[Federal Register Volume 68, Number 109 (Friday, June 6, 2003)]
[Notices]
[Pages 34021-34024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14258]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47946; File No. SR-NASD-2002-148]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Amendment Nos. 1 and 2, and Notice of Filing 
and Order Granting Accelerated Approval to Amendment Nos. 3 and 4 to 
the Proposed Rule Change by the National Association of Securities 
Dealers, Inc., to Eliminate the Regulatory Fee and Institute a 
Transaction-Based Trading Activity Fee

May 30, 2003.

I. Introduction

    On October 18, 2002, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to eliminate the NASD's 
Regulatory Fee and institute a new, transaction-based Trading Activity 
Fee (``TAF''). The NASD amended the proposed rule change on November 5, 
2002,\3\ and November 8, 2002.\4\ The proposed rule change, as modified 
by Amendment Nos. 1 and 2, was published for notice and comment in the 
Federal Register on November 19, 2002.\5\ The Commission received 23 
comments \6\ on the proposal.\7\ On March 18, 2003, the NASD responded 
to the comments, and amended the proposed rule change again.\8\ On 
April 14, 2003, the NASD extended the pilot program through June 1, 
2003.\9\ On May 19, 2003, the NASD amended the proposed rule change a 
fourth time.\10\ This order

[[Page 34022]]

