[Federal Register Volume 74, Number 228 (Monday, November 30, 2009)]
[Notices]
[Pages 62616-62623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-28472]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61042; File No. SR-FINRA-2009-057]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of a Proposed Rule Change 
Relating to Section 1(c) of Schedule A to the FINRA By-Laws To Amend 
the Personnel Assessment and Gross Income Assessment

November 20, 2009.

I. Introduction

    On August 20, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (formerly known as the National Association of Securities 
Dealers, Inc. (``NASD'')) filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder \2\ to amend Section 1(c) of Schedule A to the FINRA 
By-Laws (``Schedule A'') to increase the Personnel Assessment and to 
revise the formulation of the Gross Income Assessment calculation to be 
paid by each FINRA member. The proposed rule change was published for 
comment in the Federal Register on September 11, 2009.\3\ The 
Commission received 745 comment letters on the proposal.\4\ FINRA 
submitted a response to the comment letters on November 18, 2009.\5\ 
This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60624 (September 3, 
2009), 74 FR 46828 (September 11, 2009) (``Notice'').
    \4\ 676 of the letters were form comment letters. Of these, four 
utilized ``Letter Type A'' and 672 utilized ``Letter Type B.'' An 
example of Letter Type A and Letter B as well as all of the non-form 
comment letters are posted on the Commission's Internet Web site 
(http://www.sec.gov/comments/sr-finra-2009-057/finra2009057.shtml). 
See Exhibit 1 for a list of comment letters noted on the 
Commission's Internet Web site. All 745 comment letters are 
available for inspection and copying at the Commission's Public 
Reference Room.
    \5\ See letter from Phillip Shaikun, Associate Vice President 
and Associate General Counsel, FINRA, to Elizabeth M. Murphy, 
Secretary, Commission, dated November 18, 2009. (``Response 
Letter'').
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II. Description of FINRA's Proposal

    Currently, FINRA's primary fee structure to support its regulatory 
programs consists of the following fees: the Personnel Assessment 
(``PA''); the Gross Income Assessment (``GIA''); the Trading Activity 
Fee; and the Branch Office Assessment. These fees are used to fund 
FINRA's regulatory activities, including rulemaking and FINRA's 
examination and enforcement programs. According to FINRA, the economic 
and industry downturns experienced in 2008 and 2009 have strained 
FINRA's resources, yet its regulatory responsibilities remain constant 
and its programs robust. To stabilize its revenues and provide 
protection against future industry downturns, FINRA proposes to 
increase the PA and revise the calculation of the GIA. This will enable 
FINRA to achieve a more consistent and predictable funding stream to 
carry out FINRA's regulatory mandate.
    To those ends, the proposed rule change will increase the PA for 
all members. The PA currently is assessed on a three-tiered rate 
structure based on the number of the firm's registered representatives 
and principals (``registered persons'') as follows: members with one to 
five registered persons are assessed $75 for each such registered 
person; 6-25 registered persons, $70 for each such registered person; 
and 26 or more registered persons, $65 for each such registered person. 
The proposed rule change will increase those rates, for the first time 
in five years, to $150, $140, and $130, respectively, based on the same 
tiered structure. FINRA notes that there is a correlation between the 
cost of FINRA's regulatory programs and the number of registered 
persons within a firm and that the population of registered persons has 
remained fairly stable, even throughout the recent economic 
downturn.\6\ Accordingly, FINRA believes that an increase of the PA is

[[Page 62617]]

