[Federal Register Volume 69, Number 17 (Tuesday, January 27, 2004)]
[Proposed Rules]
[Pages 4018-4037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1605]



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Part IV





Securities and Exchange Commission





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17 CFR Parts 240 and 249



Collection Practices under Section 31 of the Exchange Act; Proposed 
Rule

  Federal Register / Vol. 69, No. 17 / Tuesday, January 27, 2004 / 
Proposed Rules  

[[Page 4018]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-49104; File No. S7-05-04]


Collection Practices Under Section 31 of the Exchange Act

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing new procedures that would govern the calculation, payment, 
and collection of fees and assessments on self-regulatory organizations 
pursuant to section 31 of the Securities Exchange Act of 1934. Under 
these new procedures, a national securities exchange or national 
securities association would provide the Commission with data on its 
securities transactions, the Commission would calculate the amount of 
fees and assessments due based on the volume of those transactions, and 
the Commission would bill the national securities exchange or national 
securities association that amount.

DATES: Comments must be received by February 26, 2004.

ADDRESSES: To help us process and review comments more efficiently, 
comments should be sent in hardcopy or by e-mail but not by both 
methods. All comments concerning this proposal should be submitted in 
triplicate to Jonathan G. Katz; Secretary; U.S. Securities and Exchange 
Commission; 450 5th Street, NW., Washington, DC 20549-0609. Comments 
also may be submitted electronically to the following e-mail address: 
[email protected]. All comments should refer to File No. S7-05-04; 
this file number should be included on the subject line if e-mail is 
used. The Commission will make comment letters available for inspection 
and copying in its Public Reference Room at the same address. The 
Commission will post electronically submitted comments on its internet 
Web site (http://www.sec.gov). Personal identifying information, such 
as names or e-mail addresses, will not be edited from electronic 
submissions. Submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Michael Gaw, Special Counsel, 202-942-
0158; or Christopher Solgan, Attorney, 202-942-7937; Division of Market 
Regulation; Securities and Exchange Commission; 450 5th Street, NW., 
Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: 

I. Background and Summary

    Pursuant to Section 31 of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ the Commission collects fees and assessments on 
securities transactions occurring on national securities exchanges and 
by or through members of national securities associations 
(collectively, ``self-regulatory organizations'' or ``SROs''). The 
largest source of the Commission's fee collections is Section 31 
fees.\2\ The Commission has not to date adopted formal rules 
prescribing procedures for the SROs to calculate the amount of their 
payments. The Commission recently completed a review of its collections 
policies and procedures in preparing its first audited financial 
statements.\3\ Based on that review, the Commission now believes that 
it is necessary and appropriate to propose rules to establish formal 
procedures. Therefore, the Commission is proposing to require the SROs 
to provide the Commission with data on all securities transactions 
subject to fees or assessments under Section 31 and to use that data to 
calculate the total amount due from each SRO.
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    \1\ 15 U.S.C. 78ee.
    \2\ The Commission anticipates that, consistent with federal 
agency financial accounting practices, these fees and assessments 
will be treated as ``revenue'' in the Commission's financial 
statements. Section 31(i) of the Exchange Act, 15 U.S.C. 78ee(i), 
requires that the fees and assessments collected by the Commission 
be ``deposited and credited as offsetting collections to the account 
providing appropriations to the Commission.'' The Commission can 
spend fees only to the extent Congress allows.
    \3\ The Accountability of Tax Dollars Act of 2002, Pub. L. 107-
289, 31 U.S.C. 3515, now requires each Federal executive agency with 
appropriated budget authority of more than $25 million to prepare 
annual audited financial statements. The Commission is subject to 
this requirement.
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II. Discussion

A. Requirements of the Statute

    Paragraph (b) of Section 31 requires each national securities 
exchange to ``pay to the Commission a fee [at a specified rate] of the 
aggregate dollar amount of sales of securities (other than bonds [and 
certain other enumerated securities]) transacted on such national 
securities exchange.'' \4\ Paragraph (c) requires each national 
securities association to ``pay to the Commission a fee [at a specified 
rate] of the aggregate dollar amount of sales transacted by or through 
any member of such association otherwise than on a national securities 
exchange of securities (other than bonds [and certain other enumerated 
securities]) registered on a national securities exchange or subject to 
prompt last sale reporting pursuant to the rules of the Commission or a 
registered national securities association.'' \5\ The fee rate 
established in paragraphs (b) and (c) is $15 per $1 million of the 
aggregate dollar amount of the subject sales,\6\ but paragraph (j) of 
Section 31 \7\ directs the Commission to adjust the fee rate if certain 
criteria are met.
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    \4\ 15 U.S.C. 78ee(b).
    \5\ 15 U.S.C. 78ee(c).
    \6\ in addition, paragraph (h) of Section 31, 15 U.S.C. 78ee(h), 
provides that ``[t]he rates per $1,000,000 required by this section 
shall be applied pro rata to amounts and balances of less than 
$1,000,000.''
    \7\ 15 U.S.C. 78ee(j).
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    Paragraph (d) requires each national securities exchange and 
national securities association to ``pay to the Commission an 
assessment \8\ equal to $0.009 for each round turn transaction (treated 
as including one purchase and one sale of a contract of sale for future 
delivery) on a security future traded on such national securities 
exchange or by or through any member of such association otherwise than 
on a national securities exchange.'' \9\
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    \8\ Funds collected by the commission pursuant to paragraphs (b) 
and (c) of section 31 are termed ``fees,'' while funds collected 
pursuant to paragraph (d) are termed ``assessments.'' The term 
``Section 31 fees'' will be used throughout this release to refer to 
both fees and assessments.
    \9\ 15 U.S.C. 78ee(d). For fiscal year 2007 and each succeeding 
fiscal year, the assessment will be $0.0042 for each such 
transaction. See id.
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    Paragraph (e) stipulates that the fees required by paragraphs (b) 
and (c) and the assessments required by paragraph (d) of Section 31 
shall be paid: ``(1) on or before March 15, with respect to 
transactions and sales occurring during the period beginning on the 
preceding September 1 and ending at the close of the preceding December 
31; and (2) on or before September 30, with respect to transactions and 
sales occurring during the period beginning on the preceding January 1 
and ending at the close of the preceding August 31.'' \10\
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    \10\ 15 U.S.C. 78ee(e).
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    Paragraph (f) provides that ``[t]he Commission, by rule, may exempt 
any sale of securities or any class of sales of securities from any fee 
or assessment imposed by this section, if the Commission finds that 
such exemption is consistent with the public interest, the equal 
regulation of markets and brokers and dealers, and the development of a 
national market system.'' \11\ The Commission has exercised this 
authority to create exemptions for several types of transactions. These 
exemptions are

[[Page 4019]]

codified in existing Rule 31-1 under the Exchange Act.\12\
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    \11\ 15 U.S.C. 78ee(f).
    \12\ 17 CFR 240.31-1. See also Securities Exchange Act Release 
No. 12624 (July 14, 1976), 41 FR 30587 (July 26, 1976) (adopting 
what are currently paragraphs (a) through (e) of rule 31-1); 
Securities Exchange Act Release No. 45371 (January 31, 2002), 67 FR 
5199 (February 5, 2002) (adopting what are currently paragraphs (f) 
and (g) of rule 31-1).
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B. Existing Practices under Section 31

    The statute does not stipulate how the ``aggregate dollar amount of 
sales''--as used in paragraphs (b) and (c) of Section 31--is to be 
calculated or who should do the calculation. The Commission has not 
previously defined this term by rule or mandated a formal procedure 
whereby the SROs must calculate and pay their Section 31 fees, instead 
permitting the SROs to develop their own procedures. As a result, the 
SROs have developed various means for determining the amounts owed:
     Two exchanges, the New York Stock Exchange 
(``NYSE'') and the American Stock Exchange (``Amex''), rely on a 
practice known as ``self-reporting.'' The exchanges do not 
independently calculate the aggregate dollar amount of sales on which 
they owe Section 31 fees. Instead, they rely on each clearing member 
firm to ``self-report'' the aggregate dollar amount of its sales, to 
multiply that amount by the fee rate, and to pay the exchange the 
resulting amount due. Each exchange aggregates the funds submitted by 
its clearing member firms and forwards this sum to the Commission.
     The National Association of Securities Dealers 
(``NASD'') determines the ``aggregate dollar amount of sales'' based on 
the transaction volume reported by NASD members to the Automated 
Confirmation Transaction Service (``ACT''). The NASD multiplies each 
clearing member's amount of sales by the fee rate and bills the member 
the result. However, the ACT data do not capture all sales on which 
Section 31 fees are due. Therefore, the NASD relies on member self-
reporting with respect to certain odd-lot sales (i.e., sales involving 
fewer than 100 shares), sales occurring in the Alternative Display 
Facility (``ADF''),\13\ and sales resulting from the exercise of an 
over-the-counter option.
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    \13\ The ADF is a pilot program that the NASD operates members 
that choose to quote or effect trades in Nasdaq securities otherwise 
than on the Nasdaq Stock Market or an exchange. See Securities 
Exchange Act Release No. 46249 (July 24, 2002), 67 FR 49821 (July 
31, 2002) (approving ADF pilot). the Commission conditioned its 
approval of the SuperMontage facility on the NASD's establishment of 
the ADF. See Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001). In the SuperMontage proposal, 
several commenters expressed concern that SuperMontage would become 
the only execution system through which substantially all displayed 
trading interest in the over-the-counter (``OTC'') markets could be 
reached. in response to these concerns, the NASD agreed to provide 
an alternative quotation and transaction reporting facility (now the 
ADF) that would, in effect, make participation in SuperMontage 
voluntary. See 66 FR at 8024. the ADF permits NASD members to comply 
with their obligations under Commission and NASD rules (including 
Rule 11Ac1-1(c)(5) under the Exchange Act, 17 CFR 11Ac1-1(c)(5), and 
Regulation ATS, 17 CFR 242.300 et seq.) without participating in 
SuperMontage.
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     The other equities exchanges calculate the 
aggregate dollar amount of sales that are subject to Section 31 fees 
based on the amount of each clearing member's transactions that are 
reported to the consolidated tape.\14\ The exchange multiplies that 
amount by the fee rate and bills each clearing member the resulting 
amount due. The exchange aggregates the funds collected from its 
clearing members and forwards this sum to the Commission.
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    \14\ See infra note 21.
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     The Options Clearing Corporation (``OCC'') pays 
Section 31 fees on behalf of the five options exchanges and Section 31 
assessments on behalf of the two security futures exchanges. OCC 
calculates the aggregate dollar amount of sales, and the total number 
of round turn transactions on security futures, of each clearing member 
that is also an OCC participant and multiplies that number by the 
applicable rate under Section 31. OCC then deducts the amounts due for 
those transactions from each participant account, aggregates the funds 
collected from the participants, and forwards the sum to the 
Commission. OCC submits a single lump-sum payment to the Commission on 
behalf of these seven exchanges. OCC does not stipulate the amount paid 
on behalf of each exchange.
    The Commission believes that the current arrangements may create 
uncertainties about whether the proper amounts due pursuant to Section 
31 are being paid to the Commission. With proposed Rules 31 and 31T and 
Form R31, the Commission seeks to establish the total amounts payable 
under Section 31 with more reliable methods.

C. Definition of Terms Used in Proposed Rule 31

    The proposed rule would require national securities exchanges and 
national securities associations to provide data on all of their 
securities transactions that are subject to Section 31. Based on that 
data, the Commission would calculate the amount owed by each SRO and 
issue bills twice per year.\15\ Proposed Rule 31 would define and 
interpret certain terms used in the statute and create and define other 
terms to facilitate the new procedures.
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    \15\ See Section 31(e) of the Exchange Act, 15 U.S.C. 78ee(e) 
(establishing two annual due dates for Section 31 fees).
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    Proposed Rule 31 would introduce the concepts of ``covered sales'' 
and ``covered round turn transactions.'' A covered sale would be a 
securities transaction subject to fees pursuant to paragraphs (b) or 
(c) of Section 31. As such, the term would not include any transactions 
in security futures, which are subject to assessments pursuant to 
paragraph (d) of Section 31. Paragraph (a)(6) of proposed Rule 31 would 
define ``covered sale'' to mean a sale of a security, other than an 
``exempt sale'' or a sale of a security future, occurring on a national 
securities exchange or by or through any member of a national 
securities association otherwise than on a national securities 
exchange. The term ``exempt sale,'' defined in paragraph (a)(11) of 
proposed Rule 31, would include a sale exempted from fees by Section 31 
itself or a sale that the Commission previously has exempted by rule.
    A ``covered round turn transaction'' would be a securities 
transaction on which an assessment is owed pursuant to paragraph (d) of 
Section 31. Paragraph (a)(7) of proposed Rule 31 would define ``covered 
round turn transaction'' to mean a round turn transaction on a security 
future, other than a round turn transaction in a future on a narrow-
based security index, occurring on a national securities exchange or by 
or through any member of a national securities association otherwise 
than on a national securities exchange. Paragraph (a)(14) of proposed 
Rule 31 would define ``round turn transaction on a security future'' as 
one purchase and one sale of a contract of sale for future delivery.
    Proposed Rule 31 would impose a new duty on ``covered SROs'' to 
report to the Commission data on all of their covered sales and covered 
round turn transactions. The term ``covered SRO'' would include 
``covered exchanges'' and ``covered associations.'' Paragraph (a)(5) of 
proposed Rule 31 would define ``covered exchange'' to mean a national 
securities exchange on which covered sales or covered round turn 
transactions occur. Currently, there are 11 national securities 
exchanges that would be covered exchanges under proposed Rule 31:
     Nine national securities exchanges registered 
pursuant to Section 6(a) of the