approves the proposed rule change as modified by Amendment Nos. 1 and 
2. Simultaneously, the Commission provides notice of filing of 
Amendment Nos. 3 and 4, and grants accelerated approval of Amendment 
Nos. 3 and 4.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See November 4, 2002 letter from Barbara Z. Sweeney, Senior 
Vice President (``SVP'') and Corporate Secretary, NASD, to Katherine 
A. England, Assistant Director, Division of Market Regulation 
(``Division''), SEC, and attachments (``Amendment No. 1''). 
Amendment No. 1 completely replaced and superseded the original 
proposed rule change.
    \4\ See November 7, 2002 letter from Barbara Z. Sweeney, SVP and 
Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division, SEC, and attachments (``Amendment No. 2''). 
Amendment No. 2 completely replaced and superseded Amendment No. 1 
and the original proposed rule change.
    \5\ See Securities Exchange Act Release No. 46817 (November 12, 
2002), 67 FR 69784.
    \6\ There are 15 comment letters submitted for the instant 
proposed rule change. However, the Commission also is considering 
comment letters submitted for SR-NASD-2002-98, SR-NASD-2002-147, SR-
NASD-2003-26 and SR-NASD-2003-73. See footnotes 7 and 9, infra.
    \7\ The NASD eliminated the Regulatory Fee and instituted the 
TAF when it filed SR-NASD-2002-98. See Securities Exchange Act 
Release No. 46416 (August 23, 2002), 67 FR 55901 (August 30, 2002). 
The proposal was effective upon filing with the Commission, pursuant 
to section 19(b)(3)(A)(ii) of the Act, and Rule 19b-4(f)(2) 
thereunder. 15 U.S.C. 78s(b)(3)(A)(ii), 17 CFR 240.19b-4(f)(2). The 
Commission received 10 comments on SR-NASD-2002-98. See September 
17, 2002 letter from Lanny A. Schwartz, Philadelphia Stock Exchange, 
Inc. (``Phlx''), to Jonathan G. Katz, Secretary, SEC (``Phlx 
Letter''); September 18, 2002 letter from Edward J. Joyce, President 
and Chief Operating Officer, The Chicago Board Options Exchange, 
Inc. (``CBOE''), to Jonathan G. Katz, Secretary, SEC (``CBOE Letter 
1''); September 20, 2002 letter submitted jointly by The 
American Stock Exchange LLC (``Amex''), CBOE, the International 
Securities Exchange, Inc. (``ISE''), The Options Clearing 
Corporation (``OCC''), The Pacific Exchange, Inc. (``PCX''), and the 
Phlx, to Jonathan G. Katz, Secretary, SEC (``OCC Joint Letter 
1'') (OCC Joint Letter 1 was later withdrawn.); 
September 23, 2002 letter from Susan Milligan, First Vice President 
and Special Counsel, OCC, to Jonathan G. Katz, Secretary, SEC (``OCC 
Joint Letter 2'') (withdraws OCC Joint Letter 1 
and substitutes a new letter that is identical to OCC Joint Letter 
1 except for the removal of the Amex as a signatory to the 
letter); September 27, 2002 letter from Jeffrey T. Brown, Senior 
Vice President (``SVP''), Secretary and General Counsel (``GC''), 
The Cincinnati Stock Exchange, Inc. (``CSE''), to Jonathan G. Katz, 
Secretary, SEC (``CSE Letter 1''); September 26, 2002 
letter from Stuart J. Kaswell, Senior Vice President (``SVP'') and 
GC, The Securities Industry Association (``SIA''), to Jonathan G. 
Katz, Secretary, SEC (``SIA Letter 1''); October 21, 2002 
letter from Margaret Wiermanski, Chief Compliance Officer, TD 
Securities, to Jonathan G. Katz, Secretary, SEC (``TD Securities 
Letter''); March 13, 2003 letter from John Boese, VP, Legal and 
compliance, The Boston Stock Exchange (``BSE''), to Jonathan G. 
Katz, Secretary, SEC (``BSE Letter''); March 27, 2003 letter from 
Edward J. Joyce, President and Chief Operating Officer, CBOE, to 
Jonathan G. Katz, Secretary, SEC (``CBOE Letter 3); May 15, 
2003 letter from Margaret Wiermanski, VP-Compliance, TD Options, 
LLC, to Jonathan G. Katz, Secretary, SEC (``TD Options Letter'').
    The NASD also filed SR-NASD-2002-147, which transformed the TAF 
into a pilot program, scheduled to terminate on December 31, 2002. 
See Securities Exchange Act Release No. 46818 (November 12, 2002), 
67 FR 69782 (November 19, 2002). The Commission received eight 
comments on SR-NASD-2002-147, which were submitted as joint letters 
for SR-NASD-2002-147 and SR-NASD-2002-148. Letters for SR-NASD-2002-
147 are not listed separately in this order, because they are fully 