both a fair and appropriate means to achieve a more consistent and 
reliable foundation to fund its regulatory operations.
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    \6\ For example, FINRA records show that since 2000, the average 
number of registered persons per year has been approximately 667,680 
and that for each of the past three years the population has been 
669,626 (2009), 676,927 (2008) and 662,742 (2007) (based on numbers 
at the end of the preceding calendar year).
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    FINRA states that even with the proposed increase of the PA, the 
GIA remains the most important component of FINRA's regulatory funding. 
The GIA is currently assessed through a seven-tier rate structure with 
a minimum GIA of $1,200.00. Under the existing GIA rate structure, 
members are required to pay an annual GIA as follows:
    (1) $1,200.00 on annual gross revenue up to $1 million;
    (2) 0.1215% of annual gross revenue greater than $1 million up to 
$25 million;
    (3) 0.2599% of annual gross revenue greater than $25 million up to 
$50 million;
    (4) 0.0518% of annual gross revenue greater than $50 million up to 
$100 million;
    (5) 0.0365% of annual gross revenue greater than $100 million up to 
$5 billion;
    (6) 0.0397% of annual gross revenue greater than $5 billion up to 
$25 billion; and
    (7) 0.0855% of annual gross revenue greater than $25 billion.
    For 2010, the current year GIA will be subject to the cap set forth 
in Regulatory Notice 08-07 (February 2008), which describes the funding 
structure that resulted from the consolidation of NASD's and the New 
York Stock Exchange's member regulation operations. FINRA states in 
Regulatory Notice 08-07 that it will apply a 10% cap on any increase or 
decrease to a firm's 2010 current year GIA \7\ resulting from the new 
pricing structure implemented in January 2008.
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    \7\ ``2010 current year GIA'' means the amount of GIA assessment 
due under the proposed new formulation. However, if 2010 current 
year GIA represents an increase or decrease of more than 10% 
compared to 2009 current year GIA, the increase or decrease will be 
capped at 10%.
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    According to FINRA, since the GIA is assessed based on a member's 
annual gross revenue for the preceding calendar year,\8\ FINRA's 
revenues derived from the GIA are subject to the year-to-year 
volatility of member revenues. In years when industry revenues are 
significantly lower, FINRA's operating revenues can drop precipitously. 
In 2009, for example, GIA revenues are down by approximately 37% 
compared to 2008 due to 2008 fourth quarter write-offs taken by 
members, particularly the largest securities firms.
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    \8\ Gross revenue for assessment purposes is set out in Section 
2 of Schedule A, which defines gross revenue as total income as 
reported on FOCUS form Part II or IIA excluding commodities income.
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    The proposed rule change seeks to ameliorate this vulnerability not 
only by shifting some of FINRA's revenue generation to the more 
consistent PA stream, but also by smoothing out the volatility inherent 
in the GIA. To that end, the proposed rule change will amend Schedule A 
to assess a GIA that is the greater of: (1) The amount that will be the 
GIA based on the existing rate structure (``current year GIA''); or (2) 
a three-year average of the GIA to be calculated by adding the current 
year GIA plus the GIA assessed on the member over the previous two 
calendar years, divided by three. For a newer firm that has been 
assessed only in the prior year, FINRA will compare the current year 
GIA to the two-year average and assess the greater amount. The existing 
GIA rate structure and phase-in implementation through 2010 will remain 
the same.\9\ Accordingly, the proposed rule change will preserve the 
current rate structure, while building a buffer against industry 
downturns. FINRA notes that it has a long history of providing rebates 
to members when revenues exceed the expenditures necessary to discharge 
its regulatory obligations and is committed to continuing that practice 
in the future.
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    \9\ The actual amount of GIA assessed in any given year, e.g., 
the current year GIA (including a cap, if applicable) or the three-
year average, will be used to calculate subsequent three-year 
average determinations.
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    FINRA believes that the proposed rule change will stabilize its 
operating cash flows by augmenting revenues based on the registered 
person population (on which FINRA's costs are more closely aligned) and 
reducing dependency on, and exposure to, less predictable industry 
revenues. FINRA estimates that, if the proposed rule change had been in 
effect for 2009, it would have replaced about 90% of the revenue 
shortfall that resulted primarily from the significant drop in GIA 
revenues. FINRA notes that, in general, those replacement revenues will 
come from several larger firms whose steep income declines in 2008 
primarily account for FINRA's current revenue deficit.
    FINRA intends to announce the proposed rule change and its approval 
by the Commission in a Regulatory Notice. The proposed rule change will 
become effective January 1, 2010.

III. Discussion of Comments and Commission Findings

    The Commission received 676 form comment letters, and 69 individual 
comment letters, regarding this proposal. FINRA responded to the 
comment letters on November 18, 2009.\10\ After careful review of the 
proposal and consideration of the comment letters and the Response 
Letter, the Commission finds, for the reasons discussed below, 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.\11\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(5) of the 
Act,\12\ which requires, among other things, that FINRA'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 which the association operates or controls.
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    \10\ See Response Letter, supra note 5.
    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3(b)(5).
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    The commenters object to FINRA's fee proposal primarily for the 
following reasons: (1) FINRA should have anticipated the market 
downturn and budgeted accordingly; (2) the proposed assessment 
increases are unreasonable in light of the difficult economic times for 
the industry and fee increases imposed by other entities, including 
regulators and market operators; (3) the percentage increase of the PA 
is too steep and out of step with inflation; and (4) the proposed 
increases will disproportionately impact small and independent broker-
dealers that were not responsible for FINRA's revenue shortfalls. Some 
commenters question whether the proposed rule change meets the 
statutory requirements of Section 15A(b)(5) of the Act. Several 
commenters offer alternative approaches to the proposed changes to the 
PA and GIA fees, including: implementing caps on the PA and GIA 
increases; implementing a phase-in period for the PA and GIA increases; 
reversing the volume discount structure for the PA assessment; and 
using a three-year GIA average instead of the proposed higher of actual 
year GIA or the three-year GIA average.
    As an initial matter, the Commission notes that, as a national 
securities association, FINRA is obligated to be so organized and to 
have the capacity to be able to carry out the purposes of the Act and 
(subject to any rule or order of the Commission pursuant to Section 
17(d) or 19(g)(2) of the Act) \13\ to enforce compliance by its members 
and persons associated with its members, with the provisions of the 
Act, and rules and

[[Page 62618]]

regulations thereunder, and FINRA's own rules.\14\ Adequate regulatory 
funding is critical to FINRA's ability to meet these statutory 
requirements.
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    \13\ See 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2).
    \14\ 15 U.S.C. 78o-3(b)(2).
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    While some member firms understandably question whether it is 
reasonable for FINRA to increase regulatory fees at a time when the 
securities industry has faced declining revenues as a result of the 
economic downturn, it is incumbent on FINRA to continue to support a 
robust regulatory program irrespective of market events. The discussion 
below addresses the significant issues raised by the commenters, 
FINRA's response to those comments, and the Commission's views with 
respect to those issues.

