, 
2016), 81 FR 73167, 73176 (October 24, 2016) (Order Approving File 
No. SR-FINRA-2016-027).
    \23\ See FINRA 2020 Annual Budget Summary, available at https://www.finra.org/sites/default/files/2020-05/2020_annual_budget_summary.pdf, at 2. Budget projections discussed 
in this filing are based on the figures used for the 2020 Annual 
Budget Summary. Budget projections are evaluated throughout the 
year, and the steps FINRA would take in the event of materially 
changed projections are discussed infra note 27 and its associated 
text. FINRA has provided a detailed program-level summary of its 
recent budgeting trends from 2018 through 2020 in Chart 1 of Exhibit 
3 to this filing. As noted in the chart, while certain program-level 
budget figures incorporate the costs of contract services, these 
costs are funded in full by contract fees. Therefore, FINRA's 
contract services are not funded with any of the regulatory revenues 
discussed in this filing, and contract service costs do not cause 
any of the projected revenue shortfalls that this filing is designed 
to correct. For example, to the extent the direct costs of services 
provided under Regulatory Services Agreements (``RSAs'') are 
included in the budget shown for Market Regulation, those direct 
costs are accounted for and fully offset by the revenues derived 
from the agreements. This includes the costs of shared resources 
used to provide services under the RSAs, as such costs are tracked 
and allocated under the agreements. In the event there is an 
expansion, modification, or termination of such agreements, FINRA 
would make corresponding adjustments to its budget projections.
    \24\ For purposes of its projections, FINRA assumed a 
conservative amount of fine money for future years based on historic 
fine money receipt. FINRA's projections further assumed investment 
gains of 4.5% annualized, consistent with historical results and 
FINRA's investment policy.
    Like other SROs, FINRA routinely imposes fines on its members or 
their registered representatives for violations of applicable SEC or 
SRO rules. Although SROs are not generally restricted by applicable 
law or regulation in terms of how they may use fine monies, FINRA 
has determined pursuant to its Guiding Principles to adopt several 
policies designed to ensure that the collection and use of fine 
monies are consistent with FINRA's public-interest mission. In 
particular, the imposition and amount of fines are not based on 
revenue considerations; FINRA does not establish any minimum amount 
of fines to be collected for purposes of the FINRA annual budget; 
fines are not considered in determining employee compensation; FINRA 
accounts for fine monies separately; fine monies may only be used 
upon approval by the Board of Governors for certain designated 
purposes, including for example capital initiatives or non-recurring 
strategic expenditures that promote effective and efficient 
regulatory oversight by FINRA; and FINRA publishes an annual report 
detailing how fine monies have been used. (For example, see FINRA's 
Report on Use of 2019 Fine Monies, available at https://www.finra.org/about/annual-reports/report-use-2019-fine-monies.)
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    Overall, the total fee increase represents just under a 5% 
compounded annual growth rate (``CAGR'') across all FINRA fees between 
this year and when the proposal is fully implemented in 2024.\25\ When 
measured more specifically against the groups of fees impacted by this 
proposal (FINRA's regulatory fees, along with qualification examination 
and registration fees), the proposal represents a 6.5% CAGR over the 
same time frame. However, as explained above, because FINRA has been 
able to defer raising fees for a number of years because of careful 
expense management and reliance on its financial reserves, FINRA also 
believes it is appropriate to measure the rate of fee increases since 
2011, the year following the last material regulatory fee increase. 
When measured over this period (2011 through 2024), the proposal 
represents a 2.4% CAGR across all FINRA fees and a 3.1% CAGR across the 
groups of fees impacted by this proposal. While this increase is 
material, FINRA's fees will continue to represent a very small dollar 
amount relative to industry revenues as reported in FOCUS reports--
specifically, when the proposal is implemented in 2024, FINRA estimates 
that the FINRA fees impacted by the proposal would represent 
approximately 0.22% (22 basis points) of recent industry revenues.\26\
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    \25\ Compound average growth rate provides a geometric average 
of the change in fees over the implementation period. It is 
particularly useful for comparing growth rates from various sets of 
data over the same multi-year period.
    \26\ As discussed below, this estimate measures the amount of 
FINRA's regulatory and use-based fees expected in 2024 as a 
percentage of 2019 industry revenues, assuming no FOCUS revenue 
growth for member firms over that time period.
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    In essence, the proposal is designed to preserve the same SEC-
approved, equitable fee allocation across members that FINRA has 
maintained for years. By pursuing a proportional aggregate increase, 
FINRA designed the proposal to change the distribution of fees across 
members as little as possible. In other words, FINRA designed the 
proposal to achieve the targeted revenue amount needed to correct 
FINRA's structural deficit--expected to be $225 million by 2024--with a 
package of specific fee increases that best yielded an equitable 
overall fee increase across member firm size and type. The five fees 
included in this proposal--the GIA, TAF, PA, registration, and 
qualification examination fees--were selected to achieve an overall 
proportional increase, with minimal distributional impact, because they 
are the most broadly assessed fees that FINRA relies on to fund its 
regulatory mission, and they match the main member firm components of 
FINRA's regulatory costs. By using a combination of fees that apply to 
different components of a firm's activities, the increase in fees 
maintains the equitable distribution of fees across varying types of 
member firms.
    When these five fees are grouped according to the three main 
components of FINRA's regulatory costs--the size of the member firm 
(GIA), the firm's trading activity (TAF), and the number and role of 
registered persons with the firm (PA, registration, and qualification 
examination fees)--they have each

[[Page 66596]]

contributed roughly the same total revenue by group for the last five 
years, and collectively they account for roughly 60% of FINRA's total 
revenues. The proposal is therefore designed as a proportional fee 
increase, splitting the proposed aggregate fee increase amount of $225 
million evenly across these three categories--$75 million from the GIA, 
$75 million from the TAF, and $75 million collectively from the 
representative-based fees (PA, registration, and qualification 
examination fees). FINRA believes this proportional approach to fee 
increases will provide member firms a greater degree of certainty and 
predictability, as it seeks to maintain consistency with FINRA's 
existing equitable fee distribution. FINRA further believes its 
proportional approach reduces the potential for unintended impacts on 
the services provided by member firms, and the business models they 
adopt, that could arise from significant changes to fee distribution.
    To further promote predictability for member firms, FINRA designed 
the proposal to reach the total targeted revenue amount in 2024 as part 
of a gradual, multi-year phase-in beginning in 2022. As noted above, 
during this time, FINRA will continue to draw an estimated $400 million 
from its financial reserves to support the phased implementation. FINRA 
currently projects it can continue to fund its annual budget deficits 
from its reserves during the implementation period, at the end of which 
FINRA projects that its remaining reserves will align with the Board-
approved level of appropriate reserves, noted in the Guiding 
Principles, equal to one year of operating costs. Discussions with 
members to date confirm that providing notice to member firms now of a 
future fee increase--with a phase-in beginning in 2022--will provide 
members with greater certainty regarding their future fee expenses that 
will be very valuable in their annual budgeting and financial planning 
processes. If FINRA's actual structural financial deficit is materially 
reduced during this period relative to current projections--for 
example, because key assumptions used in those projections are overly 
conservative-- FINRA would submit a new filing to further defer the 
proposed fee increases or consider other modifications as 
appropriate.\27\
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    \27\ Details of the assumptions FINRA used to project costs 
between 2020 and 2024 are discussed supra note 24 and infra note 60.
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Gross Income Assessment
    The GIA is a core regulatory fee designed to correlate to one of 
the three critical components of FINRA's regulatory costs, the size of 
a firm. Accordingly, the GIA is based on a firm's annual gross 
revenue,\28\ employing a seven-tier rate structure that has applied 
since 2008.\29\ The current rates are as follows:
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    \28\ Schedule A to the FINRA By-Laws defines gross revenue for 
assessment purposes as total income as reported on FOCUS form Part 
II or IIA, excluding commodities income.
    \29\ While the GIA rate structure has not changed since 2008, 
FINRA made modifications to the method of GIA calculation under the 
structure in 2009 and 2014. In 2009, the Commission approved a GIA 
calculation modification designed to mitigate year-to-year revenue 
volatility by assessing member firms the greater of a GIA calculated 
based on the firm's annual gross revenue from the preceding calendar 
year, or a GIA averaged over the prior three years. See Order 
Approving SR-FINRA-2009-057, supra note 13, 74 FR at 62617. In 2014, 
FINRA refined the GIA calculation method to provide limited relief 
for smaller member firms from unintended effects of the 2009 
calculation change; as a result of the 2014 change, firms that have 
annual gross revenue of $25 million or less pay the GIA based on 
preceding year revenue without looking to a three-year average. See 
Securities Exchange Act Release No. 73632 (November 18, 2014), 79 FR 
69937 (November 24, 2014) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2014-046).
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    (1) $1,200 on annual gross revenue up to $1 million;
    (2) 0.1215% of annual gross revenue greater than $1 million up to 
$25 million;
    (3) 0.2599% of annual gross revenue greater than $25 million up to 
$50 million;
    (4) 0.0518% of annual gross revenue greater than $50 million up to 
$100 million;
    (5) 0.0365% of annual gross revenue greater than $100 million up to 
$5 billion;
    (6) 0.0397% of annual gross revenue greater than $5 billion up to 
$25 billion; and
    (7) 0.0855% of annual gross revenue greater than $25 billion.
    FINRA is proposing the following changes to its GIA tier rates 
between 2022 and 2024: \30\
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    \30\ FINRA notes the Exhibit 5 to this proposed rule change is 
marked to show the changes as they are proposed to take effect each 
year, as described in this filing. Specifically, Exhibit 5A shows 
the proposed changes that would take effect in 2022, Exhibit 5B 
shows the proposed changes that would take effect in 2023, and 
Exhibit 5C shows the proposed changes that would take effect in 
2024.

