[Federal Register Volume 59, Number 240 (Thursday, December 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30853]


[[Page Unknown]]

[Federal Register: December 15, 1994]


=======================================================================
-----------------------------------------------------------------------
[Release No. 34-35074; File No. SR-NASD-94-58]

 

Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Relating to Gross Income Assessments and Other 
Fees for Member Firms

December 9, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November 
30, 1994, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') 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 the NASD.\1\ The NASD has designated this proposal as one 
establishing or changing a fee under Section 19(b)(3)(A)(ii) of the 
Act, which renders the rule effective upon the Commission's receipt of 
this filing. The NASD is, however, requesting that the fee be 
implemented on January 1, 1995. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\The NASD originally submitted the proposed rule change on 
October 27, 1994. On November 30, 1994, the NASD filed Amendment No. 
1 to its filing requesting that two sentences be added to this 
Notice. This notice reflects the amendment.
---------------------------------------------------------------------------

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

    The NASD is proposing a rule change to amend Schedule A, Sections 
1, 2(a) and 5 to the By-Laws, to eliminate the basic membership fee, 
revise the definition of gross revenue for assessment purposes, adjust 
the fees assessed for branch office registration and oversight, and 
revise and adjust the calculation of fees assessed on gross revenue. 
Proposed new language is in italics; proposed deletions are in 
brackets.
Schedule A
    Assessments and fees pursuant to the provisions of Article VI of 
the By-Laws of the Corporation, shall be determined on the following 
basis.
Sec. 1. Assessments
    Each member shall pay an annual assessment composed of [the 
following]:

[(a) A basic membership fee of $500.00.]
[(b)] (a) An amount equal to the greater of [$350.00] $850.00 or the 
total of:
    (i) [0.21%] 0.125% of annual gross income from state and municipal 
securities transactions.
    (ii) [0.25%] 0.125% of annual gross income from other over-the-
counter securities transactions, [and]
    (iii) [with respect to members whose books, records, and financial 
operations regarding transactions in U.S. Government securities are 
examined by the NASD, 0.25%] 0.125% of annual gross income from U.S. 
Government securities transactions, and
    (iv) with respect to members whose books, records and financial 
operations are examined by the NASD, 0.125% of annual gross income from 
securities transactions executed on an exchange.

Each member is to report annual gross income as defined in Section 5 of 
this Schedule, for either the preceding calendar year or the 
[membership] member's fiscal year ending the preceding calendar year. 
The 12-month reporting period must be in accordance with the 
[membership] member's previous written election. New members will be 
given an opportunity to make this election after they become members. 
Members wishing to change their reporting year must advise the 
Association, in writing, of the change in dates and provide a reason 
for the change (i.e., merger or other organizational change and/or 
change in tax or fiscal year). If the change is from a fiscal year to 
the calendar year or to a new fiscal year ending at a later date, the 
member is to provide two reports of gross income covering the 12 
consecutive months of both the new and old years. If such case, the 
assessment in the year of change will be the greater amount determined 
from the two reports. If the change is from a calendar year or a fiscal 
year to a new fiscal year ending at an earlier date, the member is to 
report gross income for the 12 consecutive months to the end of its new 
fiscal year.
[(c)] (b) An amount equal to $10.00 for each principal and each 
representative in the member's organization who is registered with the 
Association as of December 31st of the current fiscal year of the 
Association, or in the case of a new applicant for membership, for each 
principal and representative who is registered when the applicant's 
membership first becomes effective.
[(d) During calendar year January 1, 1994 through December 31, 1994, 
each member shall receive a credit of 62% against the amount of its 
annual assessment on gross income stated in paragraph (b) above; 
provided, however, that the minimum payment shall be $350.00]

    (c) Members shall receive a credit against the annual assessment on 
gross income stated in paragraph (a) above as follows:

(i) Portion of assessment >$5,000--25%
(ii) Portion of assessment >$25,000--5%
(iii) Portion of assessment >$50,000--5%
(iv) Portion of assessment >$100,000--5% additional
Sec. 2. Fees
    (a) Each member shall be assessed a fee of [$50.00] $75.00 for the 
registration of each branch office, as defined in the By-Laws. Each 
member shall be assessed an annual fee for each branch office in an 
amount equal to the lesser of (1) [$50.00] $75.00 per registered 
branch, or (2) the product of [$50.00] $75.00 and the number of 
registered representatives and registered principals associated with 
the member at the end of the Association's fiscal year.
* * * * *
Sec. 5. [Gross Income From Over the Counter Transactions in Securities]