A. PA Increase Is Equitable

    Currently, FINRA member firms are charged annually per registered 
person at the following rates: firms with up to five registered persons 
pay $75 for each such person; firms with between 6-25 registered 
persons pay $70 for each such person (a 6.7% discount from $75); firms 
with over 25 registered persons pay $65 for each person (a 13.3% 
discount from $75). The proposal will increase the rates to $150, $140 
(a 6.7% discount from $150), and $130 (a 13.3% discount from $150), 
respectively. While most commenters, including the 672 Form B 
commenters, state specifically that the GIA assessment changes unfairly 
burden small independent broker-dealers,\15\ some commenters note in 
general that any increase in fees, including the PA increase, unfairly 
burdens independent broker-dealers, especially in the current economic 
climate.\16\ One of these commenters advocates for a reversal of the 
discount structure, noting that FINRA should offer per person discounts 
to the smallest firms instead of the largest firms, to remedy the 
alleged inequities.\17\ Another commenter argues that the number of 
representatives is not necessarily a better indicator of FINRA 
resources consumed than overall income.\18\ This commenter advocates 
for a more complex PA structure with additional tiers and possible 
differentiation of PA rates based on the activity that the registered 
representative conducts, e.g., a higher PA rate for Series 7 registered 
representatives than for Series 6. Another commenter supports placing a 
limit on the annual percentage increase in the PA to ten percent, if 
the PA increase is approved.\19\ This commenter favors a fee structure 
in which firms engaging in higher-risk activities would be subject to 
higher fees.
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    \15\ The issue of whether the GIA fee revision is equitable is 
addressed in Section III.C. infra.
    \16\ See, e.g., First Independent Letter, Financial Network 
Letter, Form Letter B, Sykes Financial Letter, and Whitestone 
Letter, infra in Exhibit 1.
    \17\ See Abel Noser Letter, infra in Exhibit 1.
    \18\ See State Farm Letter, infra in Exhibit 1.
    \19\ See MetLife Letter, infra in Exhibit 1.
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    The Commission notes that the current three-tiered PA structure, 
including the discount percentages, was found to be consistent with the 
Act and was approved by the Commission nearly seven years ago.\20\ The 
proposed increase to the PA will not change the three-tiered structure 
of the PA or the level of the discount percentages for larger firms. 
Also, the manner of allocation of the PA fee among FINRA members will 
remain unchanged. Moreover, viewing the increase in absolute dollar 
terms, FINRA estimates that the average increase in total PA fees for 
firms with 100 or fewer registered persons, a population that 
constitutes 4,074 out of 4,868, or nearly 84%, of FINRA firms, will 
amount to approximately $1,000 per firm, whereas the largest 100 firms 
(based on the number of registered persons as of year end 2008) will 
experience an average increase of approximately $300,000.\21\ Lastly, 
as FINRA notes, the number of registered representatives is a 
significant factor that impacts FINRA's oversight responsibilities and 
thus is an equitable criterion for assessing PA fees.\22\ Therefore, 
additional tiers and/or differentiation based on Series 6 or Series 7 
or other criteria is not necessarily a better solution. The Commission 
finds that the PA increase based on the current three-tiered PA fee 
structure is an equitable allocation of fees.\23\
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    \20\ See Securities Exchange Act Release No. 47106 (December 30, 
2002), 68 FR 819 (January 7, 2003) (NASD-2002-99) (order approving 
current PA fee structure).
    \21\ See Response Letter, supra note 5 at page 6.
    \22\ In 2008, FINRA conducted 4,924 oversight and cause 
examinations. These examinations, in large part, focused on broker-
dealer conduct and activity involving interaction with customers. As 
result, in that year, FINRA brought 586 formal disciplinary actions 
against registered representatives and an additional 115 formal 
actions against member firms for failing to supervise their 
employees. See Response Letter, supra note 5 at page 6.
    \23\ A discussion of the appropriateness of a PA fee increase 
given these economic circumstances follows in Section III.E.2. 
infra.
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B. PA Increase Is Reasonable

    735 commenters argue that a 100% increase in annual PA fees is an 
unreasonably large increase.\24\ Many commenters note that an increase 
of 100% is not commensurate with the rate of inflation over the past 
five years and, in general, is not justified.\25\ FINRA responds to 
these comments by stating that assessing the proposed fee change in 
percentage terms and measuring it against an inflation benchmark such 
as the Consumer Price Index is not the proper method of analysis.\26\ 
FINRA contends that the proper measure of reasonableness is arrived at 
by comparing the absolute dollar value of the increase against the 
costs associated with operating FINRA's regulatory oversight programs 
and examination and enforcement responsibilities.\27\
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    \24\ See, e.g., Form Letter B, Sykes Financial Letter, and 
Whitestone Letter, infra in Exhibit 1.
    \25\ See, e.g., Form Letter B, Curnes Financial Letter, and 
Marvel Financial Letter, infra in Exhibit 1.
    \26\ See Response Letter, supra note 5 at page 5.
    \27\ See Id. at page 5.
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    FINRA notes that over the past two years, a time marked by modest 
inflation, FINRA's annual funding mechanisms have proven insufficient 
to sustain its regulatory programs.\28\ FINRA believes that, by 
assessing the fee increase from this perspective, the PA increase is 
reasonable and will better align FINRA's revenues with its costs. Based 
on projections that the registered representative population will 
modulate at a rate consistent with historical trends, FINRA estimates 
that the proposal will result in a total increase of $42 million in PA 
fees, an average of approximately $8,600 per firm. As noted above, 
FINRA further estimates that the average increase in total PA fees for 
firms with 100 or fewer registered persons--a population that 
constitutes 4,074 out of 4,868, or nearly 84%, of FINRA firms--will 
amount to approximately $1,000 per firm, whereas the largest 100 firms 
(based on the number of registered persons as of year end 2008) will 
see an average increase of approximately $300,000. FINRA notes that 
these estimates assume that firms do not pass along the PA to the 
individual registered persons, a practice that FINRA understands is 
done in certain segments of the securities industry. For firms that do 
engage in such practice, FINRA notes that the impact will shift from 
the firm to the registered persons.\29\
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    \28\ See Id. at page 5.
    \29\ See Id. at page 6.
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    Furthermore, FINRA believes that a PA fee of between $130 and $150 
per year is reasonable, particularly when compared to other 
professional licensing fees.\30\ According to FINRA, for the past two 
years, the PA has accounted for approximately 10-11% of FINRA's 
regulatory revenue.\31\ With