                                          GIA--Proposed Implementation
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                                                     2021 (no
         Tier (revenue)           2020 (current)      change)          2022            2023            2024
----------------------------------------------------------------------------------------------------------------
$0 to $1 million................          $1,200          $1,200          $1,200          $1,200          $1,200
Greater than $1 million up to            0.1215%         0.1215%         0.1346%         0.1511%         0.1732%
 $25 million....................
Greater than $25 million up to           0.2599%         0.2599%         0.2880%         0.3232%         0.3705%
 $50 million....................
Greater than $50 million up to           0.0518%         0.0518%         0.0574%         0.0644%         0.0738%
 $100 million...................
Greater than $100 million up to          0.0365%         0.0365%         0.0404%         0.0454%         0.0520%
 $5 billion.....................
Greater than $5 billion up to            0.0397%         0.0397%         0.0440%         0.0494%         0.0566%
 $25 billion....................
Greater than $25 billion........         0.0855%         0.0855%         0.0948%         0.1063%         0.1219%
----------------------------------------------------------------------------------------------------------------

    As stated previously, when the new GIA rates are fully implemented 
in 2024, they are designed to generate an additional $75 million 
annually. The proposed GIA increase preserves the existing seven-tier 
structure and calculation method. With these proposed increases, the 
GIA structure would continue to reflect the costs associated with 
performing regulatory responsibilities across FINRA's diverse 
population of member firms. The proposal would not increase the flat 
$1,200 fee for member firms with revenues of $1 million or less. 
Maintaining this fee level for the smallest member firms preserves 
FINRA's existing approach to cost distribution between member firms of 
varying sizes, which, as discussed in further detail below, seeks to 
prevent regulatory costs from creating an inappropriate barrier to 
entry. For rates applicable in tiers two through seven, the proposed 
changes represent progressive yearly increases through the 
implementation period, beginning with a 10.8% increase across tiers in 
2022, a 12.2% increase in 2023, and a 14.7% increase in 2024.

[[Page 66597]]

Trading Activity Fee
    The TAF is a core regulatory fee designed to correlate to the 
second critical component of FINRA's regulatory costs, the trading 
activity of a firm. FINRA initially adopted the TAF in 2002, modeled on 
the Commission's transaction-based Section 31 fee.\31\ The TAF is 
generally assessed on the sale of all exchange-listed 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 reporting requirements.\32\ The 
current TAF rates, which have not increased since 2012, are:
---------------------------------------------------------------------------

    \31\ See Securities Exchange Act Release No. 46416 (August 23, 
2002), 67 FR 55901 (August 30, 2002) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NASD-2002-98).
    \32\ Certain types of transactions are excluded from the TAF--
for example, primary market transactions, proprietary transactions 
executed by a member on a national securities exchange in the 
member's capacity as an exchange specialist or market maker, and 
transactions in U.S. Treasury Securities. See FINRA By-Laws, 
Schedule A, Section 1(b)(2) (providing full list of transactions 
exempt from the TAF). This proposal would not change the scope of 
any current TAF exemptions, and as discussed supra note 22, the 
proposed TAF rates shown in the chart below for TRACE-Eligible 
Securities do not apply to Treasuries transactions.
---------------------------------------------------------------------------

    (1) $0.000119 per share for each sale of a covered equity security, 
with a maximum charge of $5.95 per trade;
    (2) $0.002 per contract for each sale of an option;
    (3) $0.00008 per contract for each round turn transaction of a 
security future, provided there is a minimum charge of $0.01 per round 
turn transaction;
    (4) $0.00075 per bond for each sale of a covered TRACE-Eligible 
Security (other than an Asset-Backed Security) and/or municipal 
security, with a maximum charge of $0.75 per trade; and
    (5) $0.00000075 times the value, as reported to TRACE, of a sale of 
an Asset-Backed Security, with a maximum charge of $0.75 per trade.
    FINRA is proposing the following changes to its TAF rates between 
2022 and 2024:

                                                              TAF--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
           Security type                 2020 (current)         2021 (no change)              2022                   2023                   2024
--------------------------------------------------------------------------------------------------------------------------------------------------------
Covered Equity Security............  $0.000119 per share     $0.000119 per share     $0.000130 per share    $0.000145 per share    $0.000166 per share
                                      (up to $5.95 max per    (up to $5.95 max per    (up to $6.49 max per   (up to $7.27 max per   (up to $8.30 max per
                                      trade).                 trade).                 trade).                trade).                trade).
Options............................  $0.002 per contract...  $0.002 per contract...  $0.00218 per contract  $0.00244 per contract  $0.00279 per
                                                                                                                                    contract.
Security Future....................  $0.00008 per contract   $0.00008 per contract   $0.00009 per contract  $0.00010 per contract  $0.00011 per contract
                                      (with $0.01 minimum     (with $0.01 minimum     (with $0.011 minimum   (with $0.012 minimum   (with $0.014 minimum
                                      per round trip          per round trip          per round trip         per round trip         per round trip
                                      transaction).           transaction).           transaction).          transaction).          transaction).
TRACE-Eligible Security (Other than  $0.00075 per bond (up   $0.00075 per bond (up   $0.00082 per bond (up  $0.00092 per bond (up  $0.00105 per bond (up
 Asset-Backed Security) or            to $0.75 max per        to $0.75 max per        to $0.82 max per       to $0.92 max per       to $1.05 max per
 municipal security.                  trade).                 trade).                 trade).                trade).                trade).
TRACE-Eligible Asset-Backed          $0.00000075 times       $0.00000075 times       $0.00000082 times      $0.00000092 times      $0.00000105 times
 Security.                            reported value (up to   reported value (up to   reported value (up     reported value (up     reported value (up
                                      $0.75 max per trade).   $0.75 max per trade).   to $0.82 max per       to $0.92 max per       to $1.05 max per
                                                                                      trade).                trade).                trade).
--------------------------------------------------------------------------------------------------------------------------------------------------------

    When the new TAF rates are fully implemented in 2024, they are 
designed to generate an additional $75 million annually. The proposed 
TAF changes reflect proportional increases in the amount raised for 
each security type--meaning there is no anticipated change in the 
percentage of overall TAF revenue collected from transactions in each 
security type--phased in incrementally over the three-year 
implementation period. Accordingly, while TAF revenues are largely 
derived from transactions in equity securities, like the SEC's Section 
31 fee, this proposal is intended to preserve the existing distribution 
of TAF fees among security types.
Personnel Assessment
    The PA is a core regulatory fee designed to correlate to the third 
critical component of FINRA's regulatory costs, the number and role of 
registered persons at a firm. The PA currently is assessed on a three-
tiered rate structure: Members with one to five registered 
representatives and principals are assessed $150 for each such 
registered person (``Reps'' in the chart below); there is a $140 charge 
for each of the next 20 registered persons (between 6 and 25); and a 
$130 charge for each additional registered person beyond 25. These 
rates have not increased since 2010.\33\ FINRA is proposing the 
following increases to its PA tier rates between 2022 and 2024:
---------------------------------------------------------------------------

    \33\ See Regulatory Notice 09-68 (November 2009).

                                           PA--Proposed Implementation
----------------------------------------------------------------------------------------------------------------
                                                     2021 (no
      Tier (Number of Reps)       2020 (current)      change)          2022            2023            2024
----------------------------------------------------------------------------------------------------------------
Reps 0-5........................            $150            $150            $160            $180            $210
Reps 6-25.......................             140             140             150             170             200
Reps 26 and greater.............             130             130             140             160             190
----------------------------------------------------------------------------------------------------------------


[[Page 66598]]

    When the new PA rates are fully implemented in 2024, they are 
designed to generate an additional $38 million annually.
Registration Fees
    Registration fees are representative-level fees that, while use-
based, also correlate to the third critical component of FINRA's 
regulatory costs, the number and role of registered persons at a firm. 
Section 4 of Schedule A to the FINRA By-Laws establishes fees connected 
to FINRA's operation of the Central Registration Depository (``Web 
CRD[supreg]'' or ``CRD system''), the central licensing and 
registration system for the U.S. securities industry. The CRD system 
contains the registration records of broker-dealer firms and their 
associated individuals including their qualification, employment, and 
disclosure histories; it also facilitates the processing of, among 
other things, form filings and fingerprint submissions.\34\ The CRD 
system enables individuals and firms seeking registration with multiple 
states and SROs to do so by submitting a single form, fingerprint card, 
and a combined payment of fees to FINRA.
---------------------------------------------------------------------------

    \34\ Certain information reported to the CRD system is displayed 
in BrokerCheck[supreg], an electronic system that provides the 
public with information on the professional background, business 
practices, and conduct of FINRA members and their associated 
persons. Investors use BrokerCheck to help make informed choices 
about the individuals and firms with which they currently conduct or 
are considering conducting business.
---------------------------------------------------------------------------

    While FINRA continually makes investments to improve the CRD 
system, it has not increased associated registration fees since 2012. 
FINRA has explained that these fees are important to fund activities 
that help ensure the integrity of information in the CRD system--
information critical to FINRA and other regulators, as well as to 
investors through BrokerCheck--and to support FINRA's overall 
regulatory mission.\35\ FINRA is proposing to increase certain 
registration fees between 2022 and 2024 as follows:
---------------------------------------------------------------------------

    \35\ See Securities Exchange Act Release No. 67247 (June 25, 
2012), 77 FR 38866 (June 29, 2012) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2012-030).