documented in the list of comment letters for SR-NASD-2002-148.
    Subsequently, the NASD filed the instant proposed rule change 
(SR-NASD-2002-148), which contained substantially the same proposed 
rule language as was contained in SR-NASD-2002-98, but was submitted 
pursuant to Section 19(b)(2) of the Act to allow for an additional 
notice and comment period per the commenters' requests. See 
Securities Exchange Act Release No. 46817 (November 12, 2002), 67 FR 
69785 (November 19, 2002). The Commission received 15 comments on 
SR-NASD-2002-148. See December 6, 2002 letter from Edward J. Joyce, 
President and Chief Operating Officer, CBOE, to Jonathan G. Katz, 
Secretary, SEC (``CBOE Letter 2''); December 6, 2002 letter 
from William C. McGowan, Managing Director, TD Professional 
Execution, Inc., to Jonathan G. Katz, Secretary, SEC (``TD ProEx 
Letter''); December 10, 2002 letter from Eric Noll, Susquehanna 
International Group, LLP, to Jonathan G. Katz, Secretary, SEC 
(``Susquehanna Letter''); December 10, 2002 letter from Jeffrey T. 
Brown, SVP, Secretary and GC, CSE, to Jonathan G. Katz, Secretary, 
SEC (``CSE Letter 2''); December 9, 2002 letter from Barry 
S. Augenbraun, SVP and Corporate Secretary, Raymond James Financial, 
Inc., to Jonathan G. Katz, Secretary, SEC (``Raymond James 
Letter''); December 9, 2002 letter from Stuart J. Kaswell, SVP and 
GC, SIA, to Jonathan G. Katz, Secretary, SEC (``SIA Letter 
2''); January 23, 2003 letter from Mary McDermott-Holland, 
Vice Chairman, Chair, Trading Issues Committee, to Jonathan G. Katz, 
Secretary, SEC (``STA Letter''); December 11, 2002 letter from Darla 
C. Stuckey, Corporate Secretary, The New York Stock Exchange, Inc. 
(``NYSE''), to Jonathan G. Katz, Secretary, SEC (``NYSE Letter 
1''); December 5, 2002 letter, submitted jointly by CBOE, 
OCC, ISE, PCX, and Phlx, to Jonathan G. Katz, Secretary, SEC (``OCC 
Joint Letter 3''); BSE Letter; CBOE Letter 3; 
March 24, 2003 letter submitted jointly by CBOE, OCC, ISE, PCX, and 
Phlx, to Jonathan G. Katz, Secretary, SEC (``OCC Joint Letter 
4''); TD Options Letter; April 10, 2003 letter from Darla 
C. Stuckey, Corporate Secretary, NYSE, to Jonathan G. Katz, 
Secretary, SEC (``NYSE Letter 2''); May 27, 2003 letter 
from Gabriel A. Duran, Chief Compliance Officer, GVR Company, LLC, 
to Jonathan G. Katz, Secretary, SEC (``GVRC Letter'').
    The NASD extended the pilot in SR-NASD-2002-182, through March 
1, 2003. The Commission received no comments on SR-NASD-2002-182. 
The NASD extended the pilot through April 1, 2003 in SR-NASD-2003-
26. See Securities Exchange Act Release No. 47436 (March 4, 2003), 
68 FR 11422 (March 10, 2003). The Commission received two comments 
on SR-NASD-2003-26. NYSE Letter 2; GVRC Letter.
    \8\ See March 18, 2003 letter from Barbara Z. Sweeney, SVP and 
Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division, SEC, (``NASD Response Letter'' or ``Amendment 
No. 3''). In Amendment No. 3, the NASD (1) responded to the 
comments; (2) incorporated the interpretations contained in Notices 
to Members 02-36 and 02-75 in the proposed rule language. See also, 
March 28, 2003 letter from Kathleen A. O'Mara, Associate General 
Counsel, Regulatory Policy and Oversight, NASD, to Katherine A. 
England, Assistant Director, and Joseph Morra, Special Counsel, 
Division of Market Regulation, SEC (via email) (''NASD Response 
Letter 2'').
    \9\ See Securities Exchange Act Release No. 47685 (April 16, 
2003), 68 FR 20198 (April 24, 2003) (SR-NASD-2003-73). The 
Commission received two comments on the proposed rule change. See 
May 13, 2003 letter from Robert Bellick, Christopher Gust, Wolverine 
Trading, LLC, to Jonathan G. Katz, Secretary, SEC (``Wolverine 
Letter''); GVRC Letter.
    \10\ See May 19, 2003 letter from Barbara Z. Sweeney, SVP and 
Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division, SEC (``Amendment No. 4''). In Amendment No. 4, 
the NASD proposes to exempt from the TAF listed options transactions 
for members for which the NASD is not the designated options 
examining authority. The NASD proposes to make this amendment 
effective on January 1, 2004.
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II. Summary of Comments