[[Page 4020]]

Exchange Act \16\ that may trade any type of security; \17\ and
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    \16\ 15 U.S.C. 78f(a).
    \17\ These exchanges are Amex, the Boston Stock Exchange 
(``BSE''), the Chicago Board Options Exchange (``CBOE''), the 
Chicago Stock Exchange (``CHX''), the International Securities 
Exchange (``ISE''), the National Stock Exchange (``NSX'') (formerly 
known as the Cincinnati Stock Exchange), the NYSE, the Pacific 
Exchange (``PCX''), and the Philadelphia Stock Exchange (``PHLX'').
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     Two national securities exchanges registered 
pursuant to Section 6(g) of the Exchange Act \18\ that may trade no 
securities other than security futures.\19\
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    \18\ 15 U.S.C. 78f(g).
    \19\ These exchanges are NQLX and OneChicago.
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Paragraph (a)(4) of proposed Rule 31 would define ``covered 
association'' to mean any national securities association by or through 
any member of which covered sales or covered round turn transactions 
occur otherwise than on a national securities exchange. Currently, 
there is one national securities association, the NASD, that would be a 
covered association under the proposed rule.\20\
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    \20\ The National Futures Association (``NFA'') is also 
registered with the Commission as a national securities association, 
but it would not be a ``covered association'' under proposed Rule 
31. The only securities that NFA members trade are security futures. 
Currently, all trading in security futures occurs on the national 
securities exchanges. These exchanges incur liability to the 
Commission for such transactions under paragraph (d) of Section 31. 
There are no transactions in security futures by or through an NFA 
member otherwise than on a national securities exchange. Therefore, 
the NFA itself does not incur any liabilities under Section 31 and 
would not, therefore, be considered a covered association.
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D. Collecting Data on Covered Sales and Covered Round Turn Transactions

    To calculate the fees owed by each covered SRO pursuant to Section 
31, the Commission would need to know the aggregate dollar amount of 
each SRO's covered sales. Unfortunately, there is currently no single 
source for this information. As described below, covered sales are 
reported, cleared, and settled in a variety of ways and data on covered 
sales exist in a variety of sources. Proposed Rule 31 and Form R31 
would attempt to capture relevant information about all covered sales 
through the most reliable of the available sources. Data on covered 
round turn transactions could, however, be obtained from a single 
source.
1. Post-Trade Processing Generally
a. Equities
i. Exchange Trades of Equity Securities
    A trade occurring on an exchange generally must be reported to that 
exchange for dissemination to the public and to begin the process of 
clearance and settlement. Exchanges have automated systems to receive 
and process these reports. If a trade occurs on a trading floor, 
exchange rules generally require both the buyer and the seller to 
submit a record of the trade to the exchange. The exchange attempts to 
match the records submitted by the buyer and the seller and to resolve 
any discrepancies (e.g., in size or price). If the trade occurs through 
an electronic execution system of the exchange, the system ``locks'' a 
buy and a sell order together to create the trade, and further action 
generally is not necessary since all relevant details about the orders 
and the counterparties have already been entered into the system.
    Once a record of a locked-in, two-sided transaction has been 
established, the exchange reports the trade to a system known as the 
``consolidated tape.''\21\ In addition, the exchange generally submits 
a record of its locked-in transactions to a clearing agency registered 
with the Commission under Section 17A of the Exchange Act \22\ for 
clearance and settlement. The National Securities Clearing Corporation 
(``NSCC'') clears and settles transactions in debt and equity 
securities (other than security futures), and OCC clears and settles 
transactions in options and security futures.
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    \21\ The consolidated tape--which derives its name from its 
historical antecedent, the tickertape--refers to a set of three 
regulatory plans established by the SROs and approved by the 
Commission pursuant to Section 11A of the Act, 15 U.S.C. 78k-1, and 
Rule 11Aa3-2 thereunder, 17 CFR 240.11Aa3-2: (1) The Consolidated 
Tape Association (``CTA'') plan for equity securities listed on the 
NYSE, Amex, and the regional equities exchanges that meet Amex 
listing criteria; (2) the OTC/UTP plan for securities listed on the 
Nasdaq Stock Market; and (3) the Options Price Reporting Authority 
plan for exchange-listed options. These plans require individual 
SROs to transmit information to a processor, which consolidates the 
information for dissemination to vendors. The vendors, in turn, 
disseminate the information to the public.
    \22\ 15 U.S.C. 78q-1.
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    The exchanges usually forward to the appropriate registered 
clearing agency a record of each individual locked-in transaction, even 
if a particular transaction would not result in any net change in the 
accounts maintained by the clearing agency.\23\ If a transaction is 
subsequently broken \24\ or recorded in error, the SRO on which the 
transaction occurred would submit a second instruction (generally known 
as a ``reversal'') to the clearing agency to delete the earlier record. 
If the details of the trade were revised, the exchange would then 
submit a third instruction showing the corrected information. If the 
trade were canceled, no additional instruction would be submitted.
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    \23\ Generally, only broker-dealers, banks, and other 
institutions are permitted to have accounts with a registered 
clearing agency. Therefore, a customer's interest in a particular 
security is created by a record on the books of its broker-dealer, 
not by a record kept by the clearing agency. If the orders of two 
customers who have the same broker-dealer are executed against each 
other or ``cross,'' the customers' accounts held by the broker-
dealer would be adjusted to effect the transaction. The clearing 
agency, on the other hand, would take no action to effect the 
transaction because there is no net change in position in the 
account of the broker-dealer held at the clearing agency.
    \24\ Exchanges often have rules that allow a trade to be 
``broken'' or voided in certain circumstances. See, e.g., Amex Rule 
135 (Cancellation of, and Revisions in, Transactions); PCX Equities 
Rule 7.11 (Clearly Erroneous Policy); ISE Rule 720 (Obvious Errors).
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    There are a few exceptions to the general rule that the exchanges 
report all of their transactions to a clearing agency. For example, 
some exchanges have rules that allow their members to clear and settle 
transactions outside of the regular clearing system (so-called ``ex-
clearing'' transactions).\25\ As their name indicates, such trades are 
not reported to a clearing agency. The Commission has been informed 
that the number of ex-clearing transactions occurring on the exchanges 
is very small.
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    \25\ See, e.g., Amex Rule 722 (Comparison of Transaction Through 
a Registered Clearing Agency) (``This rule shall not apply if it is 
stipulated in the bid or offer that a transaction is to be completed 
ex-clearing or if it [sic] otherwise agreed by the parties 
thereto''); NYSE Rule 130(c) (Overnight Comparison of Exchange 
Transactions) (``each member or member organization which is a party 
to the contract shall submit, or cause to be submitted, such trade 
data as may be required by the Exchange or the Qualified Clearing 
Agency it selects, in such form as the Exchange or the Qualified 
Clearing Agency shall prescribe, . . . in the case where a Qualified 
Clearing Agency will not be used to compare or settle the 
transaction, to the party or parties on the other side of the 
trade''); PHLX Rule 6 (Trade Reporting and Confirmation of 
Transactions) (``SCCP shall transmit all Participant transactions, 
except ex-clearing transactions, to NSCC for clearance and 
settlement''; PHLX Rule 11 (Ex-Clearing Accounts) (``In an Ex-
Clearing Account, SCCP records and confirms a transaction, whereby 
both sides have agreed to settle the transaction outside any 
registered clearing agency mechanism'').
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    In addition, an exchange may allow an entity known as a ``qualified 
special representative'' (``QSR'') to report certain equity trades 
directly to NSCC for clearing. A QSR is an NSCC member that operates, 
has an affiliate that operates, or clears for a broker-dealer that 
operates, an automated execution system where the NSCC member is on the 
contraside of every transaction.\26\ NSCC rules do not prohibit a QSR 
from summarizing and netting its trades before reporting to NSCC, 
resulting in fewer reports to NSCC and a corresponding reduction in the 
amount

[[Page 4021]]

of the QSR's clearing fees. NSCC records the net changes in positions 
and moves funds and securities between accounts of NSCC members 
accordingly, but it is unlikely to have a record of each of the trades 
underlying the QSR report.
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    \26\ See NSCC Rule 39. As discussed below, QSRs also may report 
to NSCC equity trades occurring in the over-the-counter market.
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ii. OTC Trades of Equity Securities
    In the OTC market in equities, trades generally must be reported to 
either ACT or--if the transaction occurs in the ADF--to the Transaction 
Reporting and Comparison Service (``TRACS''). ACT is a transaction 
reporting and comparison system operated by the Nasdaq Stock 
Market,\27\ which is currently a subsidiary of the NASD.\28\ If a trade 
occurs through a Nasdaq execution system, the system automatically 
forwards to ACT a record showing a locked-in, two-sided transaction. 
Otherwise, NASD rules specify which party must report the trade to ACT, 
when the party must report it, and what information about the trade 
must be included.\29\ Upon receiving data from NASD members, ACT 
attempts to lock in the trade.\30\ If a record of a locked-in, two-
sided transaction is established, ACT can forward the trade to NSCC for 
clearance and settlement. However, because of the nature of OTC 
trading, some transactions reported to ACT are not submitted by ACT to 
NSCC. Internalized trades, for example, are generally not reported to 
NSCC even though they must be reported to ACT.\31\ In addition, an NASD 
member may instruct ACT not to report a trade to NSCC if the trade will 
be reported to NSCC directly by a QSR.
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    \27\ See NASD Rule 6110(d).
    \28\ Nasdaq has submitted an application to register as a 
national securities exchange. See Securities Exchange Act Release 
No. 44396 (June 7, 2001), 66 FR 31952 (June 13, 2001). If the 
Commission approves this application, Nasdaq would separate from the 
NASD.
    \29\ See NASD Rule 6110 Series. However, NASD rules do not 
require that odd-lot trades be reported to ACT.
    \30\ See NASD Rule 6140 (describing four methods by which ACT 
will attempt to match the trade information submitted by the 
reporting parties).
    \31\ An internalized trade occurs, for example, when a broker-
dealer, to satisfy a customer order to buy, transfers securities 
between its proprietary account and the account that it holds on 
behalf of the customer. Because an internalized trade results in no 
net change in the position of the broker-dealer's NSCC account, 
there is no reason to report it to NSCC.
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    ACT is the trade reporting system for all OTC equity markets except 
for the ADF. The NASD has developed a separate trade reporting system, 
known as TRACS, for trades occurring in the ADF. TRACS is modeled after 
and operates in a manner similar to ACT.\32\
b. Options and Security Futures
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    \32\ See NASD Rule 5400 Series.
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    The process whereby reports of transactions in options and security 
futures are matched and locked in is very similar to that for equity 
trading on the exchanges. The post-trade processing of options and 
security futures trading on national securities exchanges differs 
slightly, however, in that the exchanges forward reports of all such 
trades to a registered clearing agency (OCC), whereas with equities 
some trades are not reported to NSCC by the exchange itself (in the 
case of trades reported to a designated clearing agency by a QSR) or 
not reported at all (in the case of ex-clearing trades). Exchange-
listed options and security futures do not trade over-the-counter; 
therefore, no national securities association would incur a liability 
to the Commission under Section 31 for such trading.
    In addition, some non-exchange-listed options trade over-the-
counter, but a national securities association would not incur any 
liability to the Commission under Section 31 for such trading because 
OTC options are not ``registered on a national securities exchange or 
subject to prompt last sale reporting pursuant to the rules of the 
Commission or a registered national securities association.''\33\ 
Section 6(h)(1) of the Exchange Act makes it illegal to trade security 
futures that are not listed on a national securities exchange;\34\ 
therefore, no trading of such security futures occurs over-the-counter 
and no national securities association incurs Section 31 liability for 
such trading.
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    \33\ Section 31(c) of the Exchange Act, 15 U.S.C. 78ee(c). A 
national securities association would, however, incur a liability 
for the exercise of an OTC option if the exercise resulted in the 
sale of a security that is ``registered on a national securities 
exchange or subject to prompt last sale reporting pursuant to the 
rules of the Commission or a registered national securities 
association.'' See infra Section D(3)(a).
    \34\ See 15 U.S.C. 78f(h)(1).
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2. Additional Terms Defined in Proposed Rule 31
    One of the primary sources of data on covered sales and covered 
round turn transactions under the proposed rule would be the 
``designated clearing agencies.'' Paragraph (a)(9) of proposed Rule 31 
would define ``designated clearing agency'' to mean any clearing agency 
registered under Section 17A of the Exchange Act \35\ that clears and 
settles covered sales or covered round turn transactions. Presently, 
there are two entities that would be designated clearing agencies under 
the proposal: NSCC and OCC.
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    \35\ 15 U.S.C. 78q-1.
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    The Commission believes that clearing data obtained from the 
designated clearing agencies would provide a sound basis for the 
calculation of Section 31 fees for the covered exchanges. Market 
participants have a strong incentive to ensure the accuracy of the 
trade data reported to the clearing agencies; without accurate data, 
the clearing agencies cannot move the correct amount of funds and 
securities between participant accounts to settle transactions. The 
Commission anticipates that the vast majority of covered sales 
occurring on the covered exchanges would be captured by the clearing 
data available from the designated clearing agencies.
    In situations where clearing agency data is incomplete (in the case 
of trades reported to a designated clearing agency by a QSR) or 
nonexistent (in the case of ex-clearing trades), the Commission would 
have to rely on other sources. One such source would be a covered SRO's 
``trade reporting system.'' Paragraph (a)(16) of proposed Rule 31 would 
define ``trade reporting system'' to mean an automated facility of a 
covered SRO used to collect or compare trade data. Only automated 
facilities fall within the definition; a predominantly paper-based 
system for collecting or comparing trade data, such as the reporting 
system currently used by NASD members to report their odd-lot 
transactions to the NASD, would not be considered a ``trade reporting 
system.'' A covered SRO might have more than one trade reporting 
system.\36\
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    \36\ For example, ACT and TRACS, operated by the NASD, would 
both be considered trade reporting systems under the proposal.
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    Paragraph (e) of Section 31 stipulates that fees and assessments 
are due twice each year: (1) March 15, for sales and transactions 
``occurring'' during the period beginning on the preceding September 1 
and ending at the close of the preceding December 31; and (2) September 
30, for sales and transactions ``occurring'' during the period 
beginning on the preceding January 1 and ending at the close of the 
preceding August 31. A securities transaction can take several days to 
complete, from the day that a binding contract to trade is established 
to the day that funds and securities move between accounts to settle 
the transaction. Section 31 does not identify on which date during the 
process a transaction ``occurs,'' although the statute suggests that a 
single date must be selected in order to assign every transaction to 
one of the billing periods. For example, liability for a sale that is 
negotiated on August 30 but does not