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adoption of the proposed rule change, PA assessments will account for 
approximately 19% of FINRA's regulatory revenue.\32\ FINRA believes 
that this PA increase as a percentage of total regulatory revenue 
creates a more stable funding source with respect to FINRA's ability to 
mitigate any potentially negative fluctuations in GIA due to market 
conditions. FINRA believes that this is particularly important because 
regulatory demands typically rise in declining markets.\33\
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    \30\ See Id. at page 6.
    \31\ In 2008, PA accounted for $44 million of $454 million in 
total revenue or 9.7% and in 2009, PA accounted for $44 million of 
$383 million in total revenue or 11.5% See Response Letter, supra 
note 5 at page 4.
    \32\ See Id. at page 4.
    \33\ See Id. at pages 4 and 6.
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    After reviewing the comment letters and considering FINRA's 
response to the commenters' issues, the Commission believes that the PA 
increase is reasonable. As FINRA notes, PA revenue is less vulnerable 
to economic fluctuations than the GIA. As a result, increasing the 
portion of regulatory revenue FINRA derives from the PA should reduce 
overall revenue volatility. In addition, the Commission believes that 
the dollar amount of the PA increase is reasonably correlated to 
FINRA's oversight of member firms and their registered representatives 
and will assist FINRA to comply with the statutory requirement that it 
have the capacity to be able to carry out the purposes of the Act and 
to enforce compliance by its members and persons associated with its 
members, with provisions of the Act, the rules and regulations 
thereunder, and FINRA's own rules.\34\ Therefore, the Commission finds 
the increase in PA fees to be reasonable.\35\
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    \34\ See 15 U.S.C. 78o-3(b)(1)-(2).
    \35\ In addition, should large revenue surpluses occur in the 
future, FINRA notes that it will consider rebating those surpluses 
to members.
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C. GIA Reformulation Is Equitable