    The Commission received a total of 23 comment letters on the NASD's 
proposal to eliminate the Regulatory Fee and institute the TAF,\11\ all 
of which objected to the proposal, either for substantive or procedural 
reasons.\12\ The following summary of comments provides an overview of 
the commenters' concerns.
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    \11\ See footnotes 6, 7 and 9, supra.
    \12\ Some commenters expressed their disapproval that the NASD 
filed the initial TAF proposal for immediate effectiveness. See, 
e.g., Raymond James Letter. The Commission notes, however, that the 
point is moot, since the NASD subsequently filed SR-NASD-2002-147 
and SR-NASD-2002-148, thereby allowing for full notice and comment 
on the proposal. Additionally, some commenters objected to the TAF 
being effective upon filing with the Commission because they believe 
the lack of notice and comment was unreasonable, and that it imposed 
hardship on member firms that were required to make extensive 
programming changes with insufficient notice. SIA Letter 1; 
Raymond James Letter at 1-2; SIA Letter 2 at 2, 5, 7.
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[sbull] The NASD Should Not Charge Its Members for Services Related to 
Transactions on Other Markets, Where the NASD Does Not Provide the 
Relevant Service

    A number of commenters stated it is improper for the NASD to 
collect a fee from its members relating to transactions on other 
markets, because in that case, other markets, not the NASD, provide the 
relevant services.\13\ For example, one commenter objected to the 
NASD's proposal to apply the TAF to transactions for options market 
makers who are non-NASD members who effect a transaction on an away 
exchange, emphasizing that the NASD and the options exchanges share 
options sales practice responsibilities, and that the NASD's 
responsibilities ``are likely to decrease, not increase in the near 
future.''\14\ Expanding on that theme, another commenter suggested that 
the NASD provide more specific information about the costs to be borne 
by the NASD, and the relationship of those costs to the fees the NASD 
intends to charge, as well as the precise regulatory services the NASD 
performs and the NASD's authority to impose fees ``for services not 
unique to it.''\15\
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    \13\ Phlx Letter at 1; CSE Letter 1 at 4-5 (``To go 
outside its own jurisdiction to recoup regulatory expenses without 
justification inappropriately places the burden for the operation 
and regulation of the [NASD] on other exchanges.''); TD Securities 
Letter (TD Securities Letter concurs completely with CSE Letter 
1); SIA Letter 1 at 3; CBOE Letter 2 at 
2; Susquehanna Letter at 1-3; CSE Letter 2 at 1-2; STA 
Letter at 2; NYSE Letter 1 at 2 (``* * * NASD is not 
empowered to act as the primary regulator across markets and over 
activities unique to other SROs. Consequently, no basis exists for 
it to impose such fees.'')
    \14\ CBOE Letter 2 at 2.
    \15\ NYSE Letter 1 at 2.
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[sbull] The TAF Proposal Is Anti-Competitive Because It Indirectly 
Subsidizes Nasdaq by Effectively Reducing the Cost of Regulatory 
Services the NASD Provides to Nasdaq

    Some commenters objected to the proposed rule change on the basis 
that, by charging NASD members for securities transactions regardless 
of where a trade is executed, the NASD is providing an indirect 
subsidization to Nasdaq by reducing the cost to Nasdaq of regulatory 
services that the NASD provides to Nasdaq.\16\ They claimed that the 
TAF proposal is the NASD's and Nasdaq's attempt to ensure that the 
revenue stream generated by trading in Nasdaq securities remains 
available, asserting that the NASD is subjecting transactions on 
competing markets to the TAF in an effort to subsidize Nasdaq's 
regulatory burden.\17\
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    \16\ Phlx Letter at 2; CSE Letter 1 at 8-9; CSE Letter 
2 at 3.
    \17\ See, e.g., CSE Letter 1 at 3-4; NYSE Letter 
1 at 1 (``* * * NASD plans to capture new revenue sources 
so as to supplant and supplement fees lost when Nasdaq securities 
began to trade on markets other than the Nasdaq. Thus, the NASD 
proposes to impose regulation-related costs to fill a shortfall 
caused by competitively induced market share loss. This approach 
clearly is anti-competitive.''); BSE Letter at 2 (``* * * they are 
attempting to regain market share through anti-competitive rules * * 
*'').
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[sbull] Applying the TAF to Listed Options Transactions That Are 
Cleared by NASD Members Is Inappropriate

    Several commenters said that applying the TAF to listed options 
transactions that are cleared by NASD members is inappropriate because 
the NASD's regulatory responsibility for the listed options market is 
minimal.\18\ Making a similar point, but from the opposite perspective, 
a number of commenters said the TAF is inequitable because the NASD 
will not apply the TAF to many over-the-counter instruments, such as 
debt and variable annuities, where the NASD has primary regulatory 
responsibility.\19\
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    \18\ CBOE Letter 1 at 1-2; CBOE Letter 2 at 2; 
TD ProEx Letter at 1; Susquehanna Letter at 2; STA Letter at 2; BSE 
Letter at 4.
    \19\ CBOE Letter 1 at 2; OCC Joint Letter 2 at 
1-2; CBOE Letter 2 at 2; TD ProEx Letter at 1; STA Letter 
at 3; OCC Joint Letter 3 at 3-4.
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[sbull] The TAF Proposal Sets a Dangerous Precedent; a Single 
Transaction Could Incur Multiple Charges, Regardless of Regulatory 
Responsibilities or Nexus of Business Interest

    Some commenters expressed concern about the precedent the TAF 
proposal would set, where other self-regulatory organizations 
(``SROs'') might impose fees on transactions executed on markets for 
which the SRO performs no regulatory tasks, or for which the SRO has no 
business interest.\20\ However, one commenter acknowledged, ``assessing 
a fee on trading activity occurring in other markets may be justified 
given the NASD's responsibility for member regulation * * *'' (Emphasis 
in original).\21\ The commenter suggested that this concept is 
unprecedented, and that the impact should be examined carefully, given 
the concern that other self-regulatory organizations may impose similar 
fees, resulting in firms possibly paying considerably more than what is 
fair for regulation.\22\
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    \20\ See, e.g., CBOE Letter 1 at 2; OCC Joint Letter 
2 at 2 (``NASD should not be permitted to generate revenue 
and raise the costs of trading on the options exchanges without a 
showing that the amount of the TAF is limited to the recovery of its 
costs in connection with regulating listed options.''); CBOE Letter 
2 at 3; TD ProEx Letter at 2-3; STA Letter at 2; OCC Joint 
Letter 3 at 4; BSE Letter at 2, 4.
    \21\ SIA Letter 2 at 6.
    \22\ Id. (``Given this significant expansion of the scope of the 
fee, and the possible precedential effect it may have in the 
industry, we believe that the NASD should be required to provide in 
more detail a fair and reasonable basis for expanding the scope of 
the TAF to cover transactions executed in any market.'')
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[sbull] The Interpretations in Notices to Members 02-75 and 02-63 
Should Be Included in the Proposed Rule Language