[[Page 4022]]

settle until September 2 must be assigned to only one billing period.
    Proposed Rule 31 introduces the concept of the ``charge date'' to 
clarify this issue. Paragraph (a)(3) of proposed Rule 31 would define 
the charge date as the date on which a covered sale or covered round 
turn transaction occurs for purposes of determining the liability of a 
covered SRO pursuant to Section 31 of the Exchange Act. The charge date 
could be either the trade date or the settlement date; as discussed 
below, the date to be used would depend on the manner in which the 
trade is reported and cleared. The charge dates set forth in proposed 
Rule 31 would largely codify the existing practices of the SROs.
3. Proposed Form R31
    Paragraph (b)(1) of proposed Rule 31 would require covered SROs to 
submit to the Commission proposed Form R31 within ten business days 
after the end of each month.\37\ The form would require a covered SRO 
to report data on all of its covered sales having a charge date in the 
month of the report. This data would be derived from different sources. 
The dollar amounts of sales captured by each separate source would be 
added to provide a single figure for the aggregate dollar amount of the 
SRO's covered sales for the month. Paragraph (b) of proposed Rule 31 
also would require covered SROs to provide the total number of its 
covered round turn transactions having a charge date in the month of 
the report.
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    \37\ In light of the billing cycle established by paragraph (e) 
of Section 31, the Commission preliminarily believes that ten 
business days would be an appropriate length of time to allow 
covered SROs to complete and submit proposed Form R31. One of the 
billing dates established by paragraph (e) of Section 31 is 
September 30, covering the period January 1 to August 31. There are 
only 30 calendar days in the month of September and, depending on 
when the weekends fall, perhaps only 19 to 21 business days. In 
addition, a federal holiday--Labor Day--always falls in the month of 
September. The Commission believes that covered SROs should have at 
least a few business days between the receipt of their Section 31 
bills and the September 30 due date in order to process their 
payments. In addition, the Commission must have at least a few 
business days to calculate the total amounts due from the covered 
SROs under Section 31 and prepare the bills. For the Commission to 
perform these calculations in a timely manner, it would need the 
data to be supplied in proposed Form R31 by roughly the middle of 
September (i.e., ten business days after August 31, the close of the 
billing period).
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    Proposed Form R31 would be organized as follows:
a. Part I
    In Part I of proposed Form R31, a covered exchange would be 
required to report the aggregate dollar amount of the covered sales 
that: (1) occurred on the exchange; (2) have a charge date in the month 
of the report; and (3) the exchange itself reported to a designated 
clearing agency. The form would require covered exchanges to make 
separate entries for sales of equities and sales of options. Each 
covered exchange also would be required to report the total number of 
covered round turn transactions that: (1) occurred on the exchange; (2) 
have a charge date in the month of the report; and (3) the exchange 
reported to a designated clearing agency.
    In addition, paragraph (b)(3)(i) of proposed Rule 31 would require 
a covered association to report in Part I the aggregate dollar amount 
of covered sales that: (1) occurred by or through any of the 
association's members; (2) have a charge date in the month of the 
report; and (3) resulted from an exercise \38\ of a ``physical delivery 
exchange-traded option.'' \39\ The Commission acknowledges that this 
arrangement would represent a departure from current practices. 
Presently, Section 31 fees attributable to sales of securities 
resulting from the exercise of physical delivery exchange-traded 
options are paid to the Commission by OCC, through a voluntary 
arrangement between OCC and the options exchanges. When OCC receives 
notice that an option held in the account of one of its participants is 
being exercised, OCC instructs NSCC to move funds and securities 
between NSCC accounts to effect the exercise. OCC also deducts the 
corresponding Section 31 fees from participant accounts held at 
OCC.\40\ OCC combines the fees that it collects for sales of securities 
resulting from exercises of physical delivery exchange-traded options 
and includes this sum as part of its aggregate payment to the 
Commission of Section 31 fees. However, OCC does not and has informed 
Commission staff that it currently is not able to attribute these 
exercises to any particular exchange.
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    \38\ The sale of an option must be distinguished from the 
exercise of an option. Each event could separately lead to a 
liability being created under Section 31 of the Exchange Act.
    \39\ Paragraph (a)(15) of proposed Rule 31 would define 
``physical delivery exchange-traded option'' as a securities option 
that is listed and registered on a national securities exchange and 
settled by the physical delivery of the underlying securities. 
Options are of two general types: cash-settled and physical 
delivery. Only the exercise of an option settled by physical 
delivery could result in a covered sale. Upon the exercise of such 
an option, one party must sell to the other party (at the strike 
price) the underlying securities to fulfill the option contract. 
Such sale could create liability for an SRO pursuant to Section 31 
of the Exchange Act. With a cash-settled option, however, there is 
no sale of securities upon exercise. The option is settled by 
payment of the difference between the strike price and the market 
price of the underlying security or security index. Such payment is 
not subject to Section 31.
    \40\ For example, assume that X is long 10 put options and Y is 
short 10 put options, and that both X and Y hold accounts at OCC and 
NSCC. The security underlying the options is ABC, the strike price 
is $20, and the options are settled through physical delivery. X 
elects to exercise the put options and the exercise is assigned to 
Y. Y now must buy from X 1000 shares of ABC (10 puts x 100 shares 
underlying each put) for a price of $20,000 ($20/share x 1000 
shares). OCC instructs NSCC to move $20,000 from Y's NSCC account to 
X's NSCC account and to move 1000 shares of ABC from X's NSCC 
account to Y's NSCC account. OCC also deducts a fee from X's OCC 
account in the amount of $20,000 times the Section 31 fee rate in 
effect when the exercise occurs.
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    The Commission believes that it is not appropriate for Section 31 
fees on sales of securities resulting from the exercises of physical 
delivery exchange-traded options to be combined into a single payment 
that obscures the SRO on whose behalf the payment is being made. 
Therefore, proposed Rule 31 would clarify that the covered association 
by or through the members of which such sales occur--presently the 
NASD--would be required to report data on such covered sales and pay 
the corresponding Section 31 fees.
    The Commission believes that this approach is consistent with 
paragraphs (b) and (c) of Section 31. Paragraph (b) requires a national 
securities exchange to pay Section 31 fees on ``sales of securities * * 
* transacted on such national securities exchange,'' while paragraph 
(c) requires a national securities association to pay fees on ``sales 
transacted by or through any member of such association otherwise than 
on a national securities exchange.'' The Commission does not believe 
that a sale of a security resulting from the exercise of a physical 
delivery option can be viewed as being ``transacted on [a] national 
securities exchange.'' \41\ As noted above, the terms of the sale are 
not negotiated on or through the facilities of an exchange, but rather 
through the terms of the previously agreed options contract. Nor is the 
sale executed on or through the facilities of an exchange, since the 
sale is effected through instructions communicated by the holder of the 
option to OCC and by OCC to NSCC. The Commission believes, rather, that 
such sales occur ``otherwise than on a national securities

[[Page 4023]]

exchange'' within the meaning of paragraph (c) of Section 31, thereby 
creating liability on the part of the NASD. Therefore, the Commission 
is proposing to require the NASD to report in Part I of proposed Form 
R31 the aggregate dollar amount of covered sales resulting from the 
exercise of physical delivery exchange-traded options.\42\
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    \41\ 15 U.S.C. 78ee(b). The party required to sell shares as a 
result of the exercise (the holder in case of a put or the writer in 
case of a call) might have to purchase the underlying securities to 
have sufficient inventory to perform its obligations under the 
option contract. This purchase could occur on a national securities 
exchange and be subject to fees under paragraph (b) of Section 31. 
Nevertheless, the exercise itself (i.e., the transfer of shares 
between the writer and the holder of the option) is a separate 
transaction for purposes of Section 31.
    \42\ However, as discussed below, OCC would be obligated by 
proposed Rule 31 to provide the NASD with the data in its possession 
needed by the NASD to complete this portion of Form R31.
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    Paragraph (a)(4) of proposed Rule 31 would provide that, for a 
covered sale or covered round turn transaction included in the data 
reported in Part I by a covered exchange, the charge date would be the 
settlement date. Part I data would be supplied by a designated clearing 
agency, the primary function of which is to clear and settle securities 
transactions and which will, of course, know the settlement date of a 
transaction. By contrast, a designated clearing agency might have to 
develop new procedures to track and record transactions by trade date. 
Accordingly, the Commission believes that it would be more practical 
for the designated clearing agencies to provide data on covered sales 
and covered round turn transactions based on the settlement date.
    However, paragraph (a)(4) also provides that a covered sale 
resulting from the exercise of a physical delivery exchange-traded 
option would use the trade date as the charge date. In this case, the 
trade can be viewed as occurring when OCC sends an instruction to NSCC 
to move funds and securities between NSCC participant accounts to 
effect the exercise. The Commission believes that the alternative--for 
OCC to build systems to monitor when settlement at NSCC is complete--
would be impractical. Therefore, the Commission believes that trade 
date should be used in this instance for the charge date.
b. Part II
    In Part II, a covered exchange would be required to provide the 
aggregate dollar amount of the covered sales that: (1) occurred on the 
exchange; (2) have a charge date in the month of the report; and (3) it 
captured in a trade reporting system but does not report to a 
designated clearing agency.\43\ For example, a covered exchange that 
permits ``ex-clearing'' trades would report such trades--provided they 
meet the definition of ``covered sale''--in Part II.\44\ Ex-clearing 
trades are, by definition, not reported to a designated clearing agency 
and thus would not be captured in the Part I data. However, these 
trades should be captured by an exchange's trade reporting system and 
the aggregate dollar amount of such trades would be reported in Part 
II.
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    \43\ No covered round turn transactions would be reported in 
Part II because all transactions in security futures are reported to 
a designated clearing agency (OCC) and, thus, should be reported in 
Part I.
    \44\ Question 9 of proposed Form R31 would require a covered 
exchange to provide the aggregate dollar amount of covered sales 
that: (1) Occurred on the exchange; (2) had a charge date in the 
month of the report; (3) the exchange captured in a trade reporting 
system; and (4) were ex-clearing transactions.
---------------------------------------------------------------------------

    In addition, a covered exchange that permits its members to report 
trades directly to NSCC through a QSR would be required to report in 
Part II the aggregate dollar amount of any such trades that constitute 
covered sales.\45\ The Commission does not believe that NSCC itself 
would be an appropriate source of data for such transactions, because 
QSRs may report net changes in positions to NSCC rather than each 
separate transaction. However, these transactions should still be 
captured by the exchange's trade reporting system. Therefore, the 
Commission believes that the data captured by an exchange's trade 
reporting system would be the best source of data for these covered 
sales.\46\
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    \45\ Question 8 of proposed Form R31 would require a covered 
exchange to provide the aggregate dollar amount of covered sales 
that: (1) Occurred on the exchange; (2) had a charge date in the 
month of the report; (3) the exchange captured in a trade reporting 
system; and (4) were reported to a designated clearing agency by a 
QSR.
    \46\ At the time this proposal was issued, NSX was the only 
exchange that permitted QSRs to report exchange transactions to 
NSCC. Although QSR trades currently constitute the majority of NSX's 
volume, this volume results from the trading activity of only two 
NSX members. Consequently, at this time, the Commission believes 
that it would be appropriate to require NSX to report in Part I 
data, provided by a designated clearing agency, on all of its non-
QSR covered sales.
---------------------------------------------------------------------------