    719 commenters argue that the burdens resulting from the 
reformulation of the GIA calculation will fall disproportionately on 
small firms and independent broker-dealers. Under the existing GIA rate 
structure, members are required to pay an annual GIA as follows:
    (1) $1,200.00 on annual gross revenue up to $1 million;
    (2) 0.1215% of annual gross revenue greater than $1 million up to 
$25 million;
    (3) 0.2599% of annual gross revenue greater than $25 million up to 
$50 million;
    (4) 0.0518% of annual gross revenue greater than $50 million up to 
$100 million;
    (5) 0.0365% of annual gross revenue greater than $100 million up to 
$5 billion;
    (6) 0.0397% of annual gross revenue greater than $5 billion up to 
$25 billion; and
    (7) 0.0855% of annual gross revenue greater than $25 billion.
    The proposed rule change will leave this seven-tiered structure 
unchanged but will assess GIA based on the greater of the amount that 
will be the current year GIA or a three-year average of the GIA to be 
calculated by adding the current year GIA plus the GIA assessed on the 
member over the previous two calendar years.\36\ In its Response 
Letter, FINRA disagrees with the commenters that the revised GIA 
formulation will disadvantage small firms.\37\ FINRA believes that the 
proposal instead aligns the fee revision with the largest 100 firms 
(based on the number of registered persons as of year-end of 2008 for 
PA and the amount of GIA assessed for 2008) \38\ that primarily caused 
the GIA shortfall because of substantial write-downs against their 
FOCUS income. FINRA offers evidence, discussed in detailed below, in 
the form of data and projections to demonstrate that the change to the 
GIA formulation will not unfairly burden small firms and independent 
broker-dealers but will largely fall on the largest 100 firms (based on 
the number of registered persons as of year-end of 2008 for PA and the 
amount of GIA assessed for 2008 for GIA) whose dramatic GIA decline in 
2009 resulted in FINRA's need for additional fees.
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    \36\ For newer firms that have only been assessed in the prior 
year, FINRA will use a two-year average instead of a three-year 
average.
    \37\ See Response Letter, supra note 5 at page 6.
    \38\ See Id. at pages 6-7.
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    FINRA notes that revenues from the GIA have dropped nearly $100 
million since 2008. Nearly $95 million of that decline relates to the 
GIA paid in by the largest 100 GIA-assessed firms. Had the new proposed 
GIA calculation been in place for the 2009 billing cycle, FINRA 
projects that approximately $47 million (nearly 49%) of the lost 
revenues would have been replaced, and these largest 100 GIA-assessed 
firms would have absorbed approximately $44 million, or nearly 94%, of 
the shortfall. For 2010, FINRA estimates that with the proposed fee 
structure, the percentage of GIA paid will shift back toward the 
largest 100 GIA-assessed firms, rising to 63% from 57% in 2009. If the 
current GIA structure remains in place, these 100 firms are estimated 
to account for only 59% of GIA in 2010.\39\
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    \39\ See Id. at page 7.
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    For firms with 100 or fewer registered persons, FINRA estimates 
that, if the proposal had been implemented for 2009, the new GIA 
calculation would have resulted in an average increased GIA of $850 as 
compared to the actual amount assessed on those firms.\40\ FINRA notes 
that these firms currently receive a rebate of $1,200 against their GIA 
fee and that that rebate will continue until at least 2012. Therefore, 
under the current and the proposed GIA, these firms, if they have FOCUS 
revenues of less than $1 million, effectively pay no GIA 
assessment.\41\
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    \40\ See Id. at page 7.
    \41\ See Id. at page 7.
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    The Financial Services Institute (``FSI''), which represents the 
interests of independent broker-dealers, believes that the GIA 
modification is inequitably allocated and will ``fall particularly 
heavily on independent broker-dealer firms. * * * '' \42\ FINRA 
believes that its data shows that the proposal, if implemented, will 
not disparately impact the GIA of independent firms.\43\ FINRA reports 
that, for 2009, independent broker-dealers paid a total of $11.63 
million in GIA fees. Under the proposal, that figure is estimated to 
fall to $11.17 million for 2010. By comparison, the GIA of the largest 
100 GIA-assessed firms is projected to rise from $94 million in 2009 to 
$123.53 million under the proposal. Thus, FINRA believes that the 
increases resulting from the proposed GIA calculation will fall most 
heavily not on independent broker-dealers but on the largest 100 GIA-
assessed firms, which include the several largest firms whose steep 
income declines primarily account for FINRA's current revenue deficit.
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    \42\ See FSI Letter, infra in Exhibit 1.
    \43\ See Response Letter, supra note 5 at page at page 7.
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    After reviewing the comment letters and considering FINRA's 
Response Letter, the Commission believes that the GIA reformulation is 
an equitable allocation of fees. As FINRA notes, nearly 95% of the $100 
million in GIA revenue drop since 2008 is attributable to the largest 
100 GIA-assessed firms. Had the proposed new GIA calculation been in 
place for the 2009 billing cycle, FINRA projects that approximately $47 
million (nearly 49%) of the lost revenues would have been replaced, and 
those largest 100 GIA-assessed firms would have absorbed approximately 
$44 million, or nearly 94%, of the shortfall. FINRA estimates also show 
that the new GIA calculation will increase the GIA burden for the 
largest 100 GIA-assessed firms in 2010 from 57% to 63% of total GIA 
revenue. The GIA assessments for

[[Page 62620]]

the largest 100 GIA-assessed firms are predicted to be $280,000 more 
per firm in 2010 under the new formulation than under the current 
formulation. The expected average increase for all other firms is 
expected to be only $1,000 per firm. The totality of the data appears 
to show that any increase that results from the new GIA formulation 
falls primarily on the largest 100 GIA-assessed firms, the same firms 
largely responsible for the revenue shortfall.
    In addition, one commenter argues that using income to determine 
assessment fees is too simplified an approach and ignores many other 
factors that may be indicative of FINRA's regulatory costs relative to 
member firms, such as significant proprietary trading positions held by 
a member firm, holding of customer funds or securities by the member 
firm, and whether a member firm is self-clearing.\44\ As FINRA notes, 
it has a large and diverse membership of differing sizes and business 
models and therefore it is impossible for FINRA to develop a pricing 
scheme that accounts for the particulars of every firm.\45\ FINRA 
believes, and the Commission agrees, that the current pricing structure 
is reasonable in that it achieves a generally equitable impact across 
FINRA's membership and correlates the fees assessed to the regulatory 
services provided by FINRA.\46\ Therefore, the Commission finds that 
the proposed change to the GIA calculation will result in an equitable 
allocation that will help reduce the risk of future fluctuations in GIA 
income.
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    \44\ See MetLife Letter, infra in Exhibit 1.
    \45\ See Response Letter, supra note 5 at page 2.
    \46\ See Id. at page 2.
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D. GIA Reformulation Is Reasonable