    Notice to Members 02-75 states the TAF is not imposed on 
transactions for non-member broker-dealers who clear through an NASD 
member, unless the NASD clearing member firm also acts as executing 
broker in the transaction. Also, Notice to Members 02-63 states that 
transactions effected on a national securities exchange by a dually 
registered specialist or floor based market maker will not be subject 
to the TAF. Several commenters suggested that this language be included 
in the proposed rule language, to ensure that the language is not 
removed from the rule without the filing of a proposed rule change.\23\
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    \23\ CBOE Letter 2 at 2 and Susquehanna Letter at 2 
(regarding Notice to Members 02-75); TD ProEx Letter at 3 (regarding 
Notice to Members 02-63); OCC Joint Letter 3 at 6 
(regarding both Notices to Members).

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[[Page 34023]]

[sbull] The NASD Could Raise the Fee at Any Time

    Some commenters expressed concern that the NASD could raise the fee 
at any time, within its own discretion without notice and comment and 
Commission approval.\24\
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    \24\ CBOE Letter 2 at 3 (``Even though the current 
level of the TAF options fee is relatively small, the NASD could 
raise the fee at any time. Once the NASD establishes the precedent 
that it can tax options trades, there will be little check on its 
ability to raise the fee substantially.''); Susquehanna Letter at 3.
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[sbull] The Proposed Rule Language is Vague and Discretionary

    One commenter stated that the proposed rule language was ambiguous, 
and that such vagueness would allow the NASD to ``arbitrarily apply the 
fees to certain members while exempting others.'' \25\ The same 
commenter said that the proposed rule language that allows the NASD to 
exempt other securities and transactions as it deems appropriate would 
provide the NASD with discretion to create exemptions without having to 
present the exemptions to the Commission for approval.\26\
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    \25\ CSE Letter 2 at 3.
    \26\ Id.
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III. The NASD's Response to Comments