                                                       Registration Fees--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
                Fee                      2020 (current)         2021 (no change)              2022                   2023                   2024
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial/Transfer Registration Form   $100..................  $100..................  $125.................  $125.................  $125.
 U4 filing \36\.
Termination U5 filing..............  $40 (plus $80 if late   $40 (plus $80 if late   $40 (plus $80 if late  $50 (plus $100 if      $50 (plus $100 if
                                      filed).                 filed).                 filed).                late filed).           late filed).
System Processing Fee (for each of   $45...................  $45...................  $45..................  $45..................  $70.
 the member's registered
 representatives and principals).
Branch Office Processing Fee         $20...................  $20...................  $75..................  $75..................  $75.
 (initial and annual).
Disclosure review \37\.............  $110..................  $110..................  $110.................  $155.................  $155.
Fingerprinting \38\................  $15...................  $15...................  $15..................  $20..................  $20.
--------------------------------------------------------------------------------------------------------------------------------------------------------

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

    \36\ This fee applies for each initial or transfer Uniform 
Application for Securities Industry Registration or Transfer (``Form 
U4'') filed by a member in the CRD system to register an individual. 
Section 4(b)(1) of Schedule A includes a discount in cases where a 
member is transferring the registrations of individuals in 
connection with the acquisition of all or part of another member's 
business. The discount ranges from 10% to 50%, based on the number 
of registered personnel being transferred. While FINRA is proposing 
to increase the registration fee, it is not proposing to make any 
changes to the discount schedule.
    \37\ This fee applies for the additional processing of each 
initial or amended Form U4, Form U5, or Form BD that includes the 
initial reporting, amendment, or certification of one or more 
disclosure events or proceedings.
    \38\ This fee applies for processing and posting to the CRD 
system each set of fingerprints submitted electronically by a member 
to FINRA, plus any other charge that may be imposed by the United 
States Department of Justice for processing each set of 
fingerprints.
---------------------------------------------------------------------------

    FINRA distributed these fee adjustments for registration-related 
events in a diverse and staggered manner over the implementation period 
to moderate impact. When all of these proposed registration fee changes 
are fully implemented in 2024, they are designed to generate an 
additional $24 million annually.
Qualification Examination Fees
    Like registration fees, qualification examination fees are 
representative-level fees that, while use-based, also correlate to the 
third critical component of FINRA's regulatory costs, the number and 
role of registered persons at a firm. Section 4(c) of Schedule A to the 
FINRA By-Laws sets forth the fees associated with the qualification 
examinations that FINRA administers. Persons engaged in the investment 
banking or securities business of a FINRA member who function as 
principals or representatives are required to register with FINRA in 
each category of registration appropriate to their functions. Such 
individuals must pass an appropriate qualification examination or 
obtain a waiver before their registration can become effective. These 
mandatory qualification examinations cover a broad range of subjects 
regarding financial markets and products, individual responsibilities, 
securities industry rules, and regulatory structure.
    FINRA develops, maintains, and delivers all qualification 
examinations for individuals who are registered or seeking registration 
with FINRA.\39\ FINRA is proposing to increase its examination fees 
between 2022 and 2024 as follows:
---------------------------------------------------------------------------

    \39\ FINRA also administers and delivers examinations sponsored 
(i.e., developed) by the Municipal Securities Rulemaking Board 
(``MSRB'') and other SROs, the North American Securities 
Administrators Association, the National Futures Association, and 
the Federal Deposit Insurance Corporation. The fees charged for 
these examinations are set according to contracts with the 
examination sponsors, and FINRA is not proposing any changes to fees 
associated with those examinations as part of this proposal. FINRA 
believes this approach to raising fees only for examinations 
developed by FINRA is reasonable because this proposal is designed 
to raise revenues to align with FINRA's core regulatory costs, and 
the examinations developed by FINRA cover activity most closely 
associated with FINRA's core regulatory efforts. In addition, the 
relative number of FINRA-developed examinations, and the relative 
frequency of their administration, supports the broad distribution 
of the proposed fee increases in the equitable manner discussed 
throughout this filing. FINRA notes that because qualification 
examinations are tied fundamentally to the business an individual 
engages in, FINRA does not anticipate that the relatively modest 
proposed fee increases for FINRA's qualification examinations would 
create material direct competitive impacts. Where FINRA has 
identified potential competitive impacts of the proposal overall on 
firms' decision to maintain FINRA registration, it has included 
discussion infra note 66 and associated text. FINRA believes a 
similar analysis applies for both firms and individuals.

[[Page 66599]]



                             Qualification Examination Fees--Proposed Implementation
----------------------------------------------------------------------------------------------------------------
                                                     2021 (no
    Examination No. and name      2020 (current)      change)          2022            2023            2024
----------------------------------------------------------------------------------------------------------------
Securities Industry Essentials               $60             $60             $80             $80             $80
 (SIE) Examination..............
Series 4: Registered Options                 105             105             155             155             155
 Principal Examination..........
Series 6: Investment Company                  40              40              75              75              75
 Products and Variable Contracts
 Representative Examination.....
Series 7: General Securities                 245             245             300             300             300
 Representative Examination.....
Series 9: General Securities                  80              80             130             130             130
 Sales Supervisor Examination--
 Options Module.................
Series 10: General Securities                125             125             175             175             175
 Sales Supervisor Examination--
 General Module.................
Series 16: Supervisory Analyst               240             240             245             245             245
 Examination....................
Series 22: Direct Participation               40              40              60              60              60
 Programs Representative
 Examination....................
Series 23: General Securities                100             100             105             105             105
 Principal Examination--Sales
 Supervisor Module..............
Series 24: General Securities                120             120             175             175             175
 Principal Examination..........
Series 26: Investment Company                100             100             150             150             150
 Products and Variable Contracts
 Principal Examination..........
Series 27: Financial and                     120             120             175             175             175
 Operations Principal
 Examination....................
Series 28: Introducing Broker-               100             100             150             150             150
 Dealer Financial and Operations
 Principal Examination..........
Series 39: Direct Participation               95              95             100             100             100
 Programs Principal Examination.
Series 57: Securities Trader                  60              60              80              80              80
 Examination....................
Series 79: Investment Banking                245             245             300             300             300
 Representative Examination.....
Series 82: Private Securities                 40              40              60              60              60
 Offering Representative
 Examination....................
Series 86: Research Analyst                  185             185             225             225             225
 Examination--Analysis..........
Series 87: Research Analyst                  130             130             150             150             150
 Examination--Regulatory........
Series 99: Operations                         40              40              60              60              60
 Professional Examination.......
----------------------------------------------------------------------------------------------------------------

    When the new examination fee rates are fully implemented, they are 
designed to generate an additional $13 million annually. FINRA is 
proposing a single fee raise across examinations in 2022; due to the 
administrative burden placed on member firms to maintain and distribute 
comprehensive examination fee schedules continuously throughout the 
year to the large pool of examination enrollees, FINRA believes that 
this approach will avoid unnecessary confusion and operational burdens. 
However, the proposed single-year examination fee increase interacts 
with the overall package of proposed fee increases in a manner that 
supports the goal of a gradual three-year phased implementation period. 
In addition, FINRA has determined the amount of each examination fee 
increase based on the frequency with which the examination is 
administered, as well as the average fee per hour of examination 
length. Examinations that are administered more frequently or are 
longer in duration typically require more effort and cost to develop, 
maintain, and update, and FINRA is generally proposing greater 
increases for these examinations as a result, while the proposed 
examination fee schedule overall is designed to support the broad and 
equitable distribution of proposed fee increases, as discussed 
throughout this filing.
    While FINRA has filed the proposed rule change for immediate 
effectiveness, implementation of the proposed rule change will not 
begin until January 1, 2022. Beginning in 2022, the fee increases that 
are the subject of this proposed rule change will be phased in 
gradually over a three-year period, with full implementation in 2024, 
to allow FINRA members as much advance notice as possible to plan for 
these fee increases.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\40\ 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 further believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act, which 
requires, among other things, that FINRA rules are not designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.\41\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78o-3(b)(5).
    \41\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

Reasonableness of the Proposed Fees
    As discussed above, FINRA's longstanding approach to funding 
employs a mix of fees designed to meet FINRA's overall costs. As a not-
for-profit SRO with a diverse membership, FINRA designs its mix of fees 
to seek recovery of its overall regulatory costs in a manner that is 
fair, reasonable, and equitably allocated among FINRA's member firms 
and users of FINRA's services. As FINRA has explained in the past, it 
is not feasible to associate a direct affiliated revenue stream for 
each of its programs (for example, FINRA collects no revenues in 
connection with its examinations of member firms), and thus numerous 
operations and services must be funded by other revenue sources, which 
include both general regulatory assessments and use-based fees. FINRA 
continues to believe that its overall Commission-approved cost-based 
pricing structure is reasonable, achieves general equity across its 
membership, and correlates fees with those firm components that drive 
FINRA's regulatory costs to the extent feasible.

