[Federal Register Volume 73, Number 93 (Tuesday, May 13, 2008)]
[Notices]
[Pages 27594-27595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10567]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57764; File No. SR-NASD-2007-043]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); 
Order Approving Proposed Rule Change as Modified by Amendment No. 1 
Thereto To Amend NASD Rule 7001C To Increase the Percentage of Market 
Data Revenue Shared With NASD/NSX TRF Participants

May 1, 2008.

I. Introduction

    On June 29, 2007, the National Association of Securities Dealers, 
Inc. (``NASD'') (n/k/a Financial Industry Regulatory Authority, Inc.), 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adjust the percentage of market data revenue shared with NASD/NSX TRF 
participants.\3\ On October 29, 2007, NASD filed Amendment No. 1 to the 
proposed rule change. The proposed rule change, as amended, was 
published for comment in the Federal Register on November 14, 2007.\4\ 
The Commission received one comment letter regarding the proposal.\5\ 
FINRA responded to the comment letter on March 27, 2008.\6\ National 
Stock Exchange, Inc. (``NSX'') subsequently submitted a response to the 
comment letter.\7\ This order approves the proposed rule change, as 
modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Effective July 30, 2007, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') was formed through the consolidation of 
NASD and the member regulatory functions of NYSE Regulation, Inc.
    \4\ See Securities Exchange Act Release No. 56752 (November 6, 
2007), 72 FR 64099.
    \5\ See letter from Christopher Gilkerson and Gregory Babyak, 
Co-Chairs, Market Data Subcommittee of the SIFMA Technology and 
Regulation Committee, to Nancy M. Morris, Secretary, Commission, 
dated December 5, 2007 (``SIFMA letter''). This comment letter also 
addressed the proposal, filed by NASD, to increase the percentage of 
market data revenue shared with participants in the NASD/NYSE TRF. 
See Securities Exchange Act Release No. 56754 (November 6, 2007), 72 
FR 64101 (November 14, 2007) (SR-NASD-2007-031).
    \6\ See letter from Lisa C. Horrigan, Associate General Counsel, 
FINRA, to Nancy M. Morris, Secretary, Commission, dated March 27, 
2008 (``FINRA letter'').
    \7\ See letter from Philip M. Pinc, Vice President, Counsel, 
National Stock Exchange, Inc., to Nancy M. Morris, Secretary, 
Commission, dated April 2, 2008 (``NSX letter'').
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II. Description of the Proposed Rule Change

    FINRA proposes to amend NASD Rule 7001C to increase the percentage 
of market data revenue that is shared with FINRA members that report 
trades in New York Stock Exchange (``Tape A''), American Stock Exchange 
(``Tape B''), and Nasdaq Exchange (``Tape C'') stocks to the NASD/NSX 
Trade Reporting Facility (the ``NASD/NSX TRF'').\8\ Currently, FINRA 
members that report trades in Tape A, Tape B, and Tape C stocks to the 
NASD/NSX TRF receive a 50% pro rata credit on the gross market data 
revenue earned by the NASD/NSX TRF.\9\
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    \8\ In establishing the NASD/NSX TRF, NASD and NSX entered into 
the Limited Liability Company Agreement of NASD/NSX Trade Reporting 
Facility LLC. Under that agreement, NASD, as the ``SRO Member,'' has 
the sole regulatory responsibility for the NASD/NSX TRF. As the 
``Business Member,'' NSX is responsible for the management of the 
business affairs of the NASD/NSX TRF, to the extent those activities 
are not inconsistent with FINRA's regulatory functions.
    \9\ ``Gross revenue'' is defined as the revenue received by the 
NASD/NSX TRF from the three tape associations after the tape 
associations deduct allocated support costs and unincorporated 
business costs.
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    The proposed rule change increases from 50% to 75% the percentage 
of market data revenue that is shared with members. FINRA members that 
report trades in Tape A, Tape B and Tape C stocks to the NASD/NSX TRF 
will thus receive a 75% pro rata credit on gross market data revenue 
earned by the NASD/NSX TRF.

III. Summary of Comments

    The Commission received one comment letter in response to the 
proposed rule change.\10\ The commenter stated that the proposed rebate 
demonstrated that market data fees are excessive, and do not have a 
fair and reasonable basis.\11\ The commenter noted that, in its 
capacity as ``SRO Member,'' FINRA allocates and deducts costs before 
passing market data revenue to each TRF. According to the commenter, 
this ability to allocate costs in the context of a TRF rebuts earlier 
arguments made by the exchanges that costs of collection and 
distribution of market data could not be allocated, and should thus not 
be a basis for determining the reasonableness of market data fees.\12\ 
Finally, the commenter asserted that the issue of transparency 
regarding market data costs and revenues, which constitutes

[[Page 27595]]

part of the NetCoalition Petition,\13\ is also present in this 
filing.\14\
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    \10\ SIFMA letter, supra note 5.
    \11\ SIFMA letter at 2.
    \12\ Id.
    \13\ See Securities Exchange Act Release No. 55011 (December 27, 
2006) (order granting petition for review of SR-NYSEArca-2006-21).
    \14\ SIFMA letter at 3.
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    FINRA responded that none of the arguments made by the commenter 
was germane to the proposed rule change.\15\ For example, FINRA stated 
that the issue of the reasonableness of market data fees and the 
purported lack of transparency regarding the cost of collecting market 
data are at issue in the NetCoalition Petition and need not be resolved 
in connection with this filing.\16\ FINRA also asserted that the costs 
of collecting and distributing market data are not necessarily 
determinative of the reasonableness of the proposed rebate.\17\
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    \15\ FINRA letter at 1.
    \16\ Id. at 2.
    \17\ Id.
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    In its response, NSX stated that it generally agreed with the SIFMA 
letter.\18\ In particular, NSX agreed with SIFMA's assertion that the 
proposal to rebate 100% of market data revenue for participants of the 
NASD/NYSE TFF \19\ might drive smaller TRFs, such as the NASD/NSX TRF, 
out of business.\20\ NSX requested that the Commission approve the 
proposed rebate of market data revenue to participants in the NASD/NSX 
TRF, as it was consistent with NSX's policy of rebating market data 
revenues to investors.\21\
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    \18\ NSX letter at 2.
    \19\ See Securities Exchange Act Release No. 56754 (November 6, 
2007), 72 FR 64101 (November 14, 2007) (SR-NASD-2007-031).
    \20\ NSX letter at 2.
    \21\ Id.
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IV. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comment letter, and the responses of both FINRA and NSX to the comment 
letter, and finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association \22\ and, in 
particular, the requirements of Section 15A(b)(5) of the Act,\23\ which 
requires that FINRA rules provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities.
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    \22\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \23\ 15 U.S.C. 78o-3(b)(5).
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    The Commission believes that it is reasonable for FINRA to amend 
Rule 7001C to adjust the percentage of market data revenue shared with 
NASD/NSX TRF participants, effective retroactively to April 1, 2007. 
FINRA seeks to increase the rebate of market data revenue to NASD/NSX 
TRF participants. Neither the costs incurred in collecting that market 
data, nor the calculation of market data fees are directly at issue in 
this filing. The fact that NSX, as the Business Member, has determined 
to rebate a greater percentage of market data revenue does not 
establish that the underlying fees are excessive. The SIFMA letter does 
not raise any other issue that would preclude approval of the FINRA 
proposal.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-2007-043), as modified by 
Amendment No. 1, be, and it hereby is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-10567 Filed 5-12-08; 8:45 am]
BILLING CODE 8010-01-P