    Based on two quarters of 2009 FOCUS data, FINRA estimates that 
under the proposed GIA revision, in 2010, the assessment for the 
largest 100 firms (based on the amount of GIA assessed for 2008) will 
increase approximately $280,00 per firm over the current 
formulation.\47\ The remaining firms are estimated to experience an 
average increase of approximately $1,000 per firm. FINRA believes that 
this increase does not disproportionately burden the firms outside of 
the largest 100 (based on the amount of GIA assessed for 2008) in terms 
of the revenue generated by those firms. In addition, FINRA contends 
that this increase is necessary to cover its costs of regulatory 
oversight and will ensure that it is able to continue meet its 
regulatory obligations.\48\
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    \47\ See Id. at page 2.
    \48\ See Response Letter, supra note 5 at page 6.
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    One commenter, while appreciative of the need for stability 
resulting from the use of a three-year average, suggested that GIA 
should be based on a three-year average instead of the proposed greater 
of a three-year average or GIA based on actual current year FOCUS 
revenue.\49\ The Commission notes that using the greater of the two 
figures allows FINRA to recoup any losses on a faster time frame, 
thereby reducing the duration of the risk that any deficits in funding 
would affect FINRA's ability to meet its statutory obligations. 
Therefore, the Commission finds that FINRA's proposed GIA reformulation 
is reasonable as proposed.
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    \49\ See Committee of Annuity Issuers Letter, infra Exhibit 1.
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    In addition, the Commission notes that the intent of the GIA 
reformulation is not to impose additional burdens on FINRA members. The 
intent is to enable FINRA to fulfill its regulatory obligations by 
guarding against future revenue declines as a result of drastic 
reductions in the FOCUS revenue of FINRA members. The introduction of a 
three-year average should make this revenue stream less volatile and 
more reliable for FINRA in the future. Therefore, the Commission 
believes that the proposed GIA increase is appropriate.

E. Other Concerns of Commenters

1. FINRA Should Have Foreseen/Prepared for the Inevitable Shortfall
    727 commenters state that FINRA should have predicted the market 
downturn and taken budgetary steps to account for it. As many 
commenters stated in Letter Type B, ``FINRA's failure to properly 
prepare for the inevitable market downturn is the root cause of their 
operating cash flow concerns.'' \50\
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    \50\ See Letter Type B.
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    The Commission notes that FINRA is an SRO and is obligated under 
the Act to carry out its regulatory obligations even during a period of 
economic downturn. FINRA notes that it actually planned for a decline 
in GIA from 2008 to 2009 and accordingly adjusted its 2009 budget 
downward compared to 2008 in anticipation of the reduced revenues.\51\ 
The Commission is aware that, in a market downturn, each element of 
FINRA's funding sources is vulnerable. A firm's gross income declines 
as its trading activity declines, thereby affecting FINRA's funding for 
its regulatory programs. It would be difficult for FINRA to account for 
economic events outside of its control when planning its regulatory 
program needs and its budget. This is because one of FINRA's primary 
means of meeting its regulatory costs is the GIA, and the funding FINRA 
receives from the GIA is wholly dependent on firms' revenues.\52\ 
Moreover, to the extent that the commenters raise issues with FINRA's 
balance sheet investments, the Commission agrees with FINRA that those 
comments are misplaced. The balance sheet is used to augment FINRA's 
funding and thereby decrease the full cost of regulation assessed to 
FINRA's member firms; its value does not negate the need to adequately 
fund FINRA's regulatory programs. As an SRO, FINRA's needs and 
requirements differ from those of its members and it would be improper 
for FINRA to cut its regulatory programs to adjust to leaner times when 
those programs are necessary to meet its statutory obligations. As 
FINRA has noted, it has established a comprehensive cost-cutting 
program that so far has reduced expenses that do not directly impact 
its regulatory programs by more than $70 million from the prior 
year.\53\ This cost-cutting is in addition to the income yield from its 
balance sheet portfolio that supplements the PA and GIA fees. In the 
Commission's view, FINRA's fee proposal is fair and reasonable in light 
of FINRA's regulatory responsibilities.
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    \51\ See Response Letter, supra note 5 at page 4-5.
    \52\ See Id. at page 4.
    \53\ See Id. at page 2.
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2. Any Fee Increase Is Inappropriate Given the Current Economic 
Conditions
    728 commenters believe that the proposal is unfair because it 
occurs at a time when firms are suffering financially and have incurred 
fee increases from a variety of other entities, including the 
Commission, the Securities Investor Protection Corporation, a national 
securities exchange, the Municipal Securities Rulemaking Board and 
several states. In response, FINRA notes that its regulatory 
responsibilities have not lessened--if anything, they may have 
increased.\54\ To that end, FINRA refers to statistics that demonstrate 
that the population of registered representatives has remained fairly 
constant, even throughout recent market events.\55\ The Commission 
strongly believes that FINRA must have sufficient resources to carry 
out its statutory obligations, particularly during periods of market 
turmoil, even when its members also are

[[Page 62621]]

assessed fees by other organizations or governmental entities. In the 
Commission's view, fee increases imposed by other regulators, market 
operators or securities-related entities are not dispositive regarding 
whether it is appropriate for FINRA to increase its regulatory fees. 
The proposed PA and GIA fee increases are designed to allow FINRA to 
maintain a robust regulatory program, which the Commission believes is 
both necessary and appropriate so that FINRA can carry out its 
regulatory responsibilities effectively.
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    \54\ See Id. at page 5.
    \55\ See supra, note 6.
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F. Other Approaches Suggested by Commenters

