[Federal Register Volume 69, Number 18 (Wednesday, January 28, 2004)]
[Notices]
[Pages 4194-4196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1760]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49114; File No. SR-NASD-2003-201]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To Amend 
the Trading Activity Fee Rate and Add TRACE-Eligible and Municipal 
Securities as Covered Securities

January 22, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 30, 2003, the National Association of Securities Dealers, 
Inc. (``NASD''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by NASD. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend Schedule A of the NASD By-Laws to adjust 
the Trading Activity Fee (``TAF'') rate for covered equity securities; 
to reduce the maximum per trade charge on covered equity securities; 
and to assess the TAF on corporate debt securities that, under the 
Trade Reporting and Compliance Engine (``TRACE'') rules, are defined as 
``TRACE-eligible securities'' and municipal securities subject to the 
Municipal Securities Rulemaking Board (``MSRB'') reporting 
requirements. The text of the proposed rule change is below. Proposed 
new language is in italics; proposed deletions are in brackets.\3\
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    \3\ The Commission notes that NASD filed the proposed rule 
change with an inconsistency in the numbering of the proposed rule 
language. See page 3 of 18, as compared with page 11 of 18. The 
Commission adjusted the text in this notice to correct this 
technical error. Also, the Commission notes that NASD either failed 
to remove the statement ``Paragraph (b)(2)(K) becomes effective on 
January 1, 2004 in accordance with amendment 4 to SR-NASD-2002-148'' 
or neglected to change its placement in the proposed rule so as not 
to separate item (K) from item (L). See pages 3 of 18, and 12 of 18. 
The Commission expects NASD will file an amendment at a later date 
to correct this deficiency, and will carefully review future filings 
to avoid such errors.
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Schedule A to NASD By-Laws

* * * * *

Section 1-- Member Regulatory Fees

    (a) No Change.
    (b) Each member shall be assessed a Trading Activity Fee for the 
sale of covered securities.
    (1) Covered Securities. For purposes of the rule, covered 
securities shall mean:
    (A) All exchange registered securities wherever executed ([other 
than bonds, debentures, and other evidence of indebtedness]except debt 
securities that are not TRACE-eligible securities);
    (B) All other equity securities traded otherwise than on an 
exchange; [and]
    (C) All security futures wherever executed[.];
    (D) All TRACE-eligible securities wherever executed; and
    (E) All municipal securities subject to MSRB reporting 
requirements.
    (2) Transactions exempt from the fee. The following shall be exempt 
from the Trading Activity Fee:
    (A) through (I) No Change.
    (J) Transactions in security futures held in futures accounts; 
[and]
    (K) Transactions in exchange listed options effected by a member 
when NASD is not the designated options examining authority for that 
member[.]; and
    Paragraph (b)(2)(K) becomes effective on January 1, 2004 in 
accordance with amendment 4 to SR-NASD-2002-148.
    (L) Proprietary transactions in TRACE-eligible securities by a firm 
that is a member of both NASD and a national securities exchange and 
that are effected in the firm's capacity as an exchange specialist or 
exchange market maker.
    NASD may exempt other securities and transactions as it deems 
appropriate.
    (3) Fee Rates\*\
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    \*\ Trading Activity Fee rates are as follows: Each member shall 
pay to NASD [$0.0001]$0.000075 per share for each sale of a covered 
equity security, with a maximum charge of [$10]$3.75 per trade; 
$0.002 per contract for each sale of an option; [and] $0.04 per 
contract for each round turn transaction of a security future; and 
$.00075 per bond for each sale of a covered TRACE-eligible and/or 
municipal security, with a maximum charge of $0.75 per trade. In 
addition, if the execution price for a covered security is less than 
the Trading Activity Fee rate ([$0.0001]$0.000075 for covered equity 
securities, $0.002 for covered option contracts, or $0.04 for a 
security future) on a per share, per contract, or round turn 
transaction basis, then no fee will be assessed.
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    (A) through (C) No Change.
    (D) Each member shall pay to NASD a fee per bond for each sale of a 
covered TRACE-eligible security and/or municipal security.
    (4) Reporting of Transactions. Members shall report to NASD the 
aggregate share, bond, contract, and/or round turn volume of sales of 
covered securities in a manner as prescribed by NASD from time to time.
    (c) through (d) No Change.
* * * * *

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

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

1. Purpose
Background
    On July 24, 2002, NASD filed with the SEC proposed changes to the 
Gross Income Assessment (``GIA''), Personnel Assessment (``PA''),\4\ 
and Regulatory Fee.\5\ Those fees are used to fund NASD's member 
regulatory activities, including the regulation of members through 
examinations, processing of membership applications, financial 
monitoring, policymaking, rulemaking, and enforcement activities. The 
changes: (1) Eliminated the Regulatory Fee; (2) instituted a new 
transaction-based TAF applied across all markets, similar to the SEC's 
Section 31 Fee; (3) increased the rates assessed to member firms under 
the PA; and (4) implemented a simplified three-tiered