[[Page 66600]]

    The reasonableness of this proposal, designed to generate an 
additional $225 million annually once fully implemented in 2024, is 
reinforced by three key cost discipline mechanisms: Oversight, 
transparency, and rebates.
    First, FINRA's funding and operations are subject to several layers 
of oversight, including by the FINRA Board of Governors \42\ and the 
Commission. As discussed in FINRA's 2020 annual budget summary, FINRA's 
efforts to manage its expenses responsibly while appropriately funding 
its mission includes Board oversight of its annual budget, compensation 
and capital initiatives. This oversight is spearheaded by the Board's 
key committees (such as its Finance, Operations and Technology 
Committee), and includes requirements for Board or relevant Committee 
approval with respect to various financial matters, such as the annual 
budget, the allocation and use of fine monies, the incurring of any 
expenses above certain pre-established thresholds, the amount of any 
annual merit or incentive compensation pools, and the compensation of 
certain key employees. The Board also relies on expert external 
consultants where appropriate (e.g., the independent compensation 
consultant engaged by the Management Compensation Committee). Notably, 
this Board oversight complements various staff-level controls over 
routine costs, including expense policies that are enforced with 
systemic checks and escalating management approval requirements for 
expense requests, with the effectiveness of these policies further 
subject to review by FINRA's Internal Audit Department. These controls 
and the Board's supervision of FINRA's costs has resulted in tightly-
controlled expenses that have risen at a rate below that of inflation 
since 2010.
---------------------------------------------------------------------------

    \42\ The FINRA Board of Governors is composed of a mix of public 
and industry representatives and uses its diverse expertise to 
oversee management in the administration of FINRA's affairs and the 
promotion of FINRA's welfare, objectives, and its public service 
mission to protect investors and uphold the integrity of markets.
---------------------------------------------------------------------------

    FINRA is also extensively supervised by the Commission throughout 
the year. The SEC's Office of Compliance Inspections and Examinations 
(``OCIE'') maintains dedicated staff as part of its FINRA and 
Securities Industry Oversight (``FSIO'') program who are devoted 
exclusively to overseeing FINRA and the MSRB--the two not-for-profit 
regulatory SROs--including with respect to FINRA's overall financial 
management and the adequacy of the resources devoted to its regulatory 
programs. FSIO and other groups within OCIE conducted over 160 
examinations of FINRA in 2019 alone.\43\ In addition, rules or fees 
adopted by FINRA are subject to review by the Commission's Division of 
Trading and Markets. The Commission's oversight of FINRA, in turn, is 
itself subject to Congressional oversight and evaluation by the United 
States Government Accountability Office (``GAO'') every three years. By 
statute, the GAO evaluates ten specific aspects of the Commission's 
oversight of FINRA, including FINRA governance, executive compensation, 
and the use of funding to support FINRA's mission, including the 
methods and sufficiency of funding, how FINRA invests funds pending 
use, and the impact of these aspects on FINRA's regulatory enforcement. 
The GAO reports the results of its evaluation to Congress.\44\
---------------------------------------------------------------------------

    \43\ See supra note 7.
    \44\ See GAO Report to Congressional Committees (July 2018), 
available at https://www.gao.gov/assets/700/693217.pdf.
---------------------------------------------------------------------------

    Second, FINRA's commitment to reasonable funding in support of its 
mission is further reinforced by the transparency it has committed to 
provide on an ongoing basis--pursuant to its Guiding Principles--
regarding its financial performance. Each year, FINRA publishes an 
extensive Annual Financial Report regarding its operations, prepared in 
accordance with GAAP. In addition, FINRA publishes annual reports on 
its budget and its use of fine monies. FINRA's Board also reviews and 
affirms its Financial Guiding Principles each year and re-publishes 
these as well. FINRA also files with the IRS the Form 990 mandated for 
all not-for-profit organizations. Collectively, these reports provide 
extensive and comprehensive information regarding FINRA's policies and 
operations with respect to its budgets, revenues, costs, financial 
reserves, use of fine monies, capital and strategic initiatives, and 
compensation of senior executives, among other information. FINRA 
maintains a dedicated web page that consolidates its annual reports in 
a readily accessible place.\45\
---------------------------------------------------------------------------

    \45\ See FINRA Financial Reports and Policies, available at 
https://www.finra.org/about/annual-reports.
---------------------------------------------------------------------------

    Third, FINRA's commitment as a not-for-profit organization to 
aligning its revenues with its costs, including by providing rebates 
when revenues exceed costs, ensures that the revenues from these 
proposed fee changes will remain in line with FINRA's reasonable 
regulatory costs. As discussed above and below, FINRA distributed 
rebates to members each year from 2000 to 2014, and FINRA will continue 
to be guided by its historical approach to rebates if its revenue in 
future years exceeds its costs by a material amount.
    Together, these mechanisms help ensure the ongoing reasonableness 
of FINRA's costs and the level of fees assessed to support those costs. 
The effectiveness of these mechanisms is demonstrated by FINRA's 
experience over the last decade, during which, as discussed above and 
below, FINRA was able to undertake expanding regulatory 
responsibilities while limiting cumulative cost growth to a rate that 
was lower than inflation and cost growth at member firms.
The Proposed Fees Are Equitable and Not Unfairly Discriminatory
    As discussed throughout this filing, this proposal is designed to 
increase the fees FINRA relies on to fund its regulatory mission in a 
manner that preserves equitable and not unfairly discriminatory fee 
allocation among FINRA members and users of FINRA services. Notably, 
through this proposal FINRA is preserving the carefully calibrated mix 
of general assessment and use-based fees to fund its regulatory mission 
that the Commission previously approved as equitably allocated among 
its large and diverse membership.
    The five fees included in this proposal--the GIA, TAF, PA, member 
registration, and qualification examination fees--were selected to meet 
the necessary funding deficit by raising fees proportionately across 
member firms with minimal distributional impact, because these five 
fees are the most broadly assessed fees that FINRA relies on to fund 
its regulatory mission. When these five fees are grouped according to 
the three key drivers of FINRA's regulatory costs--the size of the firm 
(GIA), the firm's trading activity (TAF), and the number and role of 
registered persons with the firm (PA, registration, and qualification 
examination fees)--they have contributed roughly the same total revenue 
by group for the last five years.
    The proposal is therefore designed as a proportional fee increase, 
splitting the proposed aggregate fee increase amount of $225 million 
evenly across these three cost drivers--$75 million from the GIA, $75 
million from the TAF, and $75 million collectively from the 
representative-based PA, registration, and qualification examination 
fees. The Commission previously has found aligning fees with these key 
drivers to be a reasonable basis for the equitable allocation of 
FINRA's fee assessments.\46\
---------------------------------------------------------------------------

    \46\ See Securities Exchange Act Release No. 47106 (December 30, 
2002), 68 FR 819, 821 (January 7, 2003) (Order Approving File No. 
SR-NASD-2002-99) (``The Commission is satisfied that the NASD's 
proposed GIA is reasonably tailored to apportion fees based on the 
regulatory services the NASD provides''); Securities Exchange Act 
Release No. 67242 (June 22, 2012), 77 FR 38690, 38692 (June 28, 
2012) (Order Approving File No. SR-FINRA-2012-023) (finding that 
``trading in equity markets drives a significant portion of 
[FINRA's] regulatory costs, and therefore it is equitable to recover 
some of those costs from fees generated from trading activity''); 
and Order Approving SR-FINRA-2009-057, supra note 13, 74 FR at 62618 
(``[T]he number of registered representatives is a significant 
factor that impacts FINRA's oversight responsibilities and thus is 
an equitable criterion for assessing PA fees'').

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

[[Page 66601]]

    As a result of the proposed proportional increase across the three 
key drivers of FINRA's regulatory costs, FINRA projects a dispersion 
level for the rate of increase realized by member firms to be 1.7% once 
the proposal is fully implemented. In other words, FINRA projects that 
the proposal imposes one of the narrowest distributions of fee rate 
changes across members among the alternatives considered, as measured 
by the standard deviation of the rate of fee increase across members. 
Given this limited distributional impact, FINRA believes the proposal 
will preserve the same equitable and not unfairly discriminatory fee 
allocation that has long served as the foundation for FINRA's funding 
model and has been approved by the Commission.

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.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the regulatory need for the proposed rule change, its 
potential economic impacts, including anticipated costs, benefits, and 
distributional and competitive effects, relative to the current 
baseline, and the alternatives FINRA considered in assessing how best 
to meet FINRA's regulatory objectives.
Regulatory Need
    Based on an analysis of its funding sources, anticipated costs, and 
an assessment of future market activity, FINRA has determined that it 
will require additional revenues in order to meet its regulatory 
obligations in the future. FINRA anticipates that the absence of stable 
funding at the levels proposed here may have material negative impacts 
on its regulatory program and weaken investor protections. As it 
continues to rely on and deplete its reserves, FINRA may be unable to 
maintain its current capabilities at their current standards. In the 
absence of a fee increase, eventually FINRA will not be able to hire 
and retain staff with the appropriate expertise to conduct core 
regulatory activities (including market examination and surveillance, 
enforcement, regulation and rulemaking, examinations and credentialing, 
and providing transparency for markets, member firms and registered 
persons), or make the necessary investments over time in the technology 
needed to support these activities.
Economic Baseline
    The baseline for this proposed rule includes FINRA's historical 
costs and revenues, the current schedule of fees assessed by FINRA, and 
the direct and indirect allocation of those fees across member firms, 
associated persons, third parties, and investors. The baseline also 
encompasses the scope of activities conducted by FINRA today to meet 
its mission, and FINRA's current ability to meet changing market 
activities and conditions through investment in staff, physical 
infrastructure and technology.
    As discussed previously, as a not-for-profit organization, FINRA's 
operating principle is to target reasonable cost-based funding that 
allows it to appropriately fund its regulatory mission.\47\ Between 
2010 and 2019, FINRA's costs grew by a compound annualized growth rate 
(CAGR) of 1.7%, or 16% over the entire period.\48\ Over the same 
period, reported costs increased by 42% for the industry,\49\ while 
U.S. core inflation grew by 19%.\50\
---------------------------------------------------------------------------

