[Federal Register Volume 68, Number 4 (Tuesday, January 7, 2003)]
[Notices]
[Pages 819-822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-220]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47106; File No. SR-NASD-2002-99]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment No. 1 by the National Association of 
Securities Dealers, Inc., and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 2 Relating to Gross Income 
Assessments and Personnel Assessments

December 30, 2002.

I. Introduction

    On July 24, 2002, the National Association of Securities Dealers, 
Inc. (``NASD''or ``Association'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to section 19(b)(1) of 
the Securities and Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify 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 existing 
deductions and exclusions; (2) use the Personnel Assessment as a more 
prominent assessable base to fund Member Regulation activities. On 
August 21, 2002, the NASD amended the proposal.\3\ The proposed rule 
change, as modified by Amendment No. 1, was published for notice and 
comment in the Federal Register on August 30, 2002.\4\
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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 
(``Division'') Commission, 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 rest of the 
filing.).
    \4\ See Securities Exchange Act Release No. 46417 (August 23, 
2002), 67 FR 55893.
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    The Commission received 13 comment letters on the proposed rule 
change.\5\ On November 29, 2002, the

[[Page 820]]

NASD filed a response to the comment letters and simultaneously amended 
the proposed rule change.\6\ This order approves the proposed rule 
change as modified as Amendment No. 1. Simultaneously, the Commission 
provides notice of filing of Amendment No. 2 and grants accelerated 
approval of Amendment No. 2.
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    \5\ August 19, 2002 letter from Mary Yeager, Assistant 
Secretary, New York Stock Exchange, Inc. (``NYSE'') to Jonathan G. 
Katz, Secretary, Commission (``NYSE Letter''); September 17, 2002 
letter from Lanny A. Schwartz, Philadelphia Stock Exchange, Inc. 
(``Phlx'') to Jonathan G. Katz, Secretary, Commission (``Phlx 
Letter''); September 18, 2002 letter from Edward J. Joyce, President 
and Chief Operating Officer, Chicago Board Options Exchange 
(``CBOE'') to Jonathan G. Katz, Secretary, Commission (``CBOE 
Letter''); September 19, 2002 letter from Thomas W. Sexton, Vice 
President and General Counsel, National Futures Association 
(``NFA'') to Jonathan G. Katz, Secretary, Commission (``NFA 
Letter''); September 19, 2002 letter from Patrice Blanc, Chairman 
and Chief Executive Officer, Fimat USA, Inc. (``Fimat'') to Jonathan 
G. Katz, Secretary, Commission (``Fimat Letter''); September 20, 
2002 letter from Catherine D. Dixon, Assistant Secretary of the 
Commission, U.S. Commodity Futures Trading Commission (``CFTC'') to 
Jonathan G. Katz, Secretary, Commission (``CFTC Letter''); September 
26, 2002 letter from Stuart J. Kaswell, Senior Vice President and 
General Counsel, Securities Industry Association (``SIA'') to 
Jonathan G. Katz, Secretary, Commission (``SIA Letter''); September 
20, 2002 letter from David J. Vitale, President and Chief Executive 
Officer, Board of Trade of the City of Chicago, Inc., James J. 
McNulty, President and Chief Executive Officer, Chicago Mercantile 
Exchange, Inc., and J. Robert Collins, President and Chief Executive 
Officer, New York Mercantile Exchange, Inc. to Jonathan G. Katz, 
Secretary, Commission (``Mercantile Letter''); September 23, 2002 
letter from Christopher K. Hehmeyer, Co-Chairman, and Carl W. 
Gilmore, General Counsel, both of Goldenberg, Hehmeyer and Co. 
(``Goldenberg'') to Jonathan G. Katz, Secretary, Commission 
(``Goldenberg Letter'') September 20, 2002 letter from John M. 
Damgard, President, Futures Industry Association, Inc. (``FIA'') to 
Jonathan G. Katz, Secretary, Commission (``FIA Letter''); September 
23, 2002 letter from Brad W. Corey, Chief Financial Officer, Man 
Financial Inc. (``Man'') to Jonathan G. Katz, Secretary, Commission 
(``Man Letter''); September 26, 2002 letter from Ronald H. Filler, 
Senior Vice President, Lehman Brothers, Inc. (``Lehman'') to 
Jonathan G. Katz, Secretary, Commission (``Lehman Letter''); 
September 20, 2002 letter from Thomas O'Brien, Chief Financial 
Officer, TransMarket Group, L.L.C. (``TransMarket'') to Jonathan G. 
Katz, Secretary, Commission (``TransMarket Letter'').
    \2\ November 27, 2002 letter from Barbara Z. Sweeney, Senior 
Vice President and Corporate Secretary, NASD, to Katherine A. 
England, Assistant Director, Division, Commission (``NASD Response 
Letter'') and attachments (collectively, ``Amendment No. 2''). In 
Amendment No. 2, the NASD excluded commodities income from Gross 
Revenue for purposes of the GIA.
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II. Summary of Comments