[[Page 4195]]

flat rate for the GIA whereby deductions and exclusions would be 
eliminated.
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    \4\ Securities Exchange Act Release No. 46416 (Aug. 23, 2002), 
67 FR 55901 (Aug. 30, 2002) (SR-NASD-2002-98) (immediately effective 
TAF pilot program). NASD subsequently filed SR-NASD-2002-148 to give 
the proposal in SR-NASD-2002-98 a full notice and comment period and 
to adopt a permanent TAF program. See Securities Exchange Act 
Release No. 46817 (Nov. 12, 2002), 67 FR 69785 (Nov. 19, 2002).
    \5\ Securities Exchange Act Release No. 46417 (Aug. 23, 2002), 
67 FR 55893 (Aug. 30, 2002) (SR-NASD-2002-99).
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    The new member regulatory structure, as approved by the SEC,\6\ is 
revenue neutral to NASD and designed to better align NASD's regulatory 
fees with its functions, efforts, and costs. To ensure a member 
regulatory structure that is revenue neutral to NASD, NASD committed to 
analyze rates, volumes, and regulatory responsibilities periodically to 
sustain adequate funding levels for its member regulatory programs.\7\ 
Further, as part of a three-year phase-in plan included in the 
originally proposed pricing structure, NASD stated its intent to reduce 
the revenue from the collection of the TAF by approximately 50% over 
the three-year period, offset by an increase in the Personnel 
Assessment. Finally, in response to comments from a number of members 
and other self-regulatory organizations about the scope of the TAF, 
NASD committed to analyzing whether debt transactions should be 
included.
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    \6\ Securities Exchange Act Release Nos. 47946 (May 30, 2003), 
68 FR 34021 (June 6, 2003) (SR-NASD-2002-148) (approval order) and 
47106 (Dec. 30, 2002), 68 FR 819 (Jan. 7, 2003) (SR-NASD+2002-99) 
(approval order).
    \7\ Specifically, NASD stated in the text of the TAF rule that 
it will ``periodically review these revenues in conjunction with 
these costs to determine the applicable rate'' NASD By-Laws, 
Schedule A, Section 1(a).
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Proposed Changes
    Consistent with its commitment to analyze revenues and expenses and 
to reduce the share of the member regulatory program funded by TAF in 
2004, NASD is proposing a reduction of the TAF rate on covered equity 
securities from the current rate of $0.10 per 1,000 shares to $0.075 
per 1,000 shares.\8\ In addition, in response to concerns expressed by 
a number of market participants,\9\ NASD is proposing that the maximum 
charge per trade under the TAF be reduced from the current cap of 
$10.00 per trade (based on 100,000 shares) to $3.75 per trade (based on 
50,000 shares).
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    \8\ NASD By-Laws, Schedule A, Section 1(a).
    \9\ See, e.g., Letter to Robert R. Glauber and Mary L. Schapiro, 
NASD, from John P. Hughes and John C. Giesea, Security Traders 
Association, dated Oct. 21, 2003.
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    Further, to fulfill its commitment to the SEC, made in connection 
with the original TAF rule filing, NASD is proposing to assess the TAF 
on TRACE-eligible securities and municipal securities. NASD has 
reviewed reported volumes for TRACE-eligible securities and municipal 
securities in conjunction with NASD's current regulatory costs 
associated with the oversight of these securities. Based upon this 
review, NASD has determined that it is appropriate to assess TRACE-
eligible securities and municipal securities at a rate of $0.00075 per 
bond, with a maximum assessment of $0.75 per trade (based on 1,000 
bonds). NASD believes that this rate is reasonable and allows for the 
equitable allocation of the TAF on member firms, reflecting NASD's 
regulatory efforts in the fixed income market.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\10\ which requires, among 
other things, that NASD's rules provide for the equitable allocation of 
reasonable dues, fees, and other charges among members and issuers and 
other persons using any facility or system that NASD operates or 
controls. In this rule filing, NASD is reducing the TAF rate and the 
maximum TAF assessment per transaction on covered equity securities. In 
addition, NASD is assessing the TAF on TRACE-eligible securities and 
municipal securities subject to MSRB reporting requirements. These 
changes are consistent with NASD's statutory obligation under Section 
15A(b)(5) of the Act \11\ to ensure that its fees are reasonable and 
equitably allocated.
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    \10\ 15 U.S.C. 78o-(b)(5).
    \11\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which NASD consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    If the Commission approves the filing, NASD proposes that the TAF 
rate reduction be implemented on the first day of the month following 
30 days after approval of the proposed rule change. The assessment of 
fees on TRACE-eligible securities and municipal securities will be 
implemented on the first day of the month following six months after 
Commission approval. NASD is proposing an implementation date that is 
six months after SEC approval to allow member firms time to make 
programming changes to reflect the addition of a new category of 
covered securities.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-2003-201. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review comments more efficiently, comments should be sent in hardcopy 
or by e-mail but not by both methods. Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to file number SR-NASD-2003-201 and should be 
submitted by February 18, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

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[[Page 4196]]


Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1760 Filed 1-27-04; 8:45 am]
BILLING CODE 8010-01-P