    \47\ In addition to the services FINRA provides in furtherance 
of its regulatory mission, FINRA also provides certain services on a 
contract basis to third parties. These contract service fees 
represent approximately 11% of FINRA's total revenues. Importantly, 
these revenues pay in full for the services rendered under the 
contracts, and FINRA's contract services are not funded with any of 
the regulatory revenue discussed in this filing.
    \48\ Based on figures drawn from FINRA's public Annual Financial 
Reports, which include FINRA subsidiaries. As noted above, supra 
note 11, FINRA Dispute Resolution was merged into FINRA Regulation 
at the end of 2015; if costs for the two remaining subsidiaries 
besides FINRA Regulation (the FINRA Investor Education Foundation 
and FINRA CAT, LLC) are excluded, FINRA's expense CAGR over the 
period would have been 1.5%.
    \49\ Based on FOCUS reporting.
    \50\ See CPI Inflation Calculator, Bureau of Labor Statistics, 
available at https://data.bls.gov/cgi-bin/cpicalc.pl.
---------------------------------------------------------------------------

    At the same time, FINRA has seen capital markets grow in size and 
complexity, and an increase in its own regulatory responsibilities. 
Substantial increases in trading volume in listed equities, options and 
OTC equities (over 75% increase since 2015) and complexity of the 
securities markets (the number of registered securities exchanges 
significantly increased since 2011, from 13 to 25) have led to a more 
complex trading environment. This, in turn, has required new approaches 
to enhance surveillance and investigations by FINRA staff. New SEC 
regulations (an estimated 15 significant new rules in the broker-dealer 
space since 2010 based on a FINRA analysis), FINRA rulemaking designed 
to support federal initiatives (e.g., crowdfunding, fixed income mark-
up disclosure), and MSRB rules that require FINRA implementation have 
all increased FINRA's regulatory responsibilities substantially.
    During this period, the SEC has increased reliance on FINRA as the 
``first line supervisor'' for broker-dealers.\51\ In response, FINRA 
continued to invest in its surveillance and examination programs. The 
SEC also created an updated oversight framework with substantially more 
inspections and reviews of FINRA, which in turn has required FINRA to 
commit significant new resources to support those inspections and 
reviews.
---------------------------------------------------------------------------

    \51\ See supra notes 6 and 7.
---------------------------------------------------------------------------

    Over the last decade, FINRA has observed changes in the number of 
registered persons and member firms. Between 2009 and 2018, the number 
of registered member firms decreased from 4,720 to 3,607 (a change of 
approximately 26.3%) while the number of registered representatives 
decreased from 633,280 to 629,847 (a change of 0.5%).\52\ Between 2009 
and 2018, approximately 97% of the decrease in registered member firms 
came from small firms. Over the same period, the percentage of 
registered persons affiliated with small member firms dropped by a much 
smaller amount, from 12% to 10%. Despite the consolidation in the 
number of member firms, aggregate supervision costs fell minimally.
---------------------------------------------------------------------------

    \52\ As FINRA notes when it publishes industry snapshots, FINRA 
regularly updates historical data series due to data revisions by 
reporting firms.
---------------------------------------------------------------------------

    There are at least two drivers for this result. First, the exiting 
firms tended to require fewer supervisory resources because they were 
generally assessed as posing lower risks to investors and markets; 
higher-risk firms typically require more oversight. Relatedly, exiting 
firms generally conducted a smaller, simpler set of activities; larger, 
more complex firms typically require more oversight. And second, the 
number of registered persons remained fairly constant as persons from 
exiting

[[Page 66602]]

firms migrated to other firms, requiring FINRA regulatory resources to 
shift accordingly.
    Despite the increased responsibilities and changes in its own 
oversight by the SEC, FINRA achieved the relatively low growth in its 
costs through a variety of mechanisms. Staffing generates the majority 
of FINRA's expenses and has been held relatively flat over the last 
decade. In that period, total compensation costs for FINRA employees 
engaged in carrying out its core business operations rose by 15% on a 
cumulative basis, compared to 24% for the average U.S. employee.\53\ 
Further, FINRA has been successful in reducing non-compensation related 
expenses in recent years, with a 12% cumulative reduction across 
operating expenses (excluding technology) over the last 5 years, and a 
25% decrease in non-recurring expenses.\54\ FINRA's expenses have grown 
less rapidly than those of member firms. In addition, FINRA's 
proportional share of aggregate regulatory fees reported by member 
firms in total has fallen meaningfully.\55\ Charts 2 and 3, attached in 
Exhibit 3, present these findings.\56\
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    \53\ Average U.S. employee wage growth represents non-farm 
employee wage growth supplied by the Economic Policy Institute. 
FINRA employee compensation costs includes all FINRA staff exclusive 
of Technology staff.
    \54\ Technology costs are considered separately because they are 
often driven by special projects or capital expenditures, including 
initiatives designed to help control staffing costs in FINRA's core 
regulatory programs. FINRA notes that technology costs have risen at 
a greater rate over the period. Non-recurring expenses include 
capital initiatives and extraordinary initiatives. Technology costs, 
however, have risen by 22% cumulatively over the period--which is 
largely due to cloud hosting costs following FINRA's migration to 
the cloud, an increase in Technology maintenance support costs for 
newly developed applications and platforms, and expansion of FINRA's 
cybersecurity program. Cloud hosting costs are largely offset 
through the avoidance of large, periodic capital expenditures that 
would have been necessary without the migration.
    \55\ The number and amount of regulatory fees paid by FINRA 
member firms to other regulators depend upon other registrations and 
financial services provided.
    \56\ As with Chart 1, all of the charts discussed below are 
attached in Exhibit 3.
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    Over the same period between 2010 and 2019, FINRA's regulatory and 
use-based revenues remained effectively flat, influenced by few fee 
increases and a relatively steady number of registered persons. FINRA's 
total revenues grew at a compound annual growth rate of 1.1% per year, 
or 10% between 2010 and 2019.\57\ Between 2010 and 2013, FINRA 
increased regulatory fees by an aggregate amount of less than $22 
million.\58\ The period between 2013 and 2020 represents one of the 
longest windows in which FINRA has not raised regulatory fees. As a 
comparison, as illustrated in Chart 4, member firm revenues grew at a 
compound annual growth rate of 4.8% per year, or 52% between 2010 and 
2019.
---------------------------------------------------------------------------

    \57\ Based on figures drawn from FINRA's public Annual Financial 
Reports, which include FINRA subsidiaries. As noted above, supra 
note 11, FINRA Dispute Resolution was merged into FINRA Regulation 
at the end of 2015; if revenues for the two remaining subsidiaries 
besides FINRA Regulation (the FINRA Investor Education Foundation 
and FINRA CAT, LLC) are excluded, FINRA's revenue CAGR over the 
period would have been 0.8%.
    \58\ Based on estimates made at the time the fee change 
occurred, and actual results incurred in that year or subsequent 
years may vary.
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    As a not-for-profit regulator, FINRA has also maintained a policy 
of returning revenues in excess of its operating costs through rebates. 
Over the same review period that is the focus of this analysis, 2010 
through 2019, FINRA rebated regulatory fees to member firms five 
consecutive years between 2010 and 2014. The aggregate amount rebated 
was approximately $57 million.
    Chart 5 provides a view of actual revenues and expenses between 
2010 through 2019 and anticipated revenue and expenses for 2020-2024 if 
no changes to our fee structure are made.\59\ Chart 5 also includes 
historical and projected ``excess reserves,'' meaning reserves above 
what the FINRA Board of Governors has determined to be an appropriate 
minimum level of at least one year of operating expenditures. As 
discussed above, FINRA has strategically relied on its reserves to help 
fund budget deficits in the past. From 2010 through 2019, FINRA used 
over $600 million of its reserves to fund operating losses, which on 
average amounted to 6.6% of FINRA's operating budget per year. While 
FINRA will continue to strategically draw on its reserves to support 
the phased implementation of this proposal, Chart 5 illustrates the 
projection that, without taking corrective action, FINRA will deplete 
its excess reserves in the coming years.
---------------------------------------------------------------------------

    \59\ The revenues and expenses presented in Chart 5--both 
historic and projected--do not include subsidiaries other than FINRA 
Regulation and FINRA Dispute Resolution, which was merged into FINRA 
Regulation at the end of 2015.
---------------------------------------------------------------------------

    FINRA anticipates that revenues will remain at current levels 
without any changes in the fee structure. At the same time, FINRA 
assumes that future expenses will continue to grow at a reasonable pace 
of approximately 4% per year based on annual wage inflation and future 
capital initiatives.\60\ In this scenario, revenues would increasingly 
fall behind anticipated costs. FINRA's reserves will continue to be 
used to cover the shortfall in the near-term, but the reserves will 
reach their minimum prudent level of one year of operating costs within 
three to four years based on current projections if no corrective 
action is taken.
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    \60\ This estimate is based on the following assumptions for 
FINRA and excludes the independent budgeting of all of FINRA's 
active subsidiaries other than FINRA Regulation--specifically, FINRA 
CAT, LLC and the FINRA Investor Education Foundation: (i) Wage 
inflation at an annual rate between 3% and 4%, consistent with the 
financial industry over the last five years; (ii) technology expense 
growth continues at recent levels due to: Capital investments 
seeking long-term efficiency gains for both FINRA and the industry, 
rising cloud hosting costs, maintaining technology labor 
competitiveness, and ongoing disaster recovery and cybersecurity 
requirements; and (iii) no material drop in regulatory efforts and 
associated costs for FINRA's regulatory programs. Taken together, 
these assumptions lead to an estimated growth rate consistent with 
the prior decade of expense growth realized by the industry.
---------------------------------------------------------------------------