    Finally, a covered association (i.e., the NASD) would be required 
to provide in Part II the aggregate dollar amount of all covered sales 
that it captures in a trade reporting system, regardless of whether the 
association forwards this data to a designated clearing agency. This 
approach differs from that being proposed for the covered exchanges. In 
most cases, OTC covered sales are reported to NSCC by the NASD itself 
(through ACT), just as most exchanges forward their trade data to a 
designated clearing agency. However, a significant number of OTC 
covered sales are reported to NSCC directly by QSRs. The Commission 
could propose that the NASD, like the covered exchanges, be required to 
report in Part I data on covered sales that it forwards to NSCC for 
clearance and settlement and report in Part II the data on the covered 
sales that it captures in a trade reporting system but does not itself 
report to NSCC. However, the Commission believes that this approach 
would be difficult for the NASD's systems to accommodate and would 
significantly increase the possibility of data being miscounted. 
Therefore, the Commission is proposing instead that the NASD provide in 
Part II data on all of the covered sales that it captures in its trade 
reporting systems, even though the NASD itself forwards most of its 
transactions to NSCC for clearance and settlement.
    Paragraph (a)(4) of proposed Rule 31 would provide that, for any 
covered sale included in the data reported in Part II, the charge date 
would be the trade date. The trade date is one of the most important 
pieces of information captured by a trade reporting system. By 
contrast, a trade reporting system is likely to have little if any 
information about the settlement of transactions that are reported to 
it. Therefore, the Commission believes that the charge date for these 
covered sales should be the trade date.
c. Part III
    Part III would require every covered SRO to provide the aggregate 
dollar amount of covered sales that: (1) Occurred on the exchange (or, 
in the case of a covered association, by or through any member of the 
association otherwise than on a national securities exchange); (2) have 
a charge date in the month of the report; and (3) it neither reported 
to a designated clearing agency nor captured in a trade reporting 
system. For example, some OTC odd-lot transactions are not reported to 
ACT.\47\ In addition, sales of securities resulting from the exercise 
of a non-exchange-listed option are not captured by ACT or any other 
SRO's trade reporting system. As the NASD's trade reporting systems 
have no record of these transactions, the NASD must rely on its members 
to ``self-report'' them under the current arrangements for payment of 
Section 31 fees.
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    \47\ NASD rules require a member to report an odd-lot 
transaction to ACT only if the transaction is to be compared, locked 
in, and forwarded to NSCC for clearing. See NASD Rule 6130(a). Most 
odd-lot transactions are internalized trades (i.e., the NASD member 
fills the odd-lot order out of its own inventory). If an NASD member 
internalizes an odd-lot customer order, no NSCC report would be 
necessary and the member would not have to report the transaction to 
ACT.
---------------------------------------------------------------------------

    The Commission believes that self-reporting is currently the only 
viable method of capturing certain transactions for purposes of 
calculating Section 31 fees. However, the Commission

[[Page 4024]]

anticipates that the amount of self-reported data on which it would 
base its fee calculations under proposed Rule 31 would be very small.
    Paragraph (a)(4) of proposed Rule 31 would provide that, for any 
covered sale included in the data reported in Part III, the charge date 
would be the trade date. Because a trade included in Part III would 
occur outside the normal trade reporting processes, a covered SRO would 
have great difficulty in determining the settlement date for such a 
trade. Therefore, the Commission believes that the only feasible charge 
date for these covered sales would be the trade date, as self-reported 
by SRO members.
d. Reporting for Months With a Fee Rate Change
    For those months in which the Commission is required to adjust the 
Section 31 fee rate, proposed Form R31 would require covered SROs to 
report the aggregate dollar amount of covered sales in two parts.\48\ 
The first part would consist of the aggregate dollar amount of covered 
sales having a charge date in that month before the date of the fee 
rate adjustment; the second part would consist of the aggregate dollar 
amount of covered sales having a charge date in the month on or after 
the date of the fee rate adjustment.\49\ Separate reporting would be 
necessary because the Commission would have to multiply the different 
dollar amounts by the different fee rates to determine the correct 
total of Section 31 fees owed by each covered SRO.
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    \48\ See Section 31(j) of the Exchange Act, 15 U.S.C. 78ee(j). 
The Commission is not required to adjust the assessment charge on 
transactions in security futures, so covered SROs would be required 
to report only a single number for the total of such transactions on 
each monthly form.
    \49\ For example, if the fee rate changes on October 16, a 
covered SRO would be required to report on proposed Form R31 the 
aggregate dollar amount of its covered sales having a charge date 
from October 1 to 15 and separately from October 16 to 31.
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4. Exempt Sales and Transactions
    Not every sale of a security is subject to Section 31 fees, and not 
every transaction in a security future is subject to Section 31 
assessments. The statute itself exempts certain sales and round turn 
transactions, and the Commission has exempted others pursuant to the 
authority granted to it by paragraph (f) of Section 31.\50\ Paragraph 
(a)(11) of proposed Rule 31 would set forth a comprehensive list of all 
sales of securities (other than security futures) that are exempt from 
Section 31 fees (``exempt sales''). These provisions would not grant 
new exemptions from Section 31 for any types of securities sales but 
merely would consolidate the existing exemptions.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78ee(f).
---------------------------------------------------------------------------

    Paragraphs (a)(11)(i) to (v) would restate exemptions set forth in 
paragraphs (a) to (e) of existing Rule 31-1.\51\ Paragraph (a)(11)(vi), 
for any sale of an option on security index (including both a narrow-
based security index and a non-narrow-based security index), would 
combine an exemption granted by statute (for a sale of an option on a 
non-narrow-based security index) with an exemption granted by rule (for 
a sale of an option on a narrow-based security index).\52\ The net 
result is that the sale of an option on any security index--be it 
narrow-based or non-narrow-based--is exempt from Section 31 fees. 
Paragraph (a)(11)(vi) of proposed Rule 31 would clarify this point. 
Paragraph (a)(11)(vii) would incorporate language from the statute that 
specifically exempts sales of bonds, debentures, and other evidences of 
indebtedness.
---------------------------------------------------------------------------

    \51\ 17 CFR 240.31-1(a)-(e).
    \52\ See Securities Exchange Act Release No. 45371 (January 31, 
2002), 67 FR 5199 (February 5, 2002).
---------------------------------------------------------------------------

    Currently, one type of security future transaction is exempt from 
assessments under Section 31: A round turn transaction in a future on a 
narrow-based security index.\53\ This exemption would be incorporated 
directly into the definition of ``covered round turn transaction'' in 
paragraph (a)(7) of proposed Rule 31.
---------------------------------------------------------------------------

    \53\ See 17 CFR 240.31-1(g).
---------------------------------------------------------------------------

5. Obtaining Data From the Designated Clearing Agencies
    Although the duty to submit proposed Form R31 would lie with the 
covered SROs, paragraph (b)(4) of proposed Rule 31 also would impose a 
duty on each designated clearing agency to provide a covered SRO, upon 
request, with the data in the possession of the designated clearing 
agency needed by the covered SRO to complete Part I of proposed Form 
R31.
    Paragraph (b)(5) of proposed Rule 31 would provide that a covered 
SRO shall provide in Part I of Form R31 only the data supplied to it by 
a designated clearing agency. If a covered SRO were to submit its own 
data in Part I of the form rather than the data supplied by a 
designated clearing agency, the covered SRO would be in violation of 
proposed Rule 31. If a covered SRO did not submit its Form R31 in a 
timely manner but the delay was caused by a designated clearing agency, 
the designated clearing agency, rather than the covered SRO, would be 
in violation of proposed Rule 31.
    Because the data of the designated clearing agencies may include 
exempt sales, the Commission would expect the covered SROs and the 
designated clearing agencies to collaborate in establishing procedures 
to filter out such sales before the data are reported on Form R31.\54\ 
The Commission also anticipates that, to fulfill its obligations under 
paragraph (b)(4) of proposed Rule 31, the designated clearing agencies 
would have to ensure that reversals are handled properly to avoid 
double-counting of the same sale, ensure that covered sales that result 
in no net change of position in any NSCC account are still tabulated, 
and present the data to the covered SROs in a manner that can easily be 
reported on proposed Form R31. The Commission's Office of Compliance 
Inspections and Examinations would periodically review the Section 31 
fee process, including the procedures of the covered SROs and the 
designated clearing agencies.
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    \54\ OCC and the NASD already perform this filtering function 
under the current arrangements for the calculation and payment of 
Section 31 fees. For example, OCC has procedures to prevent sales of 
options on security indexes from being included in the calculation 
of Section 31 fees. The NASD has procedures to prevent members from 
being charged for various transactions that are reported to ACT but 
not subject to Section 31 fees (e.g., sales of foreign securities 
that are neither registered on a national securities exchange nor 
subject to last sale reporting pursuant to the rules of the 
Commission or a registered national securities association). Under 
the proposed rule, NSCC would have to develop procedures to filter 
exempt sales out of the data provided to the covered exchanges.
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E. Calculation and Billing of Section 31 Fees

    Under paragraph (c)(1) of proposed Rule 31, the amount due from a 
covered SRO for a billing period, as reflected in its ``Section 31 
bill,''\55\ would be the sum of the monthly amounts due for each month 
in the billing period. Each covered SRO would be required to provide on 
its monthly Form R31 the aggregate dollar amount of covered sales for 
the month as well as the total number of covered round turn 
transactions for the month. The Commission would multiply the former 
number by the ``fee rate'' (as defined in paragraph (a)(12) of proposed 
Rule 31) \56\ and the latter number by the

[[Page 4025]]

``assessment charge'' (as defined in paragraph (a)(1) of proposed Rule 
31).\57\ This would yield an amount due from each covered SRO for each 
month.\58\ The Commission would add the monthly amounts due to obtain 
the total amount due from the covered SRO for the billing period.
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    \55\ Paragraph (a)(16) of proposed Rule 31 would define 
``Section 31 bill'' to mean the bill showing the total amount due 
from a covered SRO for a billing period, as calculated by the 
Commission based on the data submitted by the covered SRO on its 
Form R31 submissions for the months of the billing period.
    \56\ ``Fee rate'' would mean the fee rate applicable to covered 
sales under paragraphs (b) and (c) of Section 31 of the Exchange 
Act, as adjusted from time to time by the Commission pursuant to 
paragraph (j) of Section 31.
    \57\ ``Assessment charge'' would mean the amount owed by a 
covered SRO for each covered round turn transaction pursuant to 
paragraph (d) of Section 31.
    \58\ The Commission believes that it is appropriate to recognize 
and record on its financial statement accounts receivable for 
Section 31 fees on a monthly basis. Generally accepted accounting 
principles require federal government agencies to follow accrual-
based accounting. One principle of accrual-based accounting is that 
an entity must recognize and match revenue and expenses in the same 
period that those revenues are earned and expenses are incurred. By 
contrast, in cash-based accounting, revenues are based on amounts 
collected during a specific period regardless of when the revenues 
were earned.
---------------------------------------------------------------------------

    Paragraph (c)(3) of proposed Rule 31 would require each covered SRO 
to pay by the due date the entire amount due for the billing period, as 
reflected in its Section 31 bill. An SRO that paid an amount different 
from that stipulated in its Section 31 bill would be in violation of 
proposed Rule 31.\59\
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    \59\ The Commission also believes that a covered SRO, in order 
to satisfy proposed Rule 31, itself must pay the Section 31 bill in 
a single payment. Paragraph (c)(3) of proposed Rule 31 would not 
permit a covered SRO to request a designated clearing agency to pay 
all or part of its Section 31 bill on its behalf. The Commission 
believes that the proposed rule would be more difficult to 
administer if it had to track multiple payments made by or on behalf 
of each covered SRO.
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F. Special Provisions Relating to Initial Implementation

    Whether or not the Commission adopts this proposal, national 
securities exchanges and national securities associations have an 
obligation to pay fees and assessments pursuant to Section 31 of the 
Exchange Act. This obligation for fiscal year 2004 began on September 
1, 2003, and the initial billing period concluded on December 31, 2003. 
The due date for Section 31 fees incurred in that period is March 15, 
2004. The second billing period began on January 1, 2004, and will 
continue until August 31, 2004.
    If the Commission adopts this proposal, it would determine the 
amount of fees and assessments owed by the covered SROs using the new 
procedure described above for the entire fiscal year 2004 (i.e., for 
covered sales and covered round turn transactions having a charge date 
between September 1, 2003, and August 31, 2004, inclusive). The 
Commission believes that this approach is more reliable and would be 
consistent with its obligations under the Accountability Act. To 
accomplish this, however, the Commission would have to adopt an 
additional rule to cover the months in fiscal year 2004 prior to the 
month that proposed Rule 31 would become effective. For example, if 
Rule 31 were to become effective in March 2004, the first Form R31 
would be due from the covered SROs on the tenth business day of April 
2004 (covering March 2004). The Commission would still need a mechanism 
to obtain data on all covered sales and covered round turn transactions 
with charge dates from September 1, 2003, to February 29, 2004, 
inclusive.
    Therefore, the Commission is also proposing temporary Rule 31T. 
Rule 31T would require every covered SRO, within one month of the 
effective date of proposed Rule 31, to submit to the Commission a Form 
R31 for each month from September 2003 to the month immediately before 
the initial month for which Rule 31 would require the SRO to submit a 
Form R31. For example, if Rule 31 were to become effective in March 
2004, temporary Rule 31T would require a covered SRO to make Form R31 
submissions for each of the months from September 2003 to February 
2004, inclusive. Rule 31 itself would require Form R31 submissions for 
March 2004 and every month thereafter.