Gross Revenue for Assessment Purposes

    [Gross income from over-the-counter transactions in securities is 
defined for assessment purposes as the gross dollar amount of profits, 
commissions, concessions, fees, discounts, allowances and other income 
subject to deductions and exclusions listed below but without any 
deductions for salaries, wages or other operating and overhead 
expenses.]
    [The amount to be reported as gross income includes but is not 
limited to:
    Amounts realized from principal and agency transactions; from over-
the-counter transactions in listed securities; from participation[s] in 
distributions as underwriters or as members of selling groups; from 
private placement fees; from proportionate interests in joint trading 
accounts; from transactions cleared through other firms acting as 
clearing agents; from transactions in municipal securities; from 
transactions in U.S. Government securities; from transactions in 
warrants, rights, options, bonds and stocks; and from sales of shares 
of investment companies, including contractual plans, real estate 
investment trusts and real estate syndicates; from transactions in 
interests in oil, gas and mineral rights; from all other over the 
counter transactions of securities. Include fees received in tender 
offers, fees for acting as financial advisor in a plan of merger, fees 
for acting as manager in an exchange offer, underwriting management 
fees.]
    [Generally, U.S. Government securities are defined for gross income 
assessment purposes as securities issued or guaranteed as to principal 
and/or interest by the U.S. Government, it agencies or 
instrumentalities. The complete definition may be found at Section 
3(a)(42) of the Securities Exchange Act of 1934.]
    [Generally, municipal securities are defined for gross income 
assessment purposes to include securities that are direct obligations 
of, or are obligations guaranteed as to principal and/or interest, or 
are industrial development bonds issued by States or political 
subdivisions thereof or their agencies and instrumentalities. The 
complete definition may be found at Section 3(a)(29) of the Securities 
Act of 1934.]
    [Gross income from sales of shares of investment companies shall 
include gross income from any shares purchased and later redistributed 
and from sales of shares by said member represented by reinvestment of 
income dividends.]
    [Members of the Association that are wholesalers, distributors or 
underwriters of direct participation programs, variable life insurance, 
variable annuities, mutual funds, or similar securities are to report 
as gross income all amounts received directly or indirectly for 
services rendered in connection with the sale of such products, 
irrespective of whether such amounts are received in the form of 
commissions, fees, sales, charges, administrative charges, or similar 
forms of compensation, as described in the prospectus or other offering 
materials. A member of the Association that is a wholesaler, 
distributor or underwriter of direct participation programs and 
receives revenues in the form of reimbursed selling expenses from an 
affiliate which is the sponsor of such direct participation programs, 
should report the amount of such reimbursements as gross income. The 
gross amount of the preceding items is to be reported for public and 
private offerings regardless of whether the member or another 
organization maintains the accounting records and actually receives the 
proceeds. An offset may be made in the appropriate section of the 
Assessment Report for amounts paid to other members of the Association. 
In the case of variable life insurance and variable annuities, gross 
income does not encompass state premium taxes or insurance risk 
charges. Nine percent (9%) of proceeds from the distribution of 
variable life insurance may be reported as an alternative to 
maintaining detailed accounting records of the charges outlined in the 
prospectus.]
    [Profits from transactions in securities held primarily for sale to 
customers and other broker-dealers, may be determined and may reflect 
profits and losses from inventory valuation on the basis shown by the 
member's books of account provided that the method of reporting is 
consistent from year to year.]
    [Deductions from the amount to be reported:]
    [Any commissions, concessions or other allowances paid to another 
member in connection with the execution or clearance of such 
transactions. For example, a member acting as a clearing agent for 
another member shall deduct from its gross income net amounts allowed 
to the non-clearing member. The non-clearing member shall include in 
gross income the amount of such allowance.]
    [Losses from underwritings and over-the-counter trading 
transactions (as opposed to transactions in investments referred to in 
the last item under ``Exclusions'') may be deducted from underwriting 
and trading profits to the extent of such profits but not in excess 
thereof.]
    [Exclusions from the amount to be reported: ]
    [Interest and dividends.]
    [Advisory fees, investment management fees and finders' fees not 
directly involving the offering of securities; proxy fees; vault 
service fees; safekeeping fees; transfer fees; and fees for financial 
advisory services for municipalities.]
    [Commissions derived from transactions executed on a registered 
national securities exchange or a foreign securities exchange.]
    [Commissions derived from transactions of which both the purchase 
and sale are executed on a registered national securities exchange 
including arbitrage or outside the territorial limits of the United 
States.]
    [Profits or losses derived from transactions in ``exempted 
securities'' as that term is defined in Section 3(a)(12) of the 
Securities Exchange Act as amended (the ``Exchange Act''), except that 
this exclusion does not apply to ``municipal securities'' or, with 
respect to members whose books and records and financial operations 
regarding transactions in U.S. Government securities are examined by 
the NASD, to ``government securities,'' as those terms are defined in 
Sections 3(a)(29) and 3(a)(42) of the Exchange Act.]
    [Profits and losses derived from transactions in commercial bank 
time certificates of deposit and commercial paper, which is defined to 
include drafts, bills of exchange, and bankers acceptances if the 
bankers acceptances have maturities at the time of issuance not 
exceeding one year.]
    [Profits and losses derived from transactions in securities held 
for investment purposes, which are described in Section 1236 of the 
Internal Revenue Code as those securities designated within 30 days of 
acquisition and clearly identified in the dealer's records as being 
held specifically for investment and not primarily for sale to 
customers in the ordinary course of business.]
    Gross revenue is defined for assessment purposes as total income as 
reported on FOCUS form Part II or IIA with the following exclusions:
     Other income unrelated to the securities business;
     Interest and dividends;
     Commodities income;
     Advisory fees, investment management fees and finders' 
fees not directly involving the offering of securities; proxy fees; 
vault service fees; safekeeping fees; transfer fees; and fees for 
financial advisory services for municipalities:
     Commissions derived from transactions executed on a 
registered national securities exchange or a foreign securities 
exchange (Note 1):
     Profits or losses derived from transactions of which both 
the purchase and sale are executed on a registered national securities 
exchange, including arbitrage (Note 1): and
     Profits and losses derived from transactions in 
certificates of deposit and commercial paper, which is defined to 
include drafts, bills of exchange, and bankers acceptances.
    In addition, members may deduct:
     Any commissions, concessions or other allowances paid to 
another member in connection with the execution or clearance of 
transactions included in reported revenue. For example, a member acting 
as a clearing agent for another member shall deduct net amounts allowed 
to the non-clearing member; and
     25% of gross wrap fees charged to and received from 
customers and paid or allocated to investment managers or advisors.
    Note 1: Income not subject to exclusion for members for whom the 
NASD is the designated examining authority.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD 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. The NASD 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