    The NASD responded to the comments,\27\ discussing its rationale 
for the structure of its TAF proposal, and modifying the proposal to 
accommodate some of the commenters' concerns. The NASD's responses to 
the more significant issues are addressed below.
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    \27\ See footnote 8, supra.
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    The NASD clarified that the TAF is to be used only to fund its 
member regulatory activities in a variety of areas such as ``sales 
practices, routine examinations, financial and operational reviews, new 
member applications, enforcement * * *'' wherever such member activity 
occurs.\28\ Although the NASD will regulate activities of its members 
in all securities, including Nasdaq securities, the NASD states that 
revenues from the TAF will not fund regulatory activities of the Nasdaq 
stock market, and also states that Nasdaq will not receive any subsidy 
based on the TAF.\29\
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    \28\ NASD Response Letter 1 at 3-4.
    \29\ Id. at 4.
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    Regarding suggestions that the TAF proposal is unfair or 
inequitable, the NASD stated that it chose to model the TAF after the 
SEC's Section 31 fee to simplify its framework for recouping its 
regulatory costs, and, in part, to minimize the programming impact on 
firms.\30\ Debt, mutual funds, and variable annuities were excluded 
from the TAF, in keeping with this model, and the NASD set its 
Personnel Assessment and Gross Income Assessment rates at a level 
designed to ensure that regulatory expense levels for such products 
were funded fairly and adequately.\31\ The NASD asserted that listed 
options are properly assessed under the TAF, since the NASD maintains 
regulatory responsibility for its members for options, and the ``NASD 
continues to assume the largest share of options self-regulatory 
allocation through the Options Self-Regulatory Council.'' \32\ 
Furthermore, the NASD stated that its current costs for options 
regulation exceed the revenue the NASD anticipates receiving from this 
portion of the TAF.\33\
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    \30\ Id.
    \31\ Id.
    \32\ Id. at 5.
    \33\ Id.
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    In response to the commenters' concern that the TAF proposal does 
not contain the exemptions to the TAF provided in Notices to Members 
02-63 and 02-75, the NASD amended the proposed rule change to 
accommodate the commenters' request.\34\
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    \34\ In response to some commenters' assertion that the NASD 
should codify the exemption discussed in Notice to Members 02-75 for 
non-member broker-dealers that clear through an NASD member broker-
dealer, unless the NASD member executes the transaction, the NASD 
stated that the NASD does not assess a fee on a non-NASD member for 
its role in effecting a transaction, regardless of where the 
transaction is cleared; however, if an NASD member clearing firm 
acts as executing broker for a non-NASD member broker-dealer 
correspondent, the NASD will assess a fee to the NASD clearing 
member. The NASD does not believe this qualifies as an exemption to 
the TAF, and therefore, does not think it should be included in the 
rule.
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    With regard to comments that suggest that the NASD has not 
established a clear nexus between the TAF and the corresponding NASD 
regulatory responsibilities, the NASD maintained that its mandate is 
broad, and that its regulatory obligations ``exist separate and apart 
from any market-specific rules and obligations.'' \35\ Additionally, 
the NASD filed Amendment No. 4, which creates an exemption from the TAF 
for listed options transactions for members for which the NASD is not 
the designated options examining authority.
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    \35\ Id. at 5-6.
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IV. 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 \36\ and, in particular, the 
requirements of section 15A(b)(5) of the Act.\37\ 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 elimination of the Regulatory 
Fee, and the implementation of the TAF, 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 recover NASD costs 
related to regulation and oversight of its members.
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    \36\ 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).
    \37\ 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 done so in a manner that is fair and reasonable. The Commission 
believes that the NASD's proposed TAF, in conjunction with the Gross 
Income Assessment, is reasonably tailored to apportion fees based on 
the regulatory services the NASD provides.
    With respect to the commenters' assertion that the NASD should not 
charge its members with respect to transactions on other markets, a 
conclusive factor in the Commission's approval of the rule is the 
NASD's broad responsibilities with respect to its members' activities, 
irrespective of where securities transactions take place. As a national 
securities association, the NASD has the responsibility to oversee its 
members' finances and conduct toward their customers, except in limited 
circumstances where this responsibility is allocated to another SRO. 
The NASD's responsibility exists even if the conduct involves a 
transaction executed on a market not directly regulated by the NASD. 
With respect to its members doing business with the public, the NASD 
incurs costs to regulate its members through financial responsibility 
reviews, examinations, and other compliance monitoring.
    The NASD's proposal uses volume of transactions as a means of 
allocating regulatory costs to its members, in addition to gross income 
and personnel fees. Assessing fees in relation to transactions 
correlates to heightened NASD responsibilities regarding firms that 
engage in the trading. In most cases,

[[Page 34024]]