III. Solicitation of Comments

    The Commission requests comment on all aspects of the proposal. In 
particular:
    1. Are data of the designated clearing agencies an appropriate 
source for the aggregate dollar amount of covered sales and the total 
number of covered round turn transactions occurring on the covered 
exchanges? If not, is there a more appropriate source for this data?
    2. Do the exchanges report to a designated clearing agency every 
transaction that occurs on the exchange, even if the transaction does 
not result in a net change of position in any participant account of 
the clearing agency? Do the clearing agencies have the means to be able 
to tabulate these transactions? If not, what would be an appropriate 
means to ensure that these transactions are counted by the Commission 
under proposed Rule 31?
    3. Are there any trades (except for trades reported to a designated 
clearing agency by a QSR) occurring on a national securities exchange 
that are reported to a clearing agency on a net basis rather than on a 
transaction-by-transaction basis? If so, would clearing data still be 
an appropriate basis for the Commission's calculation of Section 31 
fees? If not, what source would be more appropriate?
    4. Would data from the consolidated tape or an SRO's trade 
reporting system be a more feasible or reliable source of all of a 
covered exchange's covered sales? If so, why? Are there sufficient 
incentives for market participants to correct data that were 
incorrectly reported to the consolidated tape?
    5. Are ACT and TRACS an appropriate source of data for the 
aggregate dollar amount of covered OTC sales of equity securities? 
Should proposed Rule 31 and Form R31 allow the NASD to report all 
covered sales reported to ACT and TRACS in Part II of proposed Form 
R31? Would the Commission obtain more accurate information by requiring 
the NASD to report in Part I all covered sales that the NASD itself 
reports to NSCC and the remainder in Part II?
    6. Should the NASD be required to report and pay Section 31 fees on 
sales of securities resulting from exercises of physical delivery 
exchange-traded options? If not, which covered SRO should have that 
duty? Why?
    7. Aside from ex-clearing transactions, are there any types of 
covered sales occurring on a covered exchange that are not reported to 
a designated clearing agency? If so, what are they and how frequently 
do they occur? How could the Commission obtain accurate data about 
them?
    8. Is it appropriate to require the covered SROs to submit data on 
all of their covered sales even though proposed Rule 31 would require 
them to obtain data on the majority of those sales from one or more 
designated clearing agencies? Should the Commission obtain this data 
directly from the designated clearing agencies?
    9. Is it appropriate to require covered exchanges to provide data 
from their trade reporting systems for trades that are reported by a 
QSR to NSCC? If not, what would be an appropriate source?
    10. The Commission has been informed that the number of ex-clearing 
trades on the exchanges is extremely small. Is this understanding 
correct? Would it be appropriate for proposed Rule 31 and Form R31 to 
include a de minimis exception, such that a covered exchange would not 
have to tabulate and report the aggregate dollar amount of such covered 
sales provided that the exchange certified that the dollar amount was 
below a certain threshold? If so, what should that threshold be? What 
amount of Section 31 fees would the Commission be foregoing if the de 
minimis threshold were established at that level?
    11. Is ten business days a reasonable time period to give covered 
SROs to

[[Page 4026]]

prepare and submit Form R31? If not, what is a reasonable period of 
time?
    12. Are the charge dates proposed by the Commission appropriate? If 
not, how should the charge dates be determined?
    13. Are there additional means to reduce Commission reliance on 
data self-reported by SRO members?
    14. Should the Commission allow covered SROs to request a 
designated clearing agency to pay Section 31 bills on their behalf? Why 
or why not?

IV. Consideration of the Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act \60\ requires the Commission, 
whenever it engages in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider whether the action will promote efficiency, 
competition, and capital formation. In addition, Section 23(a)(2) of 
the Exchange Act \61\ requires the Commission, when promulgating rules 
under the Exchange Act, to consider the impact any such rules would 
have on competition. Section 23(a)(2) further provides that the 
Commission may not adopt a rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
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    \60\ 15 U.S.C. 78c(f).
    \61\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission preliminarily believes that proposed Rules 31 and 
31T and Form R31 would not have any adverse effect on efficiency, 
competition, or capital formation. The duty imposed on covered SROs to 
pay Section 31 fees does not arise from Commission rulemaking, but from 
the Exchange Act itself. The Commission's proposal would establish a 
process for calculating and collecting Section 31 fees. The Commission 
preliminarily believes that proposed Rule 31 would promote efficiency, 
competition, and capital formation by establishing a transparent 
process whereby the Commission would calculate and collect Section 31 
fees.
    The Commission further believes that the proposal would promote 
efficiency, competition, and capital formation by making more accurate 
the fee rate adjustments made by the Commission pursuant to paragraph 
(j) of Section 31.\62\ For example, paragraph (j)(2) requires the 
Commission to adjust the fee rate if it estimates--by March 1 of the 
fiscal year, based on the actual aggregate dollar volume of sales 
during the first five months of the fiscal year--that the amount that 
it would collect using the base fee rate set forth in paragraphs (b) 
and (c) of Section 31\63\ is ``reasonably likely'' to be 10% more or 
less than the ``target offsetting collection amount'' stipulated in 
paragraph (l) of the Exchange Act.\64\ The data received on proposed 
Form R31 should provide the Commission with more complete and more 
precise data on which to base these estimates.
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    \62\ 15 U.S.C. 78ee(j).
    \63\ 15 U.S.C. 78ee(b) and (c).
    \64\ 15 U.S.C. 78ee(l). Paragraph (j)(1) of Section 31 also 
requires the Commission to adjust the fee rate ``to a uniform 
adjusted rate that, when applied to the baseline estimate of the 
aggregate dollar amount of sales for such fiscal year, is reasonably 
likely to produce aggregate fee collections under [Section 31] 
(including assessments collected under subsection (d)) that are 
equal to the target offsetting collection amount for such fiscal 
year.'' 15 U.S.C. 78ee(j)(1).
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    Commenters are invited to present their views on the proposal's 
effect on efficiency, competition, and capital formation. Empirical 
data and other factual support for these views should be provided, if 
possible.

V. Paperwork Reduction Act

    This proposal contains ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995 (``PRA''). 
Accordingly, the Commission has submitted this proposed rulemaking to 
the Office of Management and Budget (``OMB'') for review in accordance 
with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number.\65\ 
The titles of the collections of information are ``Rule 31, Section 31 
Transaction Fees''; ``Rule 31T, Temporary Rule Regarding Fiscal Year 
2004''; and ``Form R31, Form for Reporting Covered Sales and Covered 
Round Turn Transactions Under Section 31 of the Exchange Act.''
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    \65\ 44 U.S.C. 3501 et seq.
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A. Summary of Collection of Information

    Proposed Rules 31 and 31T and Form R31 would require covered SROs 
to provide the Commission data on all of their covered sales and 
covered round turn transactions. The proposed form, due on a monthly 
basis, would consist of three parts. Part I would require each covered 
exchange to provide the aggregate dollar amount of the covered sales 
with a charge date in the month of the report that it reported to a 
designated clearing agency. Part I also would require each covered 
exchange to provide the total number of covered round turn transactions 
in security futures having a charge date in the month of the report 
that it reported to a designated clearing agency. Finally, Part I would 
require a covered association to provide the aggregate dollar amount of 
covered sales that: (1) occurred by or through any member of the 
association; (2) had a charge date in the month of the report; and (3) 
resulted from the exercise of a physical delivery exchange-traded 
option. Paragraph (b)(4) of proposed Rule 31 would require the 
designated clearing agencies to provide the covered SROs, upon request, 
with the data in their possession needed by the covered SROs to 
complete proposed Form R31.
    Part II would require each covered exchange to provide the 
aggregate dollar amount of the covered sales having a charge date in 
that month that it captures in a trade comparison system but does not 
report to a designated clearing agency. Separate entries would be 
required for covered sales that: (1) were reported to a designated 
clearing agency by a QSR; and (2) were ex-clearing transactions. Part 
II also would require a covered association to provide the aggregate 
dollar amount of any covered sales that: (1) occurred by or through any 
member of the association; (2) had a charge date in the month of the 
report; and (3) that it captures in a trade comparison system--
regardless of whether it reported some of those transactions to a 
designated clearing agency.
    Part III would require each covered SRO to provide the aggregate 
dollar amount of the covered sales that: (1) occurred on the exchange 
(or, in the case of a covered association, by or through any member of 
the association otherwise than on a national securities exchange); (2) 
had a charge date in that month; and (3) it neither captured in a trade 
comparison system nor reported to a designated clearing agency.
    For any month in which the Commission is required to adjust the 
Section 31 fee rate, a covered SRO would have to separate the data on 
the aggregate dollar amount of covered sales into two parts. The first 
part would consist of the aggregate dollar amount of covered sales 
having a charge date in that month before the date of the fee rate 
adjustment; the second part would consist of the aggregate dollar 
amount of covered sales having a charge date on or after the date of 
the fee rate adjustment.

B. Proposed Use of Information

    The Commission would use the information obtained on proposed Form 
R31 to calculate the fees and assessments owed by each covered SRO

[[Page 4027]]

to the Commission pursuant to Section 31 of the Exchange Act. Although 
such fees and assessments are due only twice a year (on March 15 and 
September 30), the Commission would use this data to calculate and 
record a receivable on its financial statements every month.

C. Respondents

    There are currently 12 covered SROs that would be subject to the 
collection of information requirements of this proposal. In addition, 
there are currently two entities--NSCC and OCC--that would be 
designated clearing agencies required by paragraph (b)(4) of proposed 
Rule 31 to provide the covered SROs with the data in their possession 
needed by the covered SROs to complete Part I of proposed Form R31. 
Therefore, there would be 14 respondents in total.

D. Total Annual Reporting and Recordkeeping Burden

1. Development Burden for System Modifications
    Under proposed Rule 31, each covered SRO would have a duty to 
provide on proposed Form R31 the aggregate dollar amount of all of its 
covered sales and the total number of its covered round turn 
transactions having a charge date in the month of the report. To comply 
with this collection of information requirement, the covered SROs would 
incur one-time burdens to develop new systems capabilities and 
procedures to collect and tabulate the necessary data. The designated 
clearing agencies also would incur burdens in configuring their systems 
to enable them to meet their obligations under paragraph (b)(4) of 
proposed Rule 31.
a. Options and Security Futures
    Currently, the options exchanges and security futures exchanges 
have arrangements with OCC whereby OCC calculates, collects, and pays 
all of the Section 31 fees and assessments on behalf of the exchanges. 
OCC already has procedures, therefore, to prevent exempt sales from 
being included in the calculation of Section 31 fees. However, OCC 
makes payments to the Commission in one lump-sum on behalf of these 
seven exchanges without stipulating the amount being paid on behalf of 
each exchange. Under proposed Rule 31, OCC would have to provide each 
options exchange with the aggregate dollar amount of its covered sales 
in options and each security futures exchange with the total number of 
its covered round turn transactions in security futures. Therefore, OCC 
would need to develop procedures to allocate each covered sale or 
covered round turn transaction to a specific exchange. Based on 
conversations between Commission staff and OCC, the Commission 
preliminarily estimates this development time to be 180 staff hours.
    In light of the fact that all covered sales in options and covered 
round turn transactions in security futures are cleared and settled by 
OCC, and that OCC would bear the primary burden for making systems 
changes to accommodate the proposal, the Commission preliminarily 
believes that the initial development burden on the five options 
exchanges and two security futures exchanges would be minimal. The 
Commission preliminarily estimates that the total initial burden on 
these seven exchanges would be 10 staff hours per exchange for a total 
of 70 hours (7 exchanges x 10 hours/exchange). Thus, the Commission 
preliminarily concludes that OCC, the options exchanges, and the 
security futures exchanges together would incur burdens for initial 
development of new systems and processes of 250 staff hours (180 + 70).
b. Exchange-Traded Equities
    NSCC does not currently perform any functions with respect to 
Section 31. Therefore, NSCC is likely to incur more initial development 
burdens than OCC. To provide the data to the covered SROs required by 
the proposal, NSCC would need to configure its systems to accurately 
tabulate the aggregate dollar amount of covered sales forwarded to it 
by the equities exchanges. Such configuration would include, among 
other things, handling reversals appropriately to avoid double-counting 
of the same transaction, designing a method to filter exempt sales out 
of the clearing data, ensuring that covered sales that result in no net 
change of position in any NSCC account are still tabulated, and 
presenting the data to the covered SROs in a manner that can be easily 
reported on proposed Form R31.
    Based on conversations between Commission staff and the proposed 
respondents, the Commission preliminarily estimates that NSCC and the 
eight exchanges that trade equities would collectively incur an 
aggregate burden of 1000 staff hours to develop new systems and 
processes to fulfill their obligations under proposed Rule 31.
c. OTC Equities
    The NASD would be the only covered association that would be 
required to report on proposed Form R31 covered sales occurring 
otherwise than on a national securities exchange. Under the current 
arrangements for the payment of Section 31 fees, the NASD calculates 
the aggregate dollar amount of sales reported to ACT after filtering 
out sales that are exempt from Section 31 fees. The NASD also 
administers a paper-based system whereby NASD members report and pay 
fees on odd-lot sales as well as sales of securities resulting from the 
exercise of non-exchange-listed options, neither of which are reported 
to ACT. The Commission anticipates that these NASD procedures would 
continue unchanged under the proposal. In addition, however, the 
proposal would require the NASD to tabulate and report all of the 
covered sales occurring in the ADF, although TRACS, the trade reporting 
system for the ADF, currently is not configured to provide such data. 
Finally, the proposal would require the NASD for the first time to 
report and pay Section 31 fees on covered sales resulting from 
exercises of physical delivery exchange-traded options.
    Based on conversations between Commission staff and the NASD, the 
Commission preliminarily estimates that the necessary configurations to 
TRACS would require 50 hours of NASD staff time. In addition, the 
Commission preliminarily believes it would require 25 hours of OCC and 
NASD staff time to develop a process whereby OCC would convey, and the 
NASD would receive and report on its Form R31, data on covered sales 
resulting from exercises of physical delivery exchange-traded options. 
This burden estimate does not include any time spent by OCC in 
compiling this data, because OCC already does so in levying and paying 
to the Commission Section 31 fees on behalf of the options exchanges 
collectively. Thus, the estimate of 25 burden hours includes only the 
burden of developing a process for conveying that data in a regular and 
reliable manner to the NASD. Finally, in light of the NASD's existing 
processes to pass Section 31 fees to its members based on transaction 
volume (as reflected in ACT) and to collect data on sales of certain 
securities self-reported by its members, the Commission preliminarily 
estimates that it would require only 15 staff hours to adapt to these 
processes to the requirements of the proposal.
    In sum, the Commission preliminarily estimates that the initial 
development burden on the NASD and OCC to comply with the proposal 
would be 80 staff hours (50 + 25 + 15).
d. Total Development Burden
    In sum, the Commission preliminarily believes that the 14 
respondents to the proposed collection of information