    In addition to the concerns and suggestions raised by commenters 
that are discussed above, commenters offered several alternative 
approaches to the proposed PA and GIA increases. For example, some 
commenters suggest that the proposed revisions to PA and GIA 
assessments be capped at a certain amount or phased in over a period of 
years.\56\ Other commenters note that FINRA has failed to sufficiently 
demonstrate a need for additional revenue in the form of increased PA 
and GIA.\57\
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    \56\ See e.g., SIFMA Letter, MetLife Letter, and GBS Financial 
Letter, infra Exhibit 1.
    \57\ See e.g., Whitestone Letter, PFS Investment Letter, and 
SagePoint Financial Letter, infra Exhibit 1.
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1. Caps on Increases or Phase-In Period
    Eight commenters suggest that any fee increase should be subject to 
an annual cap or a gradual phase-in period.\58\ One commenter suggests 
a one year delay in any fee increase \59\ while another commenter 
favors a three year phase-in period for any fee increase.\60\ Three 
other commenters recommend a phase-in period of an unspecified 
length.\61\ Five of the commenters favored a cap on any PA increase. 
Two of these commenters support a 10% cap,\62\ another commenter 
prefers a 10%-15% cap,\63\ and the two others do not suggest a specific 
amount.\64\
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    \58\ See Foresters Equity Letter, State Farm Letter, FSI Letter, 
MetLife Letter, GBS Financial Letter, SIFMA Letter, World Group 
Letter, and Committee of Annuity Insurers Letter, infra Exhibit 1.
    \59\ See Foresters Equity Letter, infra Exhibit 1.
    \60\ See FSI Letter, infra Exhibit 1.
    \61\ See GBS Financial Letter, SIFMA Letter, and World Group 
Letter, infra Exhibit 1.
    \62\ See State Farm Letter and Committee of Annuity Insurers 
Letter, infra Exhibit 1.
    \63\ See Foresters Equity Letter, infra Exhibit 1.
    \64\ See SIFMA Letter and World Group Letter, infra Exhibit 1.
---------------------------------------------------------------------------

    In its Response Letter, FINRA states that it is critical to 
implement the proposed rule change as of January 2010 and without any 
limitations. FINRA notes that it has already phased in the need for 
additional assessed funding by not charging firms in 2008 and 2009 for 
cash flow shortfalls that are funded out of its capital. FINRA points 
out that the GIA will remain subject to an existing cap for 2010,\65\ 
but notes that any further caps could leave FINRA facing the same 
fiscal quandary it currently faces in the event of continuing decreased 
revenue at firms. For the same reason, FINRA opposes a phased-in 
implementation period. FINRA believes that prolonging implementation of 
these changes will only lead to a ``geometric future fee increase, as 
FINRA perpetuates a budget imbalance and depletes its revenue-producing 
assets.'' \66\
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    \65\ For 2010, any increase or decrease in GIA will be capped at 
10% of what a firm would have paid under the prior NASD or NYSE rate 
structures that it was subject to before FINRA's GIA rate structure 
was amended in 2008.
    \66\ See Response Letter, supra note 5 at page 8.
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    The Commission agrees with FINRA that by not charging members 
increases in 2008 and 2009 when its cash flow shortfalls were 
occurring, FINRA effectively has provided a type of delayed or phased-
in implementation of the fee increases. The Commission also agrees with 
FINRA's view that any further delay in implementing the fee increases 
could result in a greater financial impact to firms in the future and, 
in the Commission's view, could potentially impact FINRA's ability to 
meet its statutory requirements. Therefore, the Commission believes 
that it is reasonable for FINRA to refrain from implementing a yearly 
cap on, or a phase-in period for, the PA and GIA fee increases.
2. FINRA Does Not Need the Additional Revenue
    Nine commenters suggest that FINRA has failed to sufficiently 
demonstrate a need for additional revenue and thus argue against any 
increase in the PA or GIA.\67\ One commenter remarks that ``it is 
apparent from FINRA's annual report that the organization has more than 
adequate assets and reserves to withstand the recent downturn.'' \68\ 
Another commenter states that ``FINRA's proposed Rule Change lacks 
proper and adequate support. Nowhere does FINRA provide any disclosure 
of what proportion PA and GIA fees represent in its revenue or income. 
Nor does FINRA describe its financial or investment models or state 
what if any preparations or actions it took or has taken in light of 
the economic and industry downturns.'' \69\
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    \67\ See IBN Financial Letter, First Independent Letter, 
Whitestone Letter, JanHobbs Financial Letter, SagePoint Financial 
Letter, Magdaleno Letter, GBS Financial Letter, FSC Securities 
Letter, and PFS Investment Letter, infra Exhibit 1.
    \68\ See e.g., First Independent Letter, infra Exhibit 1.
    \69\ See e.g., FSC Securities Letter, infra Exhibit 1.
---------------------------------------------------------------------------