the NASD has direct responsibility to oversee the firm's dealing with 
the public in effecting the transactions; the NASD may also have 
responsibility to oversee the impact of the trading on the firm's 
financial condition. In most cases, where responsibility for certain 
member activities has been allocated to other SROs, the NASD retains 
responsibility for other member functions. Thus, while trading activity 
is not wholly correlated to the full range of NASD responsibility for 
members in all instances, the Commission believes that they are closely 
enough connected to satisfy the statutory standard. To more narrowly 
tailor the transaction fees to regulatory duties, the NASD filed 
Amendment No. 4 to create an exemption from the TAF for listed options 
transactions of members for which the NASD is not the designated 
options examining authority. The Commission is granting accelerated 
approval of Amendment Nos. 3 and 4 to ensure that these changes are 
made simultaneously with the approval of the TAF proposal.\38\ The 
Commission is satisfied that the NASD has made a good faith effort to 
exclude those types of transactions where there does not exist a 
substantial nexus to the NASD's regulatory responsibilities.
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    \38\ The Commission notes that an SRO may not grant exemptions 
to its rules unless the SRO has Commission-approved rules that gives 
it the authority to do so. Furthermore, where such authority exists, 
an SRO must file a proposed rule change to grant an exemption, 
unless the circumstances for the exemption are truly unique. The 
NASD stated the exemption created by Amendment No. 4 will be 
implemented on January 1, 2004.
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    The Commission does not believe that approval of the NASD's TAF 
proposal opens the door to the imposition of fees on transactions 
executed on markets for which an SRO either has little or no nexus to 
regulatory tasks performed by the SRO or for which the SRO has no 
business interest. In setting their fees, the SROs must meet the 
statutory standard established in sections 6(b)(5) \39\ and 15A(b)(5) 
of the Act.\40\ Most SROs do not have the broad aegis of the NASD 
regarding members' customer business, and so will not have a regulatory 
nexus to support a transaction fee applicable to other markets.
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    \39\ 15 U.S.C. 78f(b)(5).
    \40\ 15 U.S.C. 78o-3(b)(5). In reviewing other similar fee 
proposals, the Commission will, as it has done here, examine the 
proposals to ensure that the costs borne by firms are commensurate 
with the functions performed.
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    The NASD currently excludes debt, mutual funds, and variable 
annuities from the scope of the TAF, because of difficulties of 
measurement. The Commission urges the NASD to consider ways to take 
into account activity in all the areas the NASD must oversee, to better 
allocate regulatory costs to these activities.\41\
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    \41\ Although the NASD did not delineate its responsibility for 
regulating trading in the over-the-counter market in unlisted 
securities, the Commission believes that the NASD indeed shoulders 
such a responsibility, and that it should devote an appropriate 
portion of the TAF to expanding and enhancing its examination and 
surveillance programs in that particular area. In this connection, 
the Commission notes that it approved recently an NASD proposal that 
will give the NASD access to real-time quotation activity in such 
securities. See Securities Exchange Act Release No. 47587 (March 27, 
2003), 68 FR 16328 (April 3, 2003) (SR-NASD-2000-42)(approval 
order). The Commission expects the NASD to devote appropriate 
resources to take advantage of this expanded information.
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    Similarly, the Commission does not share the commenters' concern 
that the NASD could raise the TAF at any time. The NASD must file any 
proposed changes to the TAF with the Commission, and the NASD has 
agreed to file all future changes to the TAF for full notice and 
comment pursuant to section 19(b)(2) of the Act.\42\ Therefore, if the 
NASD wishes to modify the TAF in the future, the NASD must file a 
proposed rule change pursuant to section 19(b)(2) of the Act,\43\ for 
notice, public comment, and approval by the Commission.
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    \42\ 15 U.S.C. 78s(b)(2). See NASD Response Letter 2.
    \43\ 15 U.S.C. 78s(b)(2).
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    In response to the commenters' concerns that the interpretations 
contained in Notice to Members 02-63 and Notice to Members 02-75 could 
be revoked or modified at any time, the NASD filed Amendment No. 3 to 
include the relevant language in the proposed rule language.
    The Commission finds good cause for approving proposed Amendment 
Nos. 3 and 4 before the 30th day after the date of publication of 
notice of filing thereof in the Federal Register. The NASD filed 
Amendment Nos. 3 and 4 in response to comments it received after 
publication of the notice of filing of the proposed rule change, to 
address certain commenters' concerns. Because Amendment Nos. 3 and 4 
are responsive to commenters' concerns, the Commission finds good cause 
for accelerating approval of the proposed rule change, as modified by 
Amendment Nos. 3 and 4.
    The Commission expects that the NASD will continue to monitor the 
manner in which the TAF is implemented, and will take whatever steps 
are necessary to ensure that the fees remain consistent with the 
mandate established in section 15A(b)(5) of the Act,\44\ so that the 
TAF remains equitable, as well as consistent with the NASD's expressed 
goal.
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    \44\ 15 U.S.C. 78o-3(b)(5).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 3 and 4, including whether 
Amendment Nos. 3 and 4 are 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 Nos. 3 and 4 that are 
filed with the Commission, and all written communications relating to 
Amendment Nos. 3 and 4 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-2002-148 and 
should be submitted by June 27, 2003.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\45\ that the proposed rule change (SR-NASD-2002-148), as modified 
by Amendment Nos. 1 and 2, be, and it hereby is, approved, and that 
Amendment Nos. 3 and 4 to the proposed rule change be, and hereby are, 
approved on an accelerated basis.
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    \45\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14258 Filed 6-5-03; 8:45 am]
BILLING CODE 8010-01-P