[[Page 4028]]

would incur a total one-time development burden of 1330 staff hours 
(250 hours for OCC and the options and security futures exchanges + 
1000 for NSCC and the equities exchanges + 80 for the NASD and OCC).
2. Ongoing Compliance Burden
    On an ongoing basis, covered SROs would be required to submit to 
the Commission proposed Form R31 within ten business days after the end 
of every month. Proposed Rule 31 would require a designated clearing 
agencies to furnish to the covered SROs the data in its possession 
needed by the SROs to complete Part I of proposed Form R31.
a. Designated Clearing Agencies
    Presently, NSCC clears transactions occurring on eight national 
securities exchanges and OCC clears transactions occurring on seven 
exchanges.\66\ Equities trading volume is far larger than options 
trading volume. Therefore, the Commission believes that NSCC's monthly 
burden in tabulating the necessary data and providing it to the 
exchanges would be larger than OCC's burden. Based on conversations 
between Commission staff, NSCC, and OCC, the Commission preliminarily 
estimates that NSCC would incur an average monthly burden of 4 staff 
hours and OCC an average monthly burden of 2 staff hours to provide the 
exchanges with the data for Part I of proposed Form R31. In addition, 
the Commission preliminarily estimates that, once the initial processes 
have been developed, OCC would incur an additional monthly burden of 1 
staff hour to provide the NASD with the aggregate dollar amount of 
covered sales resulting from exercises of physical delivery exchange-
traded options.
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    \66\ Currently, four exchanges--BSE, CHX, NSX, and NYSE--trade 
only equity securities, which are cleared and settled by NSCC. Three 
exchanges--ISE, NQLX, and OneChicago--trade securities that are 
cleared and settled only by OCC. Four exchanges--Amex, CBOE, PCX, 
and PHLX--trade both equities and options, thus requiring the 
clearance and settlement services of both NSCC and OCC.
---------------------------------------------------------------------------

    In addition, the Commission anticipates that proposed Rule 31 would 
impose additional financial resource burdens on NSCC. These resources 
would be needed to provide, among other things, CPU time, data storage, 
power, and systems maintenance. Based on conversations between 
Commission staff and NSCC, the Commission preliminarily estimates that 
this burden would be $1000 per month.
b. Covered Exchanges
    The covered exchanges themselves also would incur burdens in 
fulfilling the requirement imposed by paragraph (b) of proposed Rule 31 
to complete and submit to the Commission proposed Form R31 on a monthly 
basis. The Commission believes that an exchange's burden would increase 
slightly if it trades both equities and options, since the exchange 
would have to coordinate inputs from both NSCC and OCC. Furthermore, 
the Commission believes that an exchange that trades only options or 
security futures would incur slightly less burden than an exchange that 
trades only equities, because all data on covered sales of options 
should be obtainable from OCC and reported in Part I of proposed Form 
R31. By contrast, a covered exchange that trades equities is more 
likely to have covered sales for which it would have to rely on sources 
other than a designated clearing agency and that must be reported in 
Parts II or III. Thus, the Commission preliminarily estimates that the 
ongoing monthly burden for the covered exchanges to complete and submit 
to the Commission proposed Form R31 would be as follows:
     two exchanges that trade only security futures 
and one exchange that trades only options: 0.5 hours/form
     four exchanges that trade only equities: 1.0 
hours/form
     four exchanges that trade both equities and 
options: 1.5 hours/form
    Thus, the Commission preliminarily concludes that covered exchanges 
would incur a total of 11.5 burden hours--(3 OCC-only exchanges x 0.5 
hour/exchange = 1.5 hours) + (4 NSCC-only exchanges x 1.0 hour/exchange 
= 4.0 hours) + (4 dual exchanges x 1.5 hours/exchange = 6 hours)--to 
complete the Form R31 submissions required in a given month.
c. Covered Associations
    The Commission preliminarily estimates that one covered 
association, the NASD, would incur a monthly burden of 1 staff hour to 
receive, confirm, and report in Part I of proposed Form R31 the data 
provided to it by OCC on the aggregate dollar amount of covered sales 
having a charge date in the month of the report resulting from 
exercises of physical delivery exchange-traded options. Furthermore, 
the Commission preliminarily estimates that 2 NASD staff hours would be 
required to produce monthly reports from ACT and TRACS of all covered 
sales having a charge date in that month and to record those data on 
proposed Form R31. Finally, the Commission preliminarily estimates that 
1 NASD staff hour would be required to aggregate and record in Part III 
of proposed Form R31 data on covered sales that are self-reported by 
NASD members. The Commission preliminarily concludes that the monthly 
burden imposed on the NASD by proposal would be 4 staff hours (1 + 2 + 
1).
d. Total Ongoing Monthly Burden
    In summary, the Commission preliminarily believes that the total 
burden on the 14 respondents for completing Form R31 for a single month 
would be 22.5 staff hours (7 hours for two designated clearing agencies 
+ 11.5 hours for 11 covered exchanges + 4 hours for one covered 
association), or 270 staff hours per year (22.5 hours/month x 12 
months). In addition, the Commission preliminarily believes that one 
designated clearing agency, NSCC, would incur additional financial 
burdens of $1000 per month or $12,000 per year.
3. Proposed Rule 31T
    Proposed temporary Rule 31T would require every covered SRO, within 
one month of the effective date of proposed Rule 31, to submit to the 
Commission a Form R31 for each of the months September 2003 to the 
month that Rule 31 becomes effective. This would enable the Commission 
to obtain data on all covered sales and covered round turn transactions 
occurring in fiscal year 2004, regardless of the effective date of 
proposed Rule 31. The Commission notes that national securities 
exchanges and national securities associations have a duty to pay fees 
and assessments pursuant to Section 31 regardless of whether the 
Commission adopts this proposal.
    The Commission preliminarily estimates that, if the proposal is 
adopted, temporary Rule 31T would require each covered SRO to provide 
six additional Form R31 submissions. In Section V(D)(2)(d) above, the 
Commission estimated that the total burden on the 14 respondents to 
complete one month's worth of Form R31 submissions would be 22.5 staff 
hours. Therefore, the Commission estimates that proposed Rule 31T would 
impose a total burden of 135 staff hours (6 forms x 22.5 hours/form) on 
the 14 respondents.

E. Request for Comments

    The Commission requests comment in order to:
     evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information has practical 
utility;

[[Page 4029]]

     evaluate the accuracy of the Commission's 
estimates of the burden of the proposed collection of information;
     determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected;
     evaluate whether there are ways to minimize the 
burden of the collection of information on the respondents, including 
through the use of automated collection techniques or other forms of 
information technology; and
     evaluate whether the proposed amendments would 
have any effect on any other collection of information not previously 
identified in this section.
    Any member of the public may direct to the Commission any comments 
concerning the accuracy of these burden estimates and any suggestions 
for reducing the burdens. Persons who desire to submit comments on the 
collection of information requirements should direct their comments to 
the OMB; Attention: Desk Officer for the Securities and Exchange 
Commission; Office of Information and Regulatory Affairs; Washington, 
DC 20503; and send a copy of the comments to Jonathan G. Katz; 
Secretary; Securities and Exchange Commission; 450 Fifth Street, NW.; 
Washington, DC 20549-0609, with reference to File No. S7-05-04. 
Requests for materials submitted to the OMB by the Commission with 
regard to these collections of information should be in writing, refer 
to File No. S7-05-04, and be submitted to the Securities and Exchange 
Commission; Records Management; Office of Filings and Information 
Services; 450 Fifth Street, NW.; Washington, DC 20549. Because the OMB 
is required to make a decision concerning the collections of 
information between 30 and 60 days after publication, your comments are 
best assured of having their full effect if the OMB receives them 
within 30 days of publication of this notice.

VI. Consideration of Costs and Benefits

    The Commission is considering the costs and benefits of proposed 
Rules 31 and 31T and Form R31, as described below. The Commission 
encourages comments that address this analysis, as well as additional 
costs or benefits that we may not have considered. Empirical data and 
other factual support should be provided, if possible.

A. Costs

    Proposed Rule 31 and Form R31 would require covered SROs to provide 
the Commission on a monthly basis data on their covered sales and 
covered round turn transactions. Proposed temporary Rule 31T would 
require covered SROs to provide the Commission with Form R31 
submissions for the months of September 2003 until the month that Rule 
31 becomes effective. As discussed above in Section V, the proposal 
would cause the covered SROs and designated clearing agencies to incur 
certain paperwork costs in tabulating and reporting to the Commission 
the data required by Form R31. The Commission preliminarily estimates 
that the covered SROs and designated clearing agencies would incur a 
burden of 1330 staff hours of initial development costs, 270 staff 
hours per year to submit proposed Form R31 on a monthly basis, and 135 
staff hours to comply with proposed temporary Rule 31T. The Commission 
also preliminarily estimates that one designated clearing agency, NSCC, 
would incur a monthly financial cost of $1000 for systems maintenance 
to comply with proposed Rule 31.
    In addition, the Commission believes that certain covered SROs may 
incur additional costs to develop new methods for allocating Section 31 
fees among their members if the Commission adopts proposed Rule 31. 
Currently, the covered SROs generate the funds to pay Section 31 fees 
to the Commission by passing these fees on to their members. The NYSE 
and Amex require their members to self-report the aggregate dollar 
amount of their sales of securities and the corresponding Section 31 
fees due based on that amount. Every other equities exchanges imposes 
fees on their members based on the sales of securities that the 
exchange reports to the consolidated tape. If the Commission adopts a 
rule that would base the calculation of Section 31 fees largely on 
clearing data, either or both of the existing methods for allocating 
Section 31 fees among members of the equities exchanges could yield an 
amount that differs from that calculated by the Commission pursuant to 
proposed Rule 31.
    Therefore, a covered exchange might wish to develop new procedures 
to subdivide Section 31 fees among its members if the proposal is 
adopted. Paragraph (b)(4) of proposed Rule 31 would require a 
designated clearing agency to provide covered SROs, upon request, with 
the data in its possession needed by the SROs to complete Part I of 
Form R31. A covered SRO could also request that the designated clearing 
agency subdivide the data by SRO member so that the SRO could impose 
fees on each member for these covered sales or covered round turn 
transactions. While subdividing the data in this manner would not be 
required by proposed Rule 31, the Commission anticipates that covered 
SROs may elect to establish such processes so that they collect from 
their members only the precise amount that the Commission bills them 
under proposed Rule 31. A covered SRO that wishes to establish a new 
procedure for dividing its Section 31 fees among its members might be 
required to propose a rule change pursuant to Section 19(b) of the 
Exchange Act \67\ in order to do so.\68\
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    \67\ 15 U.S.C. 78s(b).
    \68\ In considering a proposed rule change submitted by an 
exchange to create a new method for allocating its Section 31 fees 
among its members, the Commission would examine the proposal's 
consistency with Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b), 
particularly the requirement that dues, fees, and other charges 
imposed by the exchange be allocated equitably among the exchange's 
members.
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    The Commission notes that this proposal would not impose new costs 
on covered SROs in the form of higher Section 31 fees. The rate at 
which an SRO incurs liability to the Commission for covered sales and 
covered round turn transactions is set by the statute; the proposal 
would merely establish a procedure for the Commission to obtain a 
reliable measure of the aggregate dollar amount of covered sales and 
the total number of covered round turn transactions and, using that 
information, to calculate the appropriate amount of fees and 
assessments due from each covered SRO pursuant to Section 31.

B. Benefits

    A primary benefit of this proposal is that the means by which the 
Commission derives a large source of its revenue would become more 
transparent and more easily subject to verification. The Commission 
believes that the proposal would allow it to obtain the most complete 
and reliable data available on the aggregate dollar amount of covered 
sales and total number of covered round turn transactions occurring in 
the U.S. securities markets. This data would be provided on a simple 
and easy-to-use form. The Commission believes that requiring the data 
to be reported in this manner would greatly facilitate an auditor's 
understanding of the source and calculation of the Section 31 fee 
receivables on the Commission's financial statements. The Commission 
further believes that the public interest benefits when the Commission 
can demonstrate that it is collecting the correct amount of Section 31 
fees and properly carrying out the fiscal responsibilities assigned to 
it by Congress.
    A related benefit of this proposal is that the fee rate adjustments 
made by

[[Page 4030]]

the Commission pursuant to paragraph (j) of Section 31\69\ would be 
more precise. For example, paragraph (j)(2) requires the Commission to 
adjust the fee rate if it estimates--by March 1 of the fiscal year, 
based on the actual aggregate dollar volume of sales during the first 
five months of the fiscal year--that the amount that it would collect 
using the base fee rate set forth in paragraphs (b) and (c) of Section 
31\70\ is ``reasonably likely'' to be 10% more or less than the 
``target offsetting collection amount'' stipulated in paragraph (l) of 
the Exchange Act The data received on proposed Form R31 should provide 
the Commission with more complete and more precise data on which to 
base these estimates.
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    \69\ 15 U.S.C. 78ee(j).
    \70\ 15 U.S.C. 78ee(b) and (c).
---------------------------------------------------------------------------

C. Request for Comments

    The Commission requests comments on how any aspect of the proposal 
would create benefits or impose costs on market participants. In 
particular:
     Would covered SROs have to propose rule changes 
to implement new procedures for allocating Section 31 fees among their 
members? How much would it cost to submit such a filing pursuant to 
Section 19(b) of the Exchange Act?
     Are there other ways in which the Commission 
could carry out the Section 31 fee collection process in a manner 
consistent with generally accepted accounting principles as they apply 
to federal agencies?
     Are there other costs or benefits to this 
proposal?
     Do the benefits justify the costs?