    FINRA notes that the anticipated retirement of its Order Audit 
Trail System (``OATS''), which is expected ultimately to be replaced by 
the Consolidated Audit Trail (``CAT''), does not result in an overall 
reduction in future expenses, but rather results in higher projected 
expenses for FINRA. Currently, FINRA incurs approximately $9 million 
per year in costs associated with its OATS program, including the costs 
to maintain the OATS system, host OATS data, and regulate compliance 
with OATS reporting rules. While FINRA's costs related to CAT 
implementation remain uncertain in several respects, FINRA reasonably 
projects such costs will exceed its current yearly OATS costs, due in 
large part to its need to develop a CAT reporting compliance program 
and integrate CAT data into its regulatory systems.
    Specifically, because CAT reporting requirements are new, different 
from, and more granular than OATS reporting requirements, FINRA has 
made and will continue to make significant investments in its enhanced 
regulatory program to oversee CAT reporting compliance, including the 
technology (e.g., surveillance patterns) and staff required to monitor 
for and enforce timely and accurate CAT data reporting. In contrast, 
OATS rules, infrastructure, and members' experience with compliance is 
mature, and only equities are reported to OATS, while equities and 
options are reported to CAT. These differences explain why FINRA's 
costs to regulate OATS reporting compliance are substantially less.
    In addition to costs associated with its CAT reporting compliance 
program, FINRA must account for significant costs to integrate CAT data 
into its

[[Page 66603]]

regulatory systems. These include one-time costs to migrate regulatory 
systems into an environment that can interact with CAT data, with the 
potential for greater migration costs as a result of any future 
regulatory changes, such as under the Commission's recently proposed 
amendments to the CAT NMS Plan.\61\ FINRA also is making significant 
investments in enhanced surveillance technology to account for and use 
CAT data in FINRA's oversight of various market integrity rules, as CAT 
includes expanded audit trail data for options and equities. 
Importantly, these costs are separate from and in addition to FINRA's 
obligation to contribute funding for the development, maintenance, and 
operation of the CAT system incurred by the CAT Plan Processor.\62\
---------------------------------------------------------------------------

    \61\ See Securities Exchange Act Release No. 89632 (August 21, 
2020) (Proposed Amendments to the National Market System Plan 
Governing the Consolidated Audit Trail to Enhance Data Security).
    \62\ Upon selection by the CAT NMS Plan Participants, FINRA 
created FINRA CAT, LLC as a distinct corporate subsidiary to serve 
as the CAT Plan Processor. In its capacity as the CAT Plan 
Processor, FINRA CAT, LLC is responsible for the development and 
operation of the CAT in accordance with the terms of the CAT NMS 
Plan, pursuant to an agreement between the CAT NMS Plan Participants 
and FINRA CAT, LLC. FINRA CAT, LLC is organized as a not-for-profit 
that operates on a cost basis and is not a source of revenue for 
FINRA. Pursuant to intercompany agreements, FINRA provides certain 
staff and resources to FINRA CAT, LLC so that FINRA CAT, LLC can 
carry out its obligations as the CAT Plan Processor. See Securities 
Exchange Act Release No. 85764 (May 2, 2019), 84 FR 20173 (May 8, 
2019) (Notice of Filing and Immediate Effectiveness of SR-FINRA-
2019-015). FINRA provides these staff and resources to FINRA CAT, 
LLC at cost, with FINRA CAT, LLC's portion of the cost of shared 
resources tracked and allocated completely back to FINRA CAT, LLC. 
As noted in FINRA's 2020 Annual Budget Summary and above, supra note 
60, the FINRA CAT, LLC is accounted for separately from FINRA and 
the costs and revenues of FINRA CAT, LLC are not included in FINRA's 
budget.
    Separately, FINRA and the other CAT NMS Plan Participants are 
collectively funding the costs to create, implement, and maintain 
the CAT in accordance with the CAT NMS Plan, and FINRA has relied on 
its balance sheet to pay its share of those costs to date. However, 
because the allocation of such CAT NMS Plan costs is the subject of 
ongoing discussion, FINRA has not included those CAT NMS Plan 
support costs in its budget projections. As a result, if the CAT NMS 
Plan Participants file a separate proposal to recover some portion 
of CAT NMS Plan costs through a direct CAT fee assessment on 
industry members, the effectiveness of such a filing would not 
reduce the amount that FINRA projects it needs to raise with this 
proposal to correct its structural deficit.
---------------------------------------------------------------------------

    As a result, while FINRA projects that OATS costs will be reduced 
and ultimately eliminated over the next several years, those cost 
reductions will be more than offset by FINRA's costs associated with 
ongoing efforts to implement and maintain a CAT reporting compliance 
program and integrate CAT data. In addition, although FINRA must incur 
costs to support both programs over the next several years until OATS 
retirement, FINRA believes it can manage these program budgets 
consistent with its assumption of approximately 4% overall future 
expense growth per year over the period.\63\
---------------------------------------------------------------------------

    \63\ To the extent any other FINRA systems are subject to 
retirement, FINRA will separately consider the projected budget 
impact of retirement for those systems.
---------------------------------------------------------------------------

    As described above, FINRA funds its regulatory and other related 
activities through a combination of regulatory and use-based fees. In 
aggregate, regulatory fees represent approximately 63% of these 
revenues and use-based fees represent approximately 37% of revenues. 
The specific fees that would be increased under this proposal 
represented 75% of these revenues in 2019.
    All regulatory and use-based fees identified here are assessed 
directly to member firms, but FINRA understands that many firms shift 
at least some of the fees to others. For instance, it is regular 
practice among some clearing and trading firms to ``pass through'' the 
TAF to the underlying firm executing the trade. Further, FINRA 
understands that the executing firms commonly pass the TAF directly on 
to their customers. Typically, TAF fees are reflected on the 
confirmation statement received by customers. FINRA researched a sample 
of member firms, collectively representing 25% of total TAF revenues, 
and found confirmation disclosures for roughly two thirds of the sample 
reviewed that suggested that TAF is being passed through at either the 
clearing or executing firm level.
    Similarly, FINRA understands that many firms regularly pass through 
to registered persons assessments such as the PA, registration fees, 
and examination fees. Registered persons also may seek to pass through 
these same fees to their customers indirectly as a part of their 
charges. FINRA understands that there may be differences in this 
practice across firms depending on each firms' business model. 
Competitive markets for the provision of brokerage and related 
financial intermediation services can limit the extent to which these 
fees can be passed through.
    Regulatory fees are calibrated so that larger, more active and more 
dispersed member firms have higher fees, reflecting regulatory resource 
allocation. Use-based fees are designed to capture some of the costs 
associated with these core regulatory activities in addition to the 
direct and indirect costs of the service. For example, FINRA believes 
it is appropriate that registration and examination fees help defray 
the costs of regulating registered persons because member firms 
employing more persons require additional regulatory effort on FINRA's 
part. This approach is consistent with a structure where the fees paid 
are increasing with the size of the firm's revenues (GIA) and the 
amount of trading activity it conducts (TAF). In this manner, 
regulatory and use-based fees are designed in a cohesive way such that 
they should be evaluated in aggregate and not on a fee-by-fee or 
service-by-service basis.
    The fee structure is also designed, purposefully, to account for 
diversity in firm size. Compliance and regulatory oversight naturally 
represent a larger relative cost to small firms. Because FINRA wants to 
prevent regulatory costs from creating a barrier to entry for smaller 
well-run, compliant firms, there is a level of cross-subsidization by 
larger firms of regulatory costs embedded in the fee structure 
currently in place.
    This practice is appropriate for at least two significant reasons. 
First, it is important that retail investors have access to financial 
services provided in a way that serves them best. Some investors may 
prefer to engage registered persons associated with smaller firms. 
Second, larger firms obtain more benefits from well-regulated markets, 
relative to firm size. Under well-regulated markets, investors are more 
willing to trust financial intermediaries because they are confident 
that they are treated fairly in their access to securities markets and 
products. Greater participation in the financial markets by investors 
allow firms to grow larger and become more diversified, leading to cost 
savings and reduced risk through economies of scale and scope. The 
concentration in both retail and institutional investor activity at 
larger firms suggests that larger firms reap substantial benefits from 
strong regulation and should therefore contribute a substantial portion 
of the fee revenue to support this regulation. At the same time, the 
impact of misconduct at large firms impairs investor confidence more 
broadly than similar misconduct at smaller firms.
    Chart 6 describes the estimated distribution of revenues from the 
fees covered in this proposal and the associated allocation of 
regulatory efforts by FINRA by the size of the firm, as defined in the 
FINRA By-Laws. Small member firms (firms with 150 or fewer registered 
reps) account for 90% of the firms in the industry, 10% of total 
registered persons, 50% of FINRA's total firm exam time, and 19% of 
FINRA's