    The Commission received 13 comment letters on the proposed rule 
change, all in opposition to the proposal.\7\
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    \7\ See footnote 5, supa. The Commission notes that, in 
proposing to modify its regulatory pricing structure, the NASD filed 
the instant proposed rule change in tandem with SR-NASD-2002-98. See 
Securities Exchange Act Release No. 46416 (August 23, 2002), 67 FR 
55901 (August 30, 2002). SR-NASD-2002-98 was effective upon filing 
with the Commission. 15 U.S.C. 78s(b)(3)(A)(ii), 17 CFR 240.19b-
4(f)(2). Because the NASD's proposed changes to its regulatory 
pricing structure were split between two separate yet related rule 
filings, some of the commenters expressed opposition to the 
restructuring, generally, without raising specific concerns about 
SR-NASD-2002-99. See NYSE Letter; Phlx Letter; and SIA Letter at 1-2 
(absence of the effective rate of the NASD's proposed trading 
activity fee makes it impossible for SIA member firms to determine 
the impact of all elements of the NASD's proposed pricing 
structure). No commenters objected to the Personnel Assessment 
specifically. Some commenters questioned whether the NASD's proposed 
restructuring as a whole would be revenue neutral. See e.g., NFA 
Letter at 1 (``NASD claims that its entire proposal would be revenue 
neutral, but it does not provide any figures to support that 
claim.'').
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    Many commenters objected to the proposal because they believe the 
proposed fees are not limited to recovery of costs for services 
performed by the NASD.\8\ For example, commenters expressed disapproval 
of the NASD's proposed changes to the manner in which it calculates the 
GIA, stating the new method of calculating the GIA would include 
revenue from transactions for which there is no regulatory nexus 
between the transactions and the NASD, including transactions that do 
not involve securities.\9\ Some commenters disapprove of the proposal 
because they believe the amount of the GIA will have an inverse 
relationship to the resources that the NASD must expend on firms. In 
other words, the new method of calculating the GIA allegedly would 
result in a greater financial impact on firms for which the NASD plays 
a smaller regulatory role.\10\
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    \8\ See e.g., NYSE Letter; CBOE Letter at 3; NFA Letter at 3-4; 
Fimat Letter at 1-2; Mercantile Letter at 1; Lehman Letter at 2; Man 
Letter at 2; TransMarket Letter; FIA Letter at 1 (the proposal `` * 
* * unfairly penalizes member firms that derive a significant 
portion of their revenue from activities unrelated to their 
securities business, which are not subject to the oversight of the 
NASD and with respect to which the NASD provides no regulatory 
services.'') and at 4-5.
    \9\ See e.g., CFTC Letter at 1; NFA Letter at 1-2 (GIA will 
collect income via FOCUS reports that is unrelated to securities, 
such as over-the-counter derivatives, cash commodities, futures, and 
foreign exchange); Fimat Letter (GIA will have adverse and 
disproportionate impact on combined broker-dealers/futures 
commission merchants by allowing the NASD to collect fees on revenue 
that does not come from securities-related business); Mercantile 
Letter at 1, 3 (``* * * there is no nexus between the NASD fee and 
its regulatory responsibilities in the commodity industry.''); 
Goldenberg Letter at 1 (Goldenberg will experience significant 
increase in its GIA, though ``not a single customer * * * would be 
entitled to utilize any of the regulatory services of the NASD.''.
    \10\ See NFA Letter at 4-5; FIA Letter at 2-3; Man Letter at 3.