VII. Regulatory Flexibility Act

    The Commission hereby certifies, pursuant to the Regulatory 
Flexibility Act (``RFA''),\71\ that proposed Rules 31 and 31T and Form 
R31, if adopted, would not have a significant economic impact on a 
substantial number of small businesses. Proposed Rule 31 and Form R31 
would establish a formal procedure for the calculation and payment of 
Section 31 fees. Twelve entities--the 11 national securities exchanges 
and the NASD--would be required to provide the Commission with data on 
their covered sales and covered round turn transactions. None of these 
entities is a ``small business'' for purposes of the RFA.\72\ In 
addition, two designated clearing agencies--NSCC and OCC--would be 
required to provide the covered SROs with the data in their possessions 
needed by the covered SROs to complete Part I of proposed Form R31. 
Neither clearing agency is a ``small business'' for purposes of the 
RFA.\73\ No other entities would incur obligations directly from 
proposed Rules 31 and 31T. Accordingly, the Commission certifies that 
proposed Rules 31 and 31T and Form R31 would not have a significant 
economic impact on a substantial number of small businesses.
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    \71\ 5 U.S.C. 605(b).
    \72\ See 17 CFR 240.0-10(e). Paragraph (e) of Rule 0-10 states 
that the term ``small business,'' when referring to an exchange, 
means any exchange that has been exempted from the reporting 
requirements of Rule 11Aa3-1 under the Exchange Act, 17 CFR 
240.11Aa3-1, and is not affiliated with any person (other than a 
natural person) that is not a small business or small organization 
as defined in Rule 0-10. The Commission also has found that the NASD 
is not a small business.
    \73\ See 17 CFR 240.0-10(d). Paragraph (d) of Rule 0-10 states 
that the term ``small business,'' when used with reference to a 
clearing agency, means a clearing agency that: (1) compared, 
cleared, and settled less than $500 million in securities 
transactions during the preceding fiscal year (or in the time that 
it has been in business, if shorter); (2) had less than $200 million 
of funds and securities in its custody or control at all times 
during the preceding fiscal year (or in the time that it has been in 
business, if shorter); and (3) is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization as defined in Rule 0-10.
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    The Commission requests written comments regarding this 
certification. The Commission requests that commenters describe the 
nature of any impact on small businesses and provide empirical data to 
support the extent of the impact.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\74\ a rule is ``major'' if it has resulted or is likely to 
result in:
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    \74\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million 
or more;
     A major increase in costs or prices for 
consumers or individual industries; or
     Significant adverse effects on competition, 
investment, or innovation.
    The Commission requests comment on the potential impact of the 
proposal on the economy on an annual basis. Empirical data and other 
factual support should be provided, if possible.

IX. Statutory Authority

    Proposed Rules 31 and 31T under the Exchange Act would be adopted 
pursuant to 15 U.S.C. 78a et seq., particularly Sections 6, 15A, 17A, 
19, 23(a), and 31 of the Exchange Act (15 U.S.C. 78f, 78o-3, 78q-1, 
78s, 78w(a), and 78ee).

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rule

    For the reasons set out in the preamble, the Commission proposes to 
amend title 17, chapter II of the Code of Federal Regulations as 
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    2. Section 240.31-1 is revised to read as follows:


Sec. 240.31  Section 31 transaction fees.

    (a) Definitions. For the purpose of this section, the following 
definitions shall apply:
    (1) Assessment charge means the amount owed by a covered SRO for a 
covered round turn transaction pursuant to section 31(d) of the Act (15 
U.S.C. 78ee(d));
    (2) Billing period means, for a single calendar year:
    (i) January 1 to the close of August 31 (``billing period 1''); or
    (ii) September 1 to the close of December 31 (``billing period 
2'').
    (3) Charge date means the date on which a covered sale or covered 
round turn transaction occurs for purposes of determining the liability 
of a covered SRO pursuant to section 31 of the Act. The charge date is 
the settlement date with respect to a covered sale or a covered round 
turn transaction that a covered exchange reports to a designated 
clearing agency. The charge date is the trade date with respect to a 
covered sale occurring on a covered exchange that the exchange does not 
report to a designated clearing agency, and with respect to any covered 
sale occurring otherwise than on a national securities exchange.
    (4) Covered association means any national securities association 
by or through any member of which covered sales or covered round turn 
transactions occur otherwise than on a national securities exchange.
    (5) Covered exchange means any national securities exchange on 
which

[[Page 4031]]

covered sales or covered round turn transactions occur.
    (6) Covered sale means a sale of a security, other than an exempt 
sale or a sale of a security future, occurring on a national securities 
exchange or by or through any member of a national securities 
association otherwise than on a national securities exchange.
    (7) Covered round turn transaction means a round turn transaction 
in a security future, other than a round turn transaction in a future 
on a narrow-based security index, occurring on a national securities 
exchange or by or through a member of a national securities association 
otherwise than on a national securities exchange.
    (8) Covered SRO means a covered exchange or covered association.
    (9) Designated clearing agency means a clearing agency registered 
under section 17A of the Act (15 U.S.C. 78q-1) that clears and settles 
covered sales or covered round turn transactions.
    (10) Due date means:
    (i) March 15, with respect to the amounts owed by covered SROs 
under section 31 of the Act (15 U.S.C. 78ee) for covered sales and 
covered round turn transactions having a charge date in billing period 
2; and
    (ii) September 30, with respect to the amounts owed by covered SROs 
under section 31 of the Act (15 U.S.C. 78ee) for covered sales and 
covered round turn transactions having a charge date in billing period 
1.
    (11) Exempt sale means:
    (i) Any sale of a security offered pursuant to an effective 
registration statement under the Securities Act of 1933 (except a sale 
of a put or call option issued by the Options Clearing Corporation) or 
offered in accordance with an exemption from registration afforded by 
section 3(a) or 3(b) of the Securities Act of 1933 (15 U.S.C. 77c(a) or 
77c(b)), or a rule thereunder;
    (ii) Any sale of a security by an issuer not involving any public 
offering within the meaning of section 4(2) of the Securities Act of 
1933 (15 U.S.C. 77d(2));
    (iii) Any sale of a security pursuant to and in consummation of a 
tender or exchange offer;
    (iv) Any sale of a security upon the exercise of a warrant or right 
(except a put or call), or upon the conversion of a convertible 
security;
    (v) Any sale of a security that is executed outside the United 
States and is not reported, or required to be reported, to a 
transaction reporting association as defined in Sec. 240.11Aa3-1 and 
any approved plan filed thereunder;
    (vi) Any sale of an option on a security index (including both a 
narrow-based security index and a non-narrow-based security index); and
    (vii) Any sale of a bond, debenture, or other evidence of 
indebtedness.
    (12) Fee rate means the fee rate applicable to covered sales under 
paragraphs (b) or (c) of section 31 of the Act (15 U.S.C. 78ee(b) or 
(c)), as adjusted from time to time by the Commission pursuant to 
paragraph (j) of section 31 of the Act (15 U.S.C. 78ee(j));
    (13) Narrow-based security index means the same as in section 
3(a)(55)(B) and (C) of the Act (15 U.S.C. 78c(a)(55)(B) and (C)).
    (14) Round turn transaction in a security future means one purchase 
and one sale of a contract of sale for future delivery.
    (15) Physical delivery exchange-traded option means a securities 
option that is listed and registered on a national securities exchange 
and settled by the physical delivery of the underlying securities.
    (16) Section 31 bill means the bill sent by the Commission to a 
covered SRO pursuant to section 31 of the Act (15 U.S.C. 78ee) showing 
the total amount due from the covered SRO for the billing period, as 
calculated by the Commission based on the data submitted by the covered 
SRO in its Form R31 (Sec. 249.11 of this chapter) submissions for the 
months of the billing period.
    (17) Trade reporting system means an automated facility operated by 
a covered SRO used to collect or compare trade data.
    (b) Reporting of covered sales and covered round turn transactions. 
(1) Each covered SRO shall submit Form R31 (Sec. 249.11 of this 
chapter) to the Commission within ten business days after the end of 
each month.
    (2) A covered exchange shall provide on Form R31 the following data 
on covered sales and covered round turn transactions occurring on that 
exchange that have a charge date in that month:
    (i) The aggregate dollar amount of covered sales that it reported 
to a designated clearing agency, as reflected in the data provided by 
the designated clearing agency;
    (ii) The aggregate dollar amount of covered sales that it captured 
in a trade reporting system but did not report to a designated clearing 
agency;
    (iii) The aggregate dollar amount of covered sales that it neither 
captured in a trade reporting system nor reported to a designated 
clearing agency; and
    (iv) The total number of covered round turn transactions that it 
reported to a designated clearing agency, as reflected in the data 
provided by the designated clearing agency.
    (3) A covered association shall provide on Form R31 the following 
data on covered sales and covered round turn transactions occurring by 
or through any member of such association otherwise than on a national 
securities exchange that have a charge date in that month:
    (i) The aggregate dollar amount of covered sales resulting from the 
exercise of a physical delivery exchange-traded option, as reflected in 
the data provided by a designated clearing agency;
    (ii) The aggregate dollar amount of covered sales that it captured 
in a trade comparison system;
    (iii) The aggregate dollar amount of covered sales that it did not 
capture in a trade comparison system; and
    (iv) The total number of covered round turn transactions that it 
reported to a designated clearing agency, as reflected in the data 
provided by the designated clearing agency.
    (4) A designated clearing agency shall provide a covered SRO, upon 
request, the data in its possession needed by the covered SRO to 
complete Part I of Form R31.
    (5) A covered SRO shall provide in Part I of Form R31 only the data 
supplied to it by a designated clearing agency.
    (c) Calculation and billing of section 31 fees. (1) The amount due 
from a covered SRO for a billing period, as reflected in its Section 31 
bill, shall be the sum of the monthly amounts due for each month in the 
billing period.
    (2) The monthly amount due from a covered SRO shall equal:
    (i) The aggregate dollar amount of its covered sales that have a 
charge date in that month, times the fee rate; plus
    (ii) The total number of its covered round turn transactions that 
have a charge date in that month, times the assessment charge.
    (3) By the due date, each covered SRO shall pay the Commission the 
entire amount due for the billing period, as reflected in its Section 
31 bill.
    3. Section 240.31T is added to read as follows:


Sec. 240.31T  Temporary rule regarding fiscal year 2004.

    (a) Within one month of the effective date of Sec. 240.31, each 
covered SRO shall submit to the Commission a completed Form R31 (Sec. 
249.11 of this chapter) for each of the months September 2003 to the 
month immediately before the month that Sec. 240.31 became effective, 
inclusive.
    (b) This temporary section shall expire [six months after the 
effective date of Sec. 240.31].

[[Page 4032]]

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    4. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C. 
1350, unless otherwise noted.
* * * * *
    5. Section 249.11 and Form R31 (referenced in Sec. 249.11) are 
added to read as follows:


Sec. 249.11  Form R31 for reporting covered sales and covered round 
turn transactions under section 31 of the Act.

    This form shall be used by each national securities exchange to 
report to the Commission within ten business days after the end of 
every month the aggregate dollar amount of sales of securities that 
occurred on the exchange, had a charge date in the month of the report, 
and are subject to fees pursuant to section 31(b) of the Act (15 U.S.C. 
78ee) and Sec. 240.31 of this chapter; and the total number of round 
turn transactions in security futures that occurred on the exchange, 
had a charge date in the month of the report, and are subject to 
assessments pursuant to section 31(d) of the Act and Sec. 240.31 of 
this chapter. This form also shall be used by a national securities 
association to report to the Commission within ten business days after 
the end of every month the aggregate dollar amount of sales or 
securities that occurred by or through a member of the association 
otherwise than on a national securities exchange, had a charge date in 
the month of the report, and are subject to fees pursuant to section 
31(c) of the Act and Sec. 240.31 of this chapter; and the total number 
of round turn transactions in security futures that occurred by or 
through any member of the association otherwise than on a national 
securities exchange, had a charge date in the month of the report, and 
are subject to assessments pursuant to section 31(d) of the Act and 
Sec. 240.31 of this chapter.

    Note: The text of Form R31 does not, and this amendment will 
not, appear in the Code of Federal Regulations.


[[Page 4033]]



FORM R31
 
OMB APPROVAL
OMB Number: 3235-0000
Expires: xxxx, 2006
Estimated average burden hours per form: 1.6
 
                              UNITED STATES
                   SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, DC 20549
 
         FORM FOR REPORTING COVERED SALES AND COVERED ROUND TURN
                  TRANSACTIONS UNDER SECTION 31 OF THE
                     SECURITIES EXCHANGE ACT OF 1934
 


                          FORM R31 INSTRUCTIONS
 
 
 
A. EXPLANATION OF TERMS USED IN THIS FORM
 
CHARGE DATE--The date on which a covered sale or covered round turn
 transaction occurs for purposes of determining the liability of a
 covered SRO pursuant to Section 31 of the Securities Exchange Act of
 1934 (``Exchange Act'') (15 U.S.C. 78ee). The charge date is the
 settlement date with respect to a covered sale or covered round turn
 transaction that a covered exchange reports to a designated clearing
 agency. The charge date is the trade date with respect to a covered
 sale occurring on a covered exchange that the exchange does not report
 to a designated clearing agency, and with respect to any covered sale
 occurring otherwise than on a national securities exchange.
 
COVERED ASSOCIATION--Any national securities association by or though
 any member of which covered sales or covered round turn transactions
 occur otherwise than on a national securities exchange.
 