[[Page 66604]]

revenues. Large firms, conversely, represent less than 5% of firms, 
over 80% of registered persons, 37% of FINRA's firm exam effort and 
approximately two thirds of regulatory revenues. The remaining portions 
of firm exam time and revenues are attributable to medium firms.
    Chart 7 describes the estimated distribution of revenues from the 
fees covered in this proposal and the associated allocation of 
regulatory efforts by FINRA by the firm's business model. Here, 
business model captures the primary type of services provided the firm. 
The categories of capital markets and retail member firms account for 
80% of the firms in the industry, 72% of total registered persons, 64% 
of FINRA's total examination time, and 36% of FINRA's regulatory 
revenues. The category of diversified firms, including most of the 
largest firms, accounts for approximately 5% of firms in the industry, 
almost 24% of total registered persons, over 27% of FINRA's total 
examination time, and 45% of FINRA's revenues.
Economic Impact
    FINRA's fee proposal is intended to ensure that FINRA can continue 
to meet its mission of investor protection and facilitating well-
functioning markets. This proposal preserves FINRA's ability to be a 
robust and effective regulator, protecting investors from manipulation, 
exploitation and other harm. Adequate funding allows FINRA to develop 
regulatory approaches that are more effective and efficient, and to 
revise its regulations through, among other ways, its robust 
retrospective reviews. Through appropriate funding, FINRA can continue 
to invest in technology, data, and analytics in support of its mission. 
FINRA will be better situated to adapt to changing markets, market 
behaviors, and any new responsibilities it may accrue. A stable and 
reliable funding program also permits member firms to better anticipate 
and plan for FINRA's fees. These benefits accrue to current and 
prospective investors, firms, issuers, and others participating in 
financial intermediation.
    FINRA notes that academic literature has provided evidence of the 
linkage between strong regulation in securities markets and improved 
outcomes, including more trading, lower transaction costs, and greater 
investor participation in the markets.\64\ Bruggeman, et al. [2018] 
study the impact of differences in State regulation on OTC stocks. They 
find that firms issuing in the OTC market subject to stricter 
regulation are more liquid and are subject to lower ``crash risk.'' 
Silvers [2016] studies the impact of SEC enforcement action against 
foreign cross-listed issuers. He shows evidence that other cross-listed 
issuers (not cited by the SEC) experienced positive returns, suggesting 
that increased regulatory attention increases valuation. Finally, 
Christensen et al. [2019] study the impact of the introduction of the 
European Union's Market Abuse Directive and MiFID. The study concluded 
that these initiatives designed to enhance investor protections have 
led to higher household ownership of equities.
---------------------------------------------------------------------------

    \64\ See, e.g., U. Bruggeman, A. Kaul, C. Leuz, C. and I. 
Werner, The Twilight Zone: OTC Regulatory Regimes and Market 
Quality, The Review of Financial Studies, 31, no. 3 (2018), 898-942; 
Roger Silvers, The Valuation Impact of SEC Enforcement Actions on 
Nontarget Foreign Firms, Journal of Accounting Research, 54, no. 1 
(2016), 187-234; and H. Christensen, M. Maffet, and L. Vollon, 
Securities Regulation, Household Equity Ownership, and Trust in the 
Stock Market, Review of Accounting Studies, 24, no. 3 (2019), 824-
859.
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    The proposal would implement fee changes that would be assessed 
directly to member firms. The fee increases are designed to maintain 
the current distribution of fees allocated across member firms. FINRA 
based the proposed fee distribution across member firms on the 
assumption that the activities of the firms remained constant. Under 
this assumption, approximately 74% of the fee increase would be borne 
by large firms, 13% by medium firms, 12% by small firms (excluding 
firms of 10 or fewer registered persons), and the remaining 1% by micro 
firms (firms of 10 or fewer registered persons).
    Chart 8 shows the aggregate anticipated increase in fees for the 
average firm across the period 2020-2024 and the breakdown across the 
fee categories covered by the proposed rule. Charts 9 through 11 
describe the year-over-year fee increase for 2022, 2023 and 2024 
respectively by fee type and firm size category (note that there is no 
proposed fee increase in 2020 or 2021). These charts demonstrate that 
the increase in fees remains consistently allocated across similarly 
sized firms in each calendar year, with the bulk of the fee increase 
occurring in the later years of the proposal. Taken together, these 
charts demonstrate that the fee increases in the GIA, TAF, PA, 
registration, and qualification examination fees are designed to 
allocate the growth in fees in an equitable manner both overall and 
within each calendar year of their phase-in, all else held equal, by 
maintaining a consistent fee growth impact across firm group sizes.
    Similarly, Chart 12 shows the total fee increase and breakdown 
across fee category by member firm business model, holding constant the 
activities of the firm for the aggregate increase over the period 2020-
2024. Approximately 76% of the fee increase is anticipated to be borne 
by diversified and retail firms, with the remaining 24% distributed 
relatively evenly across trading, capital markets and clearing firms. 
As with our analysis of the proposed fee increases by firm size, Charts 
13 through 15 show the annual fee increases by fee category and 
business model for the years 2022, 2023 and 2024 respectively. Here, as 
well, the charts demonstrate that the anticipated fee increases by 
category are designed such that the increase in fees remains similar 
among firms with similar business models year-by-year, all else held 
equal.
    While material, the FINRA fees subject to this proposal represent a 
very small dollar amount relative to industry activity. Holding 
industry revenues at 2019 levels, FINRA's regulatory, registration, and 
qualification examination fees in that year represented approximately 
0.16% (16 basis points) of industry revenues as reported in FOCUS 
reports. When the proposed fee changes are fully adopted, FINRA 
estimates that these fees would represent approximately 0.22% (22 basis 
points) of 2019 industry revenues, assuming no FOCUS revenue growth for 
member firms over that time period. Further, the amount of the fee 
increase borne by member firms depends on the extent to which they can 
and do shift the burden to their associated persons and customers.
    To better understand the impact of the proposed fee increases 
across member firms within each firm size category, FINRA analyzed the 
expected distribution of fee increases for all existing firms under the 
proposed fee structure, based on the expected rate of dispersion. 
Dispersion is a way to compare the anticipated growth rate in fees 
across a range of firms. Lower dispersion is associated with a higher 
degree of consistency in terms of the impact of the proposed fee 
increases, and can be interpreted as more firms in a given group 
experiencing similar rates of growth. By seeking to limit dispersion, 
the proposal is effectively limiting the potential for inequitable 
treatment across member firms. This approach reduces the potential for 
the proposed fee increase to create unintended impacts on the provision 
of financial services by member firms and the business models adopted 
by them.

[[Page 66605]]

