[Federal Register Volume 67, Number 169 (Friday, August 30, 2002)]
[Notices]
[Pages 55893-55896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-22215]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46417; File No. SR-NASD-2002-99]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the National Association of Securities 
Dealers, Inc. Relating to Gross Income Assessments and Personnel 
Assessments

August 23, 2002.
    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 July 24, 2002, 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. On August 21, 2002, the NASD amended the proposal.

[[Page 55894]]

The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See August 21, 2002 letter from Barbara Z. Sweeney, Senior 
Vice President and Corporate Secretary, NASD, to Katherine A. 
England, Assistant Director, Division of Market Regulation, SEC, and 
attachments (``Amendment No. 1''). In Amendment No. 1, the NASD 
provided new proposed rule language that completely replaces and 
supersedes the original proposed rule language, and made minor 
technical amendments to the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD proposes to amend Schedule A of the NASD By-Laws to adjust 
its Member Regulation (including Enforcement) pricing structures to: 
(1) Implement a three-tiered flat rate for the Gross Income Assessment 
(``GIA'') that would be applied to gross FOCUS revenue and would 
eliminate current deductions and exclusions; and (2) use the Personnel 
Assessment as a more prominent assessable base to fund Member 
Regulation activities.
    Under the current structure, three types of fees and assessments 
are used to fund the NASD's member regulatory activities: Regulatory 
Fee,\4\ Personnel Assessment, and GIA.\5\ The proposed restructuring is 
comprised of four important amendments: (1) Eliminate the Regulatory 
Fee; (2) institute a new transaction-based Trading Activity Fee similar 
to the SEC Section 31 Fee; (3) increase the rates assessed to member 
firms under the Personnel Assessment; and (4) implement a simplified 
three-tiered flat rate for the GIA and eliminate current deductions and 
exclusions.\6\ This proposed rule change is a part of a package of two 
separate yet related rule filings \7\ filed with the Commission as a 
result of a review of the overall NASD pricing structure \8\ and is 
intended to address the last two amendments to the NASD pricing 
restructuring by increasing the rates assessed to member firms under 
the Personnel Assessment and implementing a simplified three-tiered 
flat rate for the GIA and eliminating current deductions and 
exclusions.
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    \4\ The Regulatory Fee is described in Section 8(a) of Schedule 
A to the NASD By-Laws.
    \5\ The Personnel Assessment and GIA are described in Section 1 
of Schedule A to the NADS By-Laws.
    \6\ The changes resulting from the proposed restructuring would 
be revenue neutral.
    \7\ The other proposed rule change, which was effective on 
filing with the Commission, eliminated the Regulatory Fee and 
implemented a Trading Activity Fee, and adjusted the placement of 
the SEC Section 31 Transaction Fee in Schedule A. See Securities 
Exchange Act Release No. 46416 (August 23, 2002) (SR-NASD-2002-98).
    \8\ The NASD, in its pricing restructuring review, proposed 
changes to the Regulatory Fee in Special Notice to Members 02-09 and 
requested comments. The NASD received a number of comments. In 
response to those comments, the proposal set forth in Special Notice 
to Members 02-09 is not being pursued. This proposed rule change 
replaces the changes previously proposed.
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    These fees assessed upon and paid by member firms are used by the 
NASD to fund the NASD's member regulatory activities, including the 
supervision and regulation of members through examinations, processing 
of membership applications, financial monitoring, policy, rulemaking, 
interpretive, and enforcement activities. These amendments to this 
pricing structure are intended to serve the following purposes: (1) 
Simplify the NASD's fee structure; (2) ensure fairness in the NASD's 
fee structure by assessing higher fees to those member firms that 
require more NASD regulatory services; (3) assess a transaction-based 
fee in a manner that, unlike the Regulatory Fee, does not influence 
where members choose to execute trades; (4) reduce the cyclical nature 
of the current NASD fee structure; and (5) eliminate the NASD's 
reliance on funds generated from the Regulatory Fee on transactions 
executed through Nasdaq.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.

Schedule A to [the] NASD By-Laws

    Assessments and fees pursuant to the provisions of Article VI of 
the By-Laws of [the] NASD shall be determined on the following basis.

Section [2] 1--Member Regulation Fees

    (a) through (b) No Change.

[Section 1--Assessments]