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    Commenters objected to the proposal because they believe the NASD 
will be charging its members who have dual memberships for regulatory 
services in relation to transactions in covered securities (as defined 
in the proposals) that are effected on other markets.\11\ Additionally, 
the commenters expressed concern about the precedent the proposal will 
set. For example, if the NASD is allowed to assess a fee based on its 
member's futures business, the NFA may determine that it is acceptable 
to assess fees based on its members' securities business.\12\
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    \11\ See Phlx Letter at 1; Mercantile Letter at 1.
    \12\ Mercantile Letter at 4 (``NFA could also decide to impose 
fees on dually registered members with respect to their securities-
related transactions * * * duplicative fees would be imposed at the 
expense of members' profit margin, or, alternatively, such fees 
would merely be passed on by the members to the ultimate 
customers.''). See also Fimat Letter at 2.
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    In its response to the commenters, the NASD focused only on 
comments made in connection with the instant proposed rule change.\13\ 
The NASD expressed its belief that the proposed changes to the GIA are 
fair and equitable, because they will ``ensure that all NASD members 
use the same simplified fee structure and will be assessed on the same 
uniform basis.'' \14\
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    \13\ NASD Response Letter at 2-3. The Commission notes that the 
NASD Response Letter speaks of 15 comment letters, because the NASD 
listed comment letters received on the instant filing and on SR-
NASD-2002-98. There are only 13 letters specific to the instant 
filing, however, and the NASD will address comments relating to SR-
NASD-2002-98 at a later time.
    \14\ Id. at 5. The NASD also noted that it removed deductions 
and exclusions that were used inconsistently by member firms from 
the GIA equation. Id. However, the NASD reinstated the exclusion for 
commodities income. Noting that some of its member firms conduct 
securities and commodities business in a single, jointly registered 
entity, while other members conduct a substantially similar business 
in separate entities with separate registrations, the NASD 
determined that ``to subject those conducting securities and 
commodities business in a single jointly registered entity to the 
increased expense burden (when the commodities income is already 
assessed under a comparable regulatory scheme) would result in 
similar entities receiving different treatment.'' Id.
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    With regard to the commenters' concerns that there is no clear 
nexus between the NASD's proposed fees and the NASD's regulatory 
services provided, the NASD explained that most of the commenters 
objected to including commodities in the GIA.\15\ By reinstating the 
exclusion for commodities income, the NASD believes it has addressed 
the commenters' concerns in this regard. The NASD stated that it 
believes that the requirement that fees be reasonable and equitably 
allocated does not require a fee structure ``so specific and complex as 
to tie specific self-regulatory programs and related expenses to 
specific business lines within a firm[.]'' The NASD reiterated the 
position outlined in the proposal--that total revenues of a broker-
dealer member, combined with trading activity of those members and the 
number of registered persons, serves as an effective measure of what 
drives the NASD's regulatory costs.\16\ Regarding the concern that 
other markets may institute fees similar to the