    Recently, the NASD has undertaken a comprehensive review of its fee 
structure and assessment process in order to more closely align 
revenues with the cost of providing particular services to members. The 
focus of the review was to identify and address the contribution or 
deficit of particular NASD services, and the consequent extent of 
subsidies and deficits of member firm categories, as a basis for 
considering realignment and adjustment of fees and assessments with the 
cost of providing services. In particular, the NASD undertook to 
review, by exam category, the average and median costs to conduct 
examinations of member firms. Pursuant to Article VI of the By-Laws of 
the Corporation, the NASD requires its members to pay an annual 
assessment fee, as defined by Schedule A, Section 1 to the By-Laws, and 
an annual fee for the registration of each branch office pursuant to 
Schedule A, Section 2(a) to the By-Laws. The annual assessment is 
based, in part, upon annual gross income from over-the-counter-
transactions in securities, which is defined in Schedule A, Section 5 
to the By-Laws. Based on its review of the costs associated with 
examining member firms, the NASD proposes to amend Schedule A, Section 
1, 2(a) and 5 to the By-Laws to eliminate the basic membership fee, 
revise the definition of gross revenue for assessment purposes, adjust 
the fees assessed for branch office registration and oversight, and 
revise and adjust the calculation of fees assessed on gross revenue.
    The NASD is proposing to eliminate the requirement that members be 
assessed a basic membership fee of $500.00 in subsection (a) to Section 
1 of Schedule A. Current subsection (b) of Section 1 to Schedule A is 
proposed to be redesignated as new subsection (a). Proposed new 
subsection (a) to Section 1 would change the minimum assessment amount 
to the greater of $850.00 (up from $350.00) or the aggregate of 0.125% 
of annual gross income from state and municipal securities transactions 
(down from 0.21%), 0.125% of annual gross income from other over-the-
counter securities transactions (down from 0.25%), and 0.125% of annual 
gross income from U.S. Government securities transactions (down from 
0.25%).
    The assessment of all reportable revenue at the same rate 
eliminates the current 4 basis point lower rate for income from 
municipal and state securities transactions. Establishing the 
assessment rate at .125%, which is one-half of the present rate of 
.25%, is in recognition of the current 62% discount applied to the base 
rate of .25% and the fact that the discount has not been less than 50% 
since fiscal 1986 (based on 1984 reportable revenue). The effective 
rates for 1993 and 1994 were .0825% and .095%, respectively.
    Proposed subsection (a) also amends existing paragraph (iii) to 
assess members' income from U.S. Government securities transactions 
regardless of whether members are subject to financial responsibility 
oversight, and adds new paragraph (iv) which, with respect to members 
whose books, records and financial operations are examined by the NASD, 
assesses 0.125% of annual gross income from securities transactions 
executed on an exchange. That is, the NASD proposes to assess revenue 
from U.S. Government securities transactions for firms for whom the 
NASD is not the designated examining authority for purposes of 
financial responsibility oversight, but for whom the NASD now is 
assigned authority to conduct sales practice examinations involving 
U.S. Government securities transactions, and to assess revenue from 
exchange-related transactions (i.e., commissions, profits or losses 
derived from transactions executed on an exchange) for firms for whom 
NASD is the designated examining authority. Thus, the requirement in 
current paragraph (iii) that the NASD assess a member's income from 
U.S. Government securities transactions only if the member is subject 
to financial responsibility oversight is proposed to be eliminated.
    Current subsections (b) and (c) are proposed to be reordered as 
sections (a) and (b), respectively. Current subsection (d), which 
designates the credit, if any, each member receives against the amount 
of its annual assessment, is proposed to be eliminated and replaced by 
proposed new subsection (c), which establishes tiered discount rates 
for assessments, as follows:

(a) Portion of assessment>$5,000--25%
(b) Portion of assessment>25,000--5% (additional)
(c) Portion of assessment>50,000--5% (additional)
(d) Portion of assessment>100,000--5% (additional)

    The initial discount of 25% would bring the rate on assessments 
over $5,000 but less than $25,000 to .09375%, which is equivalent to a 
62.5% discount at the current rate. However, this rate would only apply 
to the amount over $5,000; the assessment rate for amounts under $5,000 
would be .125%. Based on the proposed tiering, a discount of 40% would 
accrue to incremental assessments over $100,000. The NASD notes that 
the costs incurred in providing oversight of small-to-medium sized 
firms are often proportionately higher than the costs for providing 
oversight for larger firms. This proposed tiering system is intended to 
address, to some extent, the regulatory subsidy currently provided by 
larger NASD member firms.
    The NASD is also proposing to amend Section 2(a) of Schedule A to 
the By-Laws to increase the fee assessed for the registration of each 
branch office from $50.00 to $75.00, and to increase the annual fee 
assessed for each registered branch to an amount equal to the lesser of 
$75.00 (currently $50.00) or the product of $75.00 (currently $50.00) 
and the number of registered representatives and principals associated 
with the member at the end of the Association's fiscal year. The 
proposed increase reflects the NASD's increased costs for registration 
and regulatory oversight of branch offices.
    Finally, the NASD is proposing to delete in its entirety the text 
of Section 5 of Schedule A, which contains the current definition of 
gross income from over-the-counter transactions in securities, and to 
replace it with a definition of gross income derived from revenue 
reported on the FOCUS report, with limited exclusions and deductions, 
in order to simplify reporting, clarify or eliminate definitional 
issues and reduce or control unreported revenue.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(5) of the Act,\2\ which require that 
the rules of the Association provide for the equitable allocation of 
reasonable dues, fees, and other charges in that the proposed rule more 
equitably realigns and adjusts fees and assessments with the costs of 
examining member firms. In particular, the NASD believes that, based on 
the most recent reported revenue (1993), the impact of the gross income 
assessment recommendations, including elimination of the basic fee and 
adoption of the new minimum assessment, will result in a slight 
reduction (approx. 1.3%) in assessment revenue compared to the present 
rate structure. However, this shortfall is offset by the higher branch 
office fee revenue and, furthermore, discount rates will continue to 
provide a mechanism to adjust revenues in the event of a material 
change, positive or negative, in reported industry revenue.
---------------------------------------------------------------------------

    \2\15 U.S.C. 78o-3.
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The NASD 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, as amended.

(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 upon filing pursuant 
to Section 19(b)(3)(A)(ii) of the Act and subparagraph (e) of Rule 19b-
4 thereunder in that it constitutes a due, fee or other charge. 
However, the NASD will not implement the rule change until January 1, 
1995.
    At any time within 60 days of the filing of a rule change pursuant 
to Section 19(b)(3)(A) of the Act, the Commission may summarily 
abrogate the 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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 inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to SR-NASD-94-58 and should be 
submitted by January 5, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30853 Filed 12-14-94; 8:45 am]
BILLING CODE 8010-01-M