    (c) Each member shall pay an annual Gross Income Assessment 
[composed of:] equal to the greater of $1,200.00 or the total of:
    [(a) An amount equal to the greater of $1,200.00 or the total of:]
    (1) [(i)] 0.125% of annual gross revenue [from state and municipal 
securities transactions] less than or equal to $100,000,000.00;
    (2) [(ii) 0.125%] 0.029% of annual gross revenue [from other over-
the-counter securities transactions,] greater than $100,000,000.00 up 
to $1,000,000,000.00; and
    (3) [(iii) 0.125%] 0.014% of annual gross revenue [from U.S. 
Government securities transactions, and] greater than 
$1,000,000,000.00.
    [(iv) with respect to members whose books, records and financial 
operations are examined by the NASD, 0.125% of annual gross revenue 
from securities transactions executed on an exchange.]
    Each member is to report annual gross revenue as defined in Section 
[7] 2 of this Schedule, for the preceding calendar year.
    (d) Each member shall pay an annual Personnel Assessment equal to:
    (1) $75.00 per principal and each representative up to five 
principals and representatives as defined below;
    (2) $70.00 per principal and each representative for six principals 
and representatives up to twenty-five principals and representatives as 
defined below; or
    (3) $65.00 per principal and each representative for twenty-six or 
more principals and representatives as defined below.
    [(b) An amount equal to $10.00 for each principal and each] A 
principal or representative is defined as a principal or representative 
in the member's organization who is registered with [Association] NASD 
as of December 31st of the [current] prior 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].
    [(c) Members shall receive a credit against the annual assessment 
on gross income stated in paragraph (a) above as follows:
    (1) Portion of assessment  $5,000--21%
    (2) Portion of assessment  $25,000--3% additional
    (3) Portion of assessment  $50,000--5% additional
    (4) Portion of assessment  $100,000--3% additional]

Section [7] 2--Gross Revenue for Assessment Purposes

    [(a)] Gross revenue is defined for assessment purposes as total 
income as reported on FOCUS form Part II or IIA. [with the following 
exclusions:]
    [(1) Other income unrelated to the securities business;]
    [(2) Commodities income;]
    [(3) 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:]
    [(4) Commissions derived from transactions executed on a registered 
national securities exchange or a foreign securities exchange (Note 
1);]
    [(5) 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]
    [(6) Profits and losses derived from transactions in certifications 
of deposit

[[Page 55895]]

and commercial paper, which is defined to include drafts, bills of 
exchange, and bankers acceptances.]
    [(b) In addition, members may deduct:]
    [(1) 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]
    [(2) 25% of gross wrap fees charged to and received from customers 
and paid or allocated to investment managers or advisors.]
    [(3) Interest and dividend expense but not in excess of related 
interest and dividend revenue or, alternatively, the member may deduct 
40% of interest earned by the member on customer securities accounts; 
provided, however in addition, the member may deduct the first $50,000 
of net interest and dividend revenue.]
    [Note 1: Income not subject to exclusion for members for whom the 
NASD is the designated examining authority.]
* * * * *

Section [8] 7--Fees for Filing Documents Pursuant to the Corporate 
Financing Rule

    No Change to rule language.

Section [9] 8--Service Charge for Processing Extension of Time Requests

    No Change to rule language.

Section [10] 9--Subscription Charges for Firm Access Query System 
(FAQS)

    No Change to rule language.

Section [11] 10--Request for Data and Publications

    No Change to rule language.

Section [12] 11--Reserved

    No Change to rule language.

Section [13] 12--Application and Annual Fees for Member Firms with 
Statutorily Disqualified Individuals

    No Change to rule language.

Section [14] 13--Review Charge for Advertisement, Sales Literature, and 
Other Such Material Filed or Submitted

    No Change to rule language.
* * * * *

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 Association 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
    The Regulatory Fee, Personnel Assessment, and GIA currently are 
used to fund the NASD's member regulatory activities, including the 
supervision and regulation of members through examinations, processing 
of membership applications, financial monitoring, policy, rulemaking, 
interpretive, and enforcement activities. The proposed changes are 
revenue neutral and strive to better align the NASD's member regulatory 
fees with its functions, efforts and costs.
    The amendments to this pricing structure are intended to serve the 
following purposes: (1) Simplify the NASD's fee structure; (2) ensure 
fairness in the NASD's fee structure by assessing higher fees to those 
member firms that drive regulatory costs; (3) assess a transaction-
based fee in a manner that, unlike the existing Regulatory Fee, does 
not influence where members choose to execute trades; (4) reduce the 
cyclical nature of the current NASD fee structure; and (5) eliminate 
the NASD's reliance on funds generated from the Regulatory fee on 
transactions executed through Nasdaq.
    The NASD's membership population varies greatly with regard to 
factors that drive the cost of required regulation. Historically, 
member regulatory fees were derived primarily from industry revenues 
and Nasdaq transactions, while the NASD derived minimal fees from the 
registration of member firm personnel. Analysis revealed that the 
number of registered persons serves as an effective proxy in 
determining the frequency of certain types of regulatory efforts, and 
therefore regulatory costs. Therefore, as before, the three critical 
factors used to measure regulatory cost for NASD member firms are 
overall size of the member firm, level of trading activity and number 
of registered representatives. However, the weight from each, as well 
as the benchmark used to measure industry revenues and transactions, 
has been shifted under the proposed amendments to better link the fees 
assessed under these factors with the NASD's costs.
Gross Income Assessment (GIA)
    The current GIA is assessed on a member firm's gross FOCUS revenues 
less various exclusions and deductions. The allowable exclusions and 
deductions have grown to the point where they totaled over 60% of gross 
FOCUS revenues in 2001. Member firms are assessed 0.125% on the net 
assessable FOCUS revenue that converts into a .0355% effective rate on 
gross FOCUS revenues. Member firms having gross FOCUS revenues less 
than or equal to $960,000 are assessed at a flat rate of $1,200.
    Under the current fee structure for the GIA, the amount of revenue 
received by the NASD is subject to unpredictable swings due to 
deductions and exclusions taken by member firms. The exclusions and 
deductions include interest expense, investment management fees, 
exchange revenue, and unrelated revenues. In 2001, gross FOCUS revenue 
increased by 30%, yet the total assessment only increased by 15% due to 
a disproportionate increase in exclusions and deductions, primarily in 
interest expense. The proposed amendments to the pricing structure are 
intended to improve the standardization, consistency and uniformity in 
which the GIA is assessed on and paid by member firms.
    The proposed solution is similar to that employed by the New York 
Stock Exchange. The rate would be applied to the gross FOCUS revenue 
with deductions and exclusions eliminated. Given the diversity and size 
of NASD member firms, the NASD proposes the following three-tiered rate 
structure:

------------------------------------------------------------------------
 
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Revised Rate Structure:
    Gross FOCUS Revenue < or = to $960 Thousand
    Assessed Flat Fee of.....................................     $1,200
    Gross FOCUS Revenue  $960 Thousand
Tiered Rate on Gross FOCUS Revenue:
    Over $1 Billion..........................................     0.014%
     $100 Million to $1 Billion...................     0.029%
    < or = to $100 Million...................................     0.125%
Effective Rates at FOCUS Revenue Category Levels:
    $10 Billion..............................................     0.017%
    $1 Billion...............................................     0.039%
    $250 Million.............................................     0.067%
    $100 Million.............................................     0.125%
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    Small member firms with gross FOCUS revenues less than or equal to 
$960,000 would continue to be assessed a flat fee of $1,200. As 
outlined above, all other member firms will be assessed a tiered rate 
based on their gross FOCUS

[[Page 55896]]

revenues. The higher the gross FOCUS revenue, the lower the effective 
rate.
    This type of rate structure will allow for greater equity among 
member firms because each member firm will be assessed on the same 
revenue base. Additionally, the new rate structure will simplify the 
process because member firms will report only gross FOCUS revenue as 
currently done on FOCUS Form Part II or IIA and will no longer need to 
report deductions and exclusions.
Personnel Assessment
    The current Personnel Assessment is a minimal fee of $10 per 
registered representative that generates only 4% of total member 
regulatory fees and inadequately supports the NASD's member regulatory 
costs. The number of registered representatives per firm is a fair and 
representative measure of the cost of member regulatory activities, yet 
has not been used as a greater basis for the assessment of fees. 
Additionally, based on the current fee structure, some firms with a 
disproportionately large number of registered representatives yet lower 
FOCUS revenues are avoiding the payment of the cost of regulating 
member firms through the payment of NASD fees.
    As part of this proposal, the Personnel Assessment will become a 
more prominent assessable base for the funding of member regulatory 
activities. Given the vast size differential of our member firms, the 
NASD proposes the following three-tiered rate structure:
    Revised Rate Structure:

 
 
 
Tiered-rate on registered reps:
     25 registered reps.............................   $65.00
    6 to 25 registered reps....................................   $70.00
    1 to 5 registered reps.....................................   $75.00
 

Phase-In
    The NASD's overall proposal will be revenue neutral to the NASD. 
However, due to the link of revenues to regulatory services provided, 
there will be effects, both negative and positive, on individual member 
firms. To minimize the impact on member firms, the restructuring of 
fees will be phased in over a three-year period. Specifically, for the 
GIA, any negative or positive variances experienced by firms will be 
phased in at a rate of 33% in Year 1, 67% in Year 2 and 100% in Year 3. 
Also, the Personnel Assessment, which will be increased to cover the 
reduction in the Trading Activity Fee, will be phased-in at a rate of 
33% in Year 1, 67% in Year 2 and 100% in Year 3. Based upon a review of 
the majority of the NASD's small member firms, the net increase of fees 
will average approximately $100 in Year 1.
    Additionally, the NASD will continue to reduce these fees through 
rebates to the member firms in connection with the proceeds raised from 
the sale of Nasdaq. The NASD will continue to use a portion of these 
rebates to eventually reduce the minimum GIA amount from $1,200 to 
$600. The remaining balance and any additional discretionary rebates 
will be used to further reduce any negative impact experienced by the 
member firms as a result of this proposal.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(5) of the Act,\9\ which requires, 
among other things, that the NASD's 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 which the 
NASD operates or controls. Moreover, the NASD believes the level of the 
fee is reasonable because it relates to the recovery of the costs of 
supervising and regulating members. The NASD believes that the majority 
of the small member firms would not be impacted by the change in the 
GIA's structure since over half of the NASD member firm population has 
gross FOCUS revenues of less than $960,000.
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    \9\ 15 U.S.C. 78o-3(b)(5).
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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 on the current 
proposal.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.\10\
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    \10\ The NASD will implement the new fees on January 1, 2003, 
provided the Commission approves this proposed rule change.
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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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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 file number SR-NASD-2002-99 and 
should be submitted by September 20, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-22215 Filed 8-29-02; 8:45 am]
BILLING CODE 8010-01-P