[[Page 821]]

NASD's fees, the NASD restates its position that the fees it is 
proposing ``are directly related to the regulatory responsibilities of 
NASD, are member regulatory fees not market regulatory fees, and are 
revenue neutral to NASD.'' \17\
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    \15\ NASD Response Letter at 7.
    \16\ Id. at 8.
    \17\ Id.
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    Finally, with regard to the concern that commenters are unable to 
comment meaningfully on the proposal because of the lack of specifics 
on the trading activity fee in SR-NASD-2002-98, the NASD states that it 
has since established and published the trading activity fee rates. 
Furthermore, the trading activity fee portion of the NASD's proposed 
fee restructuring proposal is now subject to full notice and 
comment.\18\
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    \18\ See Securities Exchange Act Release No. 46817 (November 12, 
2002), 67 FR 69785 (November 19, 2002) (SR-NASD-2002-148).
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III. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change, the 
comment letters, and the NASD's response to the comments, and finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities association \19\ and, in particular, the 
requirements of section 15A(b)(5) of the Act.\20\ Section 15A(b)(5) 
requires, among other things, that the rules of a national securities 
association 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 association operates or 
controls. The Commission finds that the three-tiered flat rate for the 
GIA that the NASD proposes to apply to gross FOCUS revenue and the use 
of the Personnel Assessment, as described in the instant proposed rule 
change, is consistent with section 15A(b)(5) of the Act, in that the 
proposal is reasonably designed to simplify the NASD's fee structure, 
and to fairly and equitably assess higher fees to those member firms 
that require a greater portion of NASD regulatory services.
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    \19\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78o-3(b)(5).
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    The Commission recognizes the difficulties inherent in 
restructuring the NASD's regulatory fees, and believes that the NASD 
has made a good faith effort to do so in a manner that is fair and 
reasonable. The Commission also notes that the NASD has indicated it 
will examine the fees periodically, and will adjust the fees 
accordingly in an effort to keep the fees at a level that is revenue 
neutral to the NASD.
    While some commenters believe there is no clear nexus between the 
NASD's proposed fees and the regulatory services the NASD provides, the 
Commission believes that the NASD had adequately addressed this 
concern. The Commission believes that both the overall business 
activity of a firm and the level of transactions a firm handles are 
reflected in the cost of the NASD's regulatory services. If the fee 
were based on either measure alone firms whose business is 
predominantly reflected in one or the other measure would subsidize the 
operations of other firms. Furthermore, the NASD, as a registered 
national securities association, has a wide-ranging responsibility for 
overseeing the just and equitable conduct of its members, as well as 
its members' financial condition, no matter what activities its members 
choose to conduct through the broker-dealer. The Commission is 
satisfied that the NASD's proposed GIA is reasonably tailored to 
apportion fees based on the regulatory services the NASD provides. 
Additionally, the Commission agrees that the NASD's decision to 
reinstate the exclusion for commodities income in the GIA should 
substantially satisfy the commenters who expressed dissatisfaction with 
this aspect of the proposal.
    With regard to the commenters' concern that approval of the NASD's 
proposed fee restructuring may set a precedent whereby other markets 
may institute fees similar to the NASD's fees, the Commission notes 
that any fee proposal filed with the Commission must meet the statutory 
standard established in section 15A(b))5) of the Act.\21\ In 
particular, the Commission will, as it has done in the instant proposed 
rule change, assess any such proposal to determine whether or not the 
proposed fees have a sufficient nexus to the regulatory 
responsibilities of the proposing entity, and are fees based on the 
regulation of members as opposed to the regulation of markets.
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    \21\ Exchange rules must comply with section 6(b)(4) of the Act. 
15 U.S.C. 78f(b)(4).
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    The Commission believes that the NASD has been responsive to the 
commenters' concerns that more time and information is necessary to 
evaluate the NASD's tandem proposed rule changes to restructure its 
regulatory fees. With the filing of SR-NASD-2002-147 and SR-NASD-2002-
148, the NASD has provided the public with further opportunity to 
evaluate its proposed regulatory fee restructuring.
    With regard to all other issues raised by the commenters, the 
Commission is satisfied that the NASD has adequately and accurately 
addressed the commenters' concerns.
    The Commission finds good cause for approving proposed Amendment 
No. 2 before the 30th day after the date of publication of notice of 
filing thereof in the Federal Register. The NASD filed Amendment No. 2 
in response to comments it received after the publication of the notice 
of filing of the proposed rule change, to address certain commenters' 
concerns.\22\ Because Amendment No. 2 is responsive to these 
commenters' concerns, the Commission finds good cause for accelerating 
approval of the proposed rule change, as amended.
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    \22\ Certain commenters objected to the NASD's method of 
calculating the GIA because it would include revenue from 
transactions for which there is no regulatory nexus between the 
transactions and the NASD. See footnote 9, supra. Although the NASD 
believes that the GIA structure as proposed constitutes ``a 
reasonable fee that is equitably allocated, and consistent with the 
Act,'' the NASD reinstated the exclusion for commodities. NASD 
Response Letter at 5. According to the NASD, some of its member 
firms conduct securities and commodities business in a single 
jointly registered entity, and other members conduct a substantially 
similar business as separate entities with separate registrations. 
Reinstating the exclusion for commodities income allows similarly 
situated entities to receive the same treatment. While the NASD 
believes that commodities income drives some of the NASD's 
regulatory costs for jointly registered firms, it reinstated the 
exclusion for commodities income. Id.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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 Amendment No. 2 that are filed with the Commission, and all 
written communications relating to Amendment No. 2 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 January 28, 2003.

[[Page 822]]

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
\23\ that the proposed rule change (SR-NASD-2002-99), as amended by 
Amendment No. 1, be, and it hereby is, approved, and that Amendment No. 
2 to the proposed rule change be, and hereby is, approved on an 
accelerated basis.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-220 Filed 1-6-03; 8:45 am]
BILLING CODE 8010-01-M