COVERED EXCHANGE--Any national securities exchange on which covered
 sales or covered round turn transactions occur.
 
COVERED SALE--A sale of a security, other than an exempt sale or a sale
 of a security future, occurring on a national securities exchange or by
 or through any member of a national securities association otherwise
 than on a national securities exchange.
 
COVERED ROUND TURN TRANSACTION--A round turn transaction in a security
 future, other than a round turn transaction in a future on a narrow-
 based security index, occurring on a national securities exchange or by
 or through a member of a national securities association otherwise than
 on a national securities exchange.
 
COVERED SRO--A covered exchange or a covered association.
 
DESIGNATED CLEARING AGENCY--A clearing agency registered under Section
 17A of the Exchange Act (15 U.S.C. 78q-1) that clears and settles
 covered sales or covered round turn transactions.
 
EX-CLEARING TRANSACTION--A sale of a security that clears and settles
 otherwise than through a designated clearing agency.
 
EXEMPT SALE--(i) Any sale of a security offered pursuant to an effective
 registration statement under the Securities Act of 1933 (``Securities
 Act'') (except a sale of a put or call option issued by the Options
 Clearing Corporation) or offered in accordance with an exemption from
 registration afforded by Section 3(a) or 3(b) thereof (15 U.S.C. 77c(a)
 or 77c(b)), or a rule thereunder; (ii) any sale of a security by an
 issuer not involving any public offering within the meaning of Section
 4(2) of the Securities Act (15 U.S.C. 77d(2)); (iii) any sale of a
 security pursuant to and in consummation of a tender or exchange offer;
 (iv) any sale of a security upon the exercise of a warrant or right
 (except a put or call), or upon the conversion of a convertible
 security; (v) any sale of a security that is executed outside the
 United States and is not reported, or required to be reported, to a
 transaction reporting association as defined in 17 CFR 240.11Aa3-1 and
 any approved plan filed thereunder; (vi) any sale of an option on a
 security index (including both a narrow-based security index and a non-
 narrow-based security index); and (vii) any sale of a bond, debenture,
 or other evidence of indebtedness.
 
FEE RATE--The fee rate applicable to covered sales under paragraphs (b)
 or (c) of Section 31 of the Exchange Act (15 U.S.C. 78ee(b) and (c)),
 as adjusted from time to time by the Commission pursuant to paragraph
 (j) of Section 31 of the Exchange Act (15 U.S.C. 78ee(j)).
 
NARROW-BASED SECURITY INDEX--Has the same meaning as in Section
 3(a)(55)(B) and (C) of the Exchange Act (15 U.S.C. 78c(a)(55)(B) and
 (C)).
 
PHYSICAL DELIVERY EXCHANGE-TRADED OPTION--An option that is listed and
 registered on a national securities exchange and that is settled by the
 physical delivery of the underlying securities.
 
QUALIFIED SPECIAL REPRESENTATIVE--A member of a designated clearing
 agency that operates, has an affiliate that operates, or clears for a
 broker-dealer that operates, an automated execution system where the
 designated clearing agency member is on the contra-side of every
 transaction.
 
TRADE REPORTING SYSTEM--An automated facility operated by a covered SRO
 used to collect or compare trade data.
 


[[Page 4034]]


 
 
 
B. GENERAL INSTRUCTIONS
1.                 Covered exchanges shall use Form R31 to report to the
                    Commission, pursuant to Section 31 of the Securities
                    Exchange Act of 1934 (``Exchange Act'') and 17 CFR
                    240.31, data regarding all covered sales and covered
                    round turn transactions that: (1) occurred on the
                    exchange; and (2) have a charge date in the month
                    for which this form is being submitted.
 
2.                 Covered associations shall use Form R31 to report to
                    the Commission, pursuant to Section 31 of the
                    Exchange Act and Rule 31 thereunder, data regarding
                    all covered sales that: (1) occurred by or through
                    any member of the association otherwise than on a
                    national securities exchange; and (2) have a charge
                    date in the month for which this form is being
                    submitted.
 
3.                 Form R31 shall be submitted within ten business days
                    after the end of every month, and such other times
                    as stipulated in 17 CFR 240.31T.
 
4.                 A covered SRO must obtain the data necessary to
                    complete Part I of this Form R31 from a designated
                    clearing agency. Pursuant to Rule 31, a designated
                    clearing agency is required, upon request, to
                    provide a covered SRO with the data in its
                    possession needed by the covered SRO to complete
                    Form R31. A covered SRO shall provide in Part I of
                    this Form R31 only the data supplied to it by a
                    designated clearing agency.
 
5.                 For any item that requests the aggregate dollar
                    amount of covered sales, enter responses ``A'' and
                    ``B'' as follows. For any month in which the
                    Commission does not adjust the fee rate, enter the
                    aggregate dollar amount of covered sales for the
                    entire month in ``A'' and leave ``B'' blank. For any
                    month in which the Commission adjusts the fee rate,
                    enter in ``A'' the aggregate dollar amount of
                    covered sales having a charge date in that month
                    before the date of the fee rate adjustment, and
                    enter in ``B'' the aggregate dollar amount of
                    covered sales having a charge date in that month on
                    or after the date of the fee rate adjustment. The
                    total number of covered round turn transactions
                    should be provided in a single entry.
 
6.                 CONTACT EMPLOYEE--The individual listed on the
                    Execution Page (Page 1) of Form R31 as the contact
                    employee must be authorized to represent on behalf
                    of the covered SRO that the information provided on
                    this Form R31 is complete and accurate.
 
7.                 FORMAT--A covered SRO must file this Form R31 with
                    the Commission in paper. Please type all
                    information. Use only the current version of Form
                    R31 or a reproduction. Attach an Execution Page
                    (Page 3) with an original manual signature.
 
8.                 WHERE TO FILE AND NUMBER OF COPIES--Submit one
                    original and two copies of Form R31 to: Securities
                    and Exchange Commission; Attention: Form R31; Office
                    of Economic Analysis; 450 Fifth Street, NW.;
                    Washington, DC 20549-1105.
 
9.                 PAPERWORK REDUCTION ACT DISCLOSURE
 
                    Form R31 requires covered SROs to
                    provide data regarding all covered sales and covered
                    round turn transactions having a charge date in the
                    month for which this form is being submitted.
 
                    An agency may not conduct or
                    sponsor, and a person is not required to respond to,
                    a collection of information unless it displays a
                    currently valid control number. Sections 3(a)(1), 5,
                    6(a), and 23(a) of the Exchange Act (15 U.S.C.
                    78c(a)(1), 78e, 78f(a), and 78w(a)) authorize the
                    Commission to collect information on this Form R31.
 
                    Form R31 is designed to enable the
                    Commission to determine the amount of fees and
                    assessments that are due from every covered SRO
                    under Section 31 of the Exchange Act.
 
                    The Commission has estimated that
                    each respondent will spend, on average,
                    approximately 1.6 hours completing this Form R31.
                    This average includes designated clearing agencies
                    as respondents.
 
                    Any member of the public may
                    direct to the Commission any comments concerning the
                    accuracy of this burden estimate and any suggestions
                    for reducing this burden.
 
                    No assurance of confidentiality is
                    given by the Commission with respect to the
                    responses made in Form R31. The public has access to
                    the information contained in Form R31.
 
                    This collection of information has
                    been reviewed by the Office of Management and Budget
                    in accordance with the clearance requirements of 44
                    U.S.C. 3507. The applicable Privacy Act system of
                    records is SEC-2 and the routine uses of the records
                    are set forth at 40 FR 39255 (August 27, 1975) and
                    41 FR 5318 (February 5, 1976).
 


[[Page 4035]]


------------------------------------------------------------------------
                         U.S. SECURITIES AND
                         EXCHANGE COMMISSION
                        WASHINGTON, DC 20549
                          FORM FOR REPORTING
                          COVERED SALES AND
   Form R31  Page 1      COVERED ROUND TURN    Date filed  (MM/DD/YYYY)
                         TRANSACTIONS UNDER
                          SECTION 31 OF THE
                         SECURITIES EXCHANGE
                             ACT OF 1934
------------------------------------------------------------------------
 


 
 WARNING: INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE
                           CRIMINAL VIOLATIONS
 
1.                 State the name of the covered SRO:
 
2.                 State the month and year for which this Form R31 is
                    being filed:
 
3.                 Provide the following information for the contact
                    employee:
 
                   Name:
                   Title:
                   Telephone Number:
                   E-mail Address:
                   Street Address:
 
                                 PART I
 
           QUESTIONS 4-6 TO BE COMPLETED BY COVERED EXCHANGES
 
4.                 Provide the aggregate dollar amount of covered sales
                    of equity securities that: (a) occurred on the
                    exchange; (b) had a charge date in the month of this
                    report; and (c) the exchange reported to a
                    designated clearing agency, as reflected in the data
                    provided by a designated clearing agency:
 
                   (A)
                   (B)
 
5.                 Provide the aggregate dollar amount of covered sales
                    of options that: (a) occurred on the exchange; (b)
                    had a charge date in the month of this report; and
                    (c) the exchange reported to a designated clearing
                    agency, as reflected in the data provided by a
                    designated clearing agency:
 
                   (A)
                   (B)
 
6.                 Provide the total number of covered round turn
                    transactions that: (a) occurred on the exchange; (b)
                    had a charge date in the month of this report; and
                    (c) the exchange reported to a designated clearing
                    agency:
 
           QUESTION 7 TO BE COMPLETED BY COVERED ASSOCIATIONS
 
7.                 Provide the aggregate dollar amount of covered sales
                    of equity securities that: (a) occurred by or
                    through any member of the association; (b) had a
                    charge date in the month of this report; and (c)
                    resulted from the exercise of a physical delivery
                    exchange-traded option, as reflected in the data
                    provided by a designated clearing agency:
 
                   (A)
                   (B)
                  ------------------------------------------------------
 
           DO NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY
 


[[Page 4036]]


------------------------------------------------------------------------
                         U.S. SECURITIES AND
                         EXCHANGE COMMISSION
                        WASHINGTON, DC 20549
                         FORM FOR REPORTING
                          COVERED SALES AND
  Form R31  Page 1       COVERED ROUND TURN     Date filed  (MM/DD/YYYY)
                         TRANSACTIONS UNDER
                          SECTION 31 OF THE
                       SECURITIES EXCHANGE ACT
                               OF 1934
------------------------------------------------------------------------
 


 
                                 PART II
           QUESTIONS 8-9 TO BE COMPLETED BY COVERED EXCHANGES
 
8.                 Provide the aggregate dollar amount of covered sales
                    that: (a) occurred on the exchange; (b) had a charge
                    date in the month of this report; (c) the covered
                    exchange captured in a trade reporting system; and
                    (d) were reported to a designated clearing agency by
                    a qualified special representative:
 
                   (A)
                   (B)
 
9.                 Provide the aggregate dollar amount of covered sales
                    that: (a) occurred on the exchange; (b) had a charge
                    date in the month of this report; (c) the exchange
                    captured in a trade reporting system; and (d) were
                    ex-clearing transactions:
 
                   (A)
                   (B)
 
           QUESTION 10 TO BE COMPLETED BY COVERED ASSOCIATIONS
 
 10.               For each trade reporting system of the association,
                    provide the aggregate dollar amount of covered sales
                    that: (a) occurred by or through a member of the
                    association otherwise than on a national securities
                    exchange; (b) had a charge date in the month of this
                    report; and (c) the association captured in a trade
                    reporting system:
 
                   Name of Trade Reporting System:
 
                   (A)
                   (B)
 
                   Name of Trade Reporting System:
 
                   (A)
                   (B)
 
                                 PART III
 
            QUESTION 11 TO BE COMPLETED BY COVERED EXCHANGES
 
 11.               Provide the aggregate dollar amount of covered sales
                    that: (a) occurred on the exchange; (b) had a charge
                    date in the month of this report; and (c) the
                    exchange neither captured in a trade reporting
                    system nor reported to a designated clearing agency:
 
                   (A)
                   (B)
 
           QUESTION 12 TO BE COMPLETED BY COVERED ASSOCIATIONS
 
 12.               Provide the aggregate dollar amount of covered sales
                    that: (a) occurred by or through a member of the
                    association otherwise than on a national securities
                    exchange; (b) had a charge date in the month of this
                    report; and (c) the association did not capture in a
                    trade reporting system:
 
                   (A)
                   (B)
                  ------------------------------------------------------
 
           DO NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY
 


[[Page 4037]]


------------------------------------------------------------------------
                       U.S. SECURITIES AND
                       EXCHANGE COMMISSION
                       WASHINGTON, DC 20549
                        FORM FOR REPORTING
                        COVERED SALES AND
  Form R31  Page 1      COVERED ROUND TURN     Date filed  (MM/DD/YYYY)
                        TRANSACTIONS UNDER
                        SECTION 31 OF THE
                     SECURITIES EXCHANGE ACT
                             OF 1934
------------------------------------------------------------------------
 


 
                                EXECUTION:
 
                   The undersigned has executed this form on behalf of,
                    and with the authority of, the covered SRO. The
                    undersigned and the covered SRO represent that the
                    information and statements contained herein are
                    current, true, and complete.
 
                   MM/DD/YY:
 
                   Name of Covered SRO:
 
                   BY:
 
                   Signature:
 
                   Print Name and Title:
 
  This page must be completed in full with original, manual signature.
------------------------------------------------------------------------
 
           DO NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY
 


    By the Commission.
    Dated: January 20, 2004.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-1605 Filed 1-26-04; 8:45 am]
BILLING CODE 8010-01-P