    FINRA's analysis examines the level of dispersion based on the CAGR 
of the expected fee increase. CAGR is measured in this analysis 
relative to the fee categories impacted by this proposal. CAGR provides 
a standard metric to compare the relative impact of the fee increases 
within and across subgroups. Because the number of registered persons, 
trading activity and resulting aggregate fee dollar amounts vary 
significantly across firms and firm sizes, benchmarking to CAGR permits 
FINRA to identify a fee schedule that most closely compares the 
magnitude of the distribution across firms.
    Charts 16 through 19 provide a view on the distribution of fee 
increases within each member firm size group. These charts also report 
the median increase in regulatory fees, along with registration and 
qualification examination fees, that are the subject of this proposal 
over the full period 2020 through 2024 by firm size. Within the charts, 
each of the four central bars represents one standard deviation from 
the median, so that the two most central dark blue bars together would 
theoretically represent approximately 67% of all firms evaluated (plus 
or minus one standard deviation) and approximately 95% of firms 
evaluated should be represented under the four most central dark blue 
and mid-blue bars (plus or minus two standard deviations) presented in 
the charts.
    While it is not feasible to eliminate the possibility that member 
firms will experience a rate of fee growth that is outside of the two 
standard deviation range, FINRA sought to limit the number of firms 
falling into this category when structuring this fee increase. These 
charts demonstrate that the proposal significantly limits the number of 
firms that fall beyond two standard deviations from the median 
increase. In particular, the proposal limits those firms that would be 
expected to experience a materially higher fee increase than the median 
(as defined by two standard deviations). For the entire population of 
member firms, FINRA estimates that no firm would experience a fee 
increase greater than two standard deviations from the median increase. 
In other words, no firm would be expected to bear an unduly high fee 
increase relative to the entire population of all firms (as defined by 
greater than two standard deviations).\65\
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    \65\ Only 13 firms would be anticipated to experience an 
increase of more than two standard deviations relative to their peer 
group by size. The bulk of these firms have ten or fewer registered 
persons and are compared to other firms within the micro firm size 
category, which is the size grouping with the widest rate of 
dispersion given more significant variability in micro firm business 
models. The highest expected CAGR resulting from the fee increase 
for these firms would be 8.4%.
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    Based on this analysis, FINRA concludes the following:
     For micro firms, the median firm would anticipate an 
annual increase in fees of 3.9%, translating to a dollar increase of 
$642. Approximately two-thirds of these firms would experience an 
annual increase between 2.4% and 5.5% between 2020 and 2024. Holding 
revenues constant at 2019 levels, regulatory fees would increase from 
0.21% to 0.27% of FOCUS reported revenues on average. This group 
includes 1,671 firms and represents 47.7% of all FINRA members.
     For other small firms, the median firm would anticipate an 
annual increase in fees of 6.2%, translating to a dollar increase of 
$6,200. More than 80% of these firms would experience an annual 
increase in fees between 5.3% and 7.1% between 2020 and 2024. Holding 
revenues constant at 2019 levels, regulatory fees would increase from 
0.22% to 0.30% of FOCUS reported revenues on average. This group 
includes 1,470 firms and represents 42.0% of all FINRA members.
     For medium firms, the median firm would anticipate a 6.6% 
annual increase in fees, translating to a dollar increase of $73,000. 
More than 80% of these firms would experience an annual increase 
between 5.6% and 7.6% between 2020 and 2024. Holding revenues constant 
at 2019 levels, regulatory fees would increase from 0.18% to 0.25% of 
FOCUS reported revenues on average. This group includes 193 firms and 
represents 5.5% of all FINRA members.
     For large firms, the median firm would anticipate a 6.4% 
annual increase in fees, translating to a dollar increase of $293,000. 
Approximately 90% of these firms would experience an annual increase 
between 5.5% and 7.4% between 2020 and 2024. Holding revenues constant 
at 2019 levels, regulatory fees would increase from 0.15% to 0.20% of 
FOCUS reported revenues on average. This group includes 167 firms and 
represents 4.8% of all FINRA members.
    To better understand the anticipated year-over-year impacts 
associated with the proposal, Charts 20 through 22 describe the 
dispersion in the annual growth rate for each year in which fees will 
be raised, segregated by firm size category. These charts demonstrate 
that dispersion remains fairly constant across calendar years covered 
by the proposal. Although there is some variation across the firm size 
groupings, a simple average of the four groupings leads to an estimate 
that: 78% of member firms would be expected to experience a fee 
increase within one standard deviation from the median increase in 
2022, 76% of member firms would be expected to experience a fee 
increase within one standard deviation of the median fee increase in 
2023, and 73% of member firms would be expected to experience a fee 
increase within one standard deviation of the median fee increase in 
2024. FINRA believes that these charts demonstrate a high rate of 
consistency around the median expected fee increase and illustrate how 
the proposal will preserve the existing equitable and fair distribution 
of fees across FINRA's member firms.
    FINRA notes that Charts 16 through 22 illustrate a wider relative 
range of dispersion amongst micro firms. Chart 16 also denotes a lower 
expected median fee increase for micro firms relative to other, larger 
firm types. This is due to the minimum GIA fee being held constant, 
rather than increasing along with the general GIA tiered fee schedule. 
Because more than half of micro firms were only subject to the minimum 
GIA fee in 2019, the median fee increase for micro firms will be lower 
relative to other firm sizes, and the range of outcomes within this 
grouping contains greater variance as select micro firms will be 
subject to the increase in GIA while others will not. FINRA believes 
that the resulting fee structure remains fair and equitable; moreover, 
maintaining the minimum GIA at current levels fosters investor choice 
and limits the impact of fees on the dimension of competition, as 
discussed above.
    As part of its analysis, FINRA also considered the broad potential 
impacts on competition under this proposal. The analysis considers the 
impact across all FINRA member firms, across FINRA member firms based 
on size or business model, and between FINRA member firms and other 
financial service providers.
    FINRA does not anticipate that the proposal will materially impact 
competition among member firms. The proposal is designed to maintain 
the current funding model and the relative allocation of fees across 
its core regulatory and use-based categories. In other words, each of 
the affected fees would increase in a commensurate manner relative to 
the fees charged under the existing framework; no individual fee would 
be raised such that it may create unintended hardships for

[[Page 66606]]

some firms and benefit others. Implementation of the proposal would not 
require significant system or process changes by firms.
    Similarly, FINRA does not anticipate that the proposal will 
materially impact competition across member firms of different sizes or 
business models. The analysis of distributions within firm size does 
indicate that firms may anticipate some differences in fee increases 
based on the services they provide and the way they provide those 
services. But, as designed, the proposal maintains the relative 
allocation of fees across firm size and business model, meaning the 
proposal is designed to preserve a consistent rate of growth in fee 
increases across firm size and business model. As noted above, this 
approach is intended to limit the unintended impact that any specific 
fee change may create hardships for some firms and benefit others. 
Further, the approach maintains the current approach for cross-
subsidization of regulatory fees between member firms of different size 
and between regulatory and use-based fees.
    FINRA can identify two potential impacts of this proposal on the 
competition between its member firms and other providers of financial 
services. Although FINRA anticipates that these increases are 
calibrated to limit their impact on individual member firms, at the 
margin some member firms may find these increases material to their 
business. Further, where firms may have the ability to provide similar 
services, or a subset of services, without registration with FINRA, 
increased costs may increase the likelihood that these firms drop their 
FINRA registration in favor of the alternative business model. Based on 
the information available to it today, FINRA does not have an accurate 
measure of the number of member firms that may choose to deregister as 
a result of this proposal.\66\
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    \66\ FINRA notes that because of the time lapse between 
proposal, adoption and implementation of fee increases, combined 
with changing business environments over time, it is difficult to 
reliably estimate the number of firms that might have exited 
historically because of previous fee increases.
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    The proposal may have an additional impact on competition in this 
dimension. As discussed above, strong and effective supervision and 
regulation of securities markets has been shown to increase investor 
confidence in the fairness of the market. This has been measured by an 
increase in household participation in the securities markets, more 
available liquidity, and higher securities valuations. Given the 
presence of close substitutes to broker-dealers for retail clients--
e.g., investment advisory services, issuers selling directly to the 
public, or certain market-linked insurance products--it may be 
reasonable to expect that effective supervision by FINRA may create a 
positive externality to those competitors. That is, increased 
confidence by retail investors due to FINRA's activities may increase 
business opportunities, lower transactional costs, or otherwise benefit 
non-FINRA member competitors, including instances where investors do 
not recognize these competitors are not supervised by FINRA.
Alternatives Considered
    In developing this proposal, FINRA considered several options. 
First, FINRA considered making the fee changes effective immediately 
and not deferring the initial implementation to 2022. FINRA rejected 
this alternative because it believed it would be important to provide 
member firms adequate time to plan for the proposed fee increase while 
implementing other significant regulatory changes, including Regulation 
BI. Further, FINRA is cognizant that there is significant uncertainty 
in markets and the general economy during the global pandemic related 
to the coronavirus disease (COVID-19). Thus, increasing fees at this 
time may impose a greater burden.
    Similarly, FINRA considered waiting to submit this proposed rule 
change until closer to when the proposed fee increases are scheduled to 
take effect in 2022, or pursuing separate filings for each year of the 
proposed fee increases between 2022 and 2024. Based on feedback from 
members of FINRA's advisory committees and other industry consultations 
that additional time and clarity would permit member firms to better 
plan for the proposed package of fee increases over multiple budget 
cycles, FINRA determined to move forward now with its current 
projections. As noted above, FINRA will continue to evaluate its 
financial condition during this period and make its financial 
information transparent to the public through its regular published 
reports. If FINRA's structural financial deficit is materially reduced 
during this period, or if key assumptions change, FINRA would submit a 
new filing to further defer the proposed fee increases or consider 
other modifications as appropriate.
    FINRA also considered delaying the implementation of the fee 
increase beyond 2022. As noted above, FINRA is cognizant of the current 
uncertainty in markets. But the same market conditions that may create 
challenges for member firms also impact FINRA. Market volatility has 
negatively affected FINRA's reserves portfolio, similar to many 
investors. This limits FINRA's flexibility in relying on its reserves 
to cover funding gaps and indicates the need for stable funding as soon 
as practicable. Further, FINRA notes that investor protections are of 
vital importance, particularly in times of market turmoil where FINRA 
has seen an increase in customer complaints, regulatory actions against 
fraud, and increased resources for surveillance.\67\ Impairing FINRA's 
ability to meet its mandate at this time may have material negative 
implications for investors and the financial markets. Taking these 
concerns into account, FINRA believes that the most prudent course of 
action is to delay implementation until 2022, but no further.
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    \67\ In the first quarter of 2020, FINRA saw an increase in 
alerts generated through its market surveillance of over 250% 
compared to the same quarter in 2019.
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    Finally, FINRA considered altering the mix of fees as part of this 
proposal. Some examples of approaches considered included placing 
greater weight on fees associated with registered persons, placing 
greater weight on trading-related fees, and reducing the level of 
cross-subsidization between large and small member firms. In each of 
these scenarios, the total amount raised in the proposal would have 
remained constant, but how the increases would be distributed across 
member firms would differ. Each scenario had associated with it a shift 
in the burdens based on firm size or business model. FINRA believes 
that these alternatives did not yield a more equitable fee mix. As a 
result, FINRA rejected these alternative formulations because the 
proposed approach maintains the current equitable structure, provides 
member firms with greater consistency and predictability in expected 
fees and the potential for complex impacts on competition inherent in 
the alternatives. FINRA believes that an overall proportional fee 
increase that maintains the current distribution of fees imposes the 
least aggregate impact on market participants and on the competition 
between them.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)

[[Page 66607]]

of the Act \68\ and paragraph (f)(2) of Rule 19b-4 thereunder.\69\ At 
any time within 60 days of the filing of the proposed rule change, the 
Commission summarily may temporarily suspend such rule change 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. If the Commission takes such 
action, the Commission shall institute proceedings to determine whether 
the proposed rule should be approved or disapproved.
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    \68\ 15 U.S.C. 78s(b)(3)(A).
    \69\ 17 CFR 240.19b-4(f)(2).
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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-2020-032 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2020-032. 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 website (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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2020-032 and should be submitted 
on or before November 10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\70\
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    \70\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23141 Filed 10-19-20; 8:45 am]
BILLING CODE 8011-01-P