    In its Response Letter, FINRA states that income from its reserves 
is used to offset a part of the cost of its regulatory program each 
year, and consequently that funding stream is in lieu of a more 
substantial fee increase on members.\70\ FINRA expects such income to 
offset regulatory costs by approximately $50 million in 2010.\71\ 
Moreover, FINRA notes that it delayed seeking any fee increase for 2008 
and 2009 by utilizing the principal of its reserves. However, FINRA 
does not believe that it would be prudent to continue to exhaust its 
reserves to cover all future operating deficits, because such a 
practice is unsustainable and would inevitably result in a much more 
substantial fee increase in the future.\72\
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    \70\ See Response Letter, supra note 5 at page 3.
    \71\ See Id. at page 3.
    \72\ See Id. at pages 3-4.
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    FINRA further notes that it has minimized the proposed fee 
increases through a comprehensive cost-cutting program that so far has 
reduced expenses that do not directly impact its regulatory programs by 
more than $70 million from the prior year.\73\ According to FINRA, it 
supplements, where possible, member fees and assessments with the 
income yield from its balance sheet portfolio. FINRA states that by 
reallocating assets it has reduced performance volatility, while 
creating a more reliable income stream to subsidize fees. However, 
FINRA notes that these actions alone have been insufficient to make up 
the funding deficits it has experienced over the prior two years. 
According to FINRA, the proposed rule change is intended to remedy 
ongoing deficits and ameliorate vulnerability to future revenue 
shortfalls. Therefore, FINRA believes that the proposed fee increases 
are necessary and any delay in their implementation will necessitate 
future fee increases of much greater magnitude.\74\
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    \73\ See Id. at page 2.
    \74\ See Id. at page 2.
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    The Commission believes that FINRA has sufficiently demonstrated 
that the proposed increases in PA and GIA fees are necessary to 
adequately support FINRA's regulatory programs. FINRA makes a 
compelling argument that its balance sheet resources are finite and 
cannot be relied upon solely to overcome a regulatory revenue 
shortfall. As an SRO, FINRA needs to maintain adequate reserves to 
ensure that it can

[[Page 62622]]

continue to operate a vigorous regulatory system. In addition, the 
Commission notes that FINRA has implemented cost cutting measures and 
taken other steps to minimize the magnitude of the proposed fee 
increases. Therefore, the Commission finds that the proposed fee 
increases are equitable and consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\75\ that the proposed rule change (SR-FINRA-2009-057), be, and it 
hereby is, approved.
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    \75\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
---------------------------------------------------------------------------

    \76\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.

EXHIBIT 1

Comments on FINRA Rulemaking

    Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Section 1(c) of Schedule A to the FINRA By-Laws to Amend the Personnel 
Assessment and Gross Income Assessment.
    (Release No. 34-60624; File No. SR-FINRA-2009-057).
    Total Number of Comment Letters Received--745.
    Comments have been received from individuals and entities using the 
following Letter Types:
    a. 4 individuals or entities using Letter Type A.
    b. 672 individuals or entities using Letter Type B.
    1. Jonathan Zulauf, dated September 2, 2009.
    2. Richard J. Carlesco Jr., LUTCF, IBN Financial Services, Inc., 
dated September 17, 2009 (``IBN Financial Letter'').
    3. Phillip H. Palmer, ChFC, President and CEO, First Independent 
Financial Services Inc. dated September 17, 2009 (``First Independent 
Letter'').
    4. William R. Sykes, President, Sykes Financial Services LLC, dated 
September 17, 2009 (``Sykes Financial Letter'').
    5. Anthony Pappas, Ph.D., President, Whitestone Securities Inc., 
dated September 21, 2009 (``Whitestone Letter'').
    6. David M. Sobel, Esq., EVP/COO, Abel/Noser Corp., dated September 
22, 2009 (``Abel Noser Letter'').
    7. Kevin Hart Korfield, Kevin Hart Korfield & Co. Inc. dated 
September 23, 2009.
    8. Nancy Wheeler Bertacini, Curnes Financial Group, FNIC, dated 
September 24, 2009 (``Curnes Financial Letter'').
    9. David L. Ehrig, dated September 24, 2009.
    10. Janice Hobbs, President, JanHobbs Financial Group, dated 
September 24, 2009 (``JanHobbs Financial Letter'').
    11. Bryon Holz, dated September 24, 2009.
    12. John Ikeda, Registered Principal Financial Network Investment 
Corp., dated September 24, 2009 (``Financial Network Letter'').
    13. Timothy Jones, Chairman CJM Wealth Advisers LTD, dated 
September 24, 2009.
    14. Kate Marvel, President, Marvel Financial Planning, Inc., dated 
September 24, 2009 (``Marvel Financial Letter').
    15. Jonathan Meany, CFP, dated September 24, 2009.
    16. Gary Orler, Investment Executive, Raymond James Financial 
Services, Inc., dated September 24, 2009.
    17. Suzanne Seay, CFP, Royal Alliance, dated September 24, 2009.
    18. John Sklencar, Financial Advisor FSC Securities Corp., dated 
September 24, 2009.
    19. Frank L. Smith, President, Foresters Equity Services, Inc., 
dated September 24, 2009 (``Foresters Equity Letter'').
    20. Daniel G. Trout, Senior Associate, Financial Principles LLC, 
dated September 24, 2009.
    21. James Woytcke, CEO/Owner, Financial Success Ltd., dated 
September 24, 2009.
    22. Tim, dated September 24, 2009.
    23. Jeffrey M. Auld, President and Chief Executive Officer, 
SagePoint Financial Inc., dated September 24, 2009 (``SagePoint 
Letter'').
    24. Kurt Dressler, Capital Investment Counsel, dated September 25, 
2009.
    25. Bruce Ferguson, Managing Member, Raymond James Financial, dated 
September 25, 2009.
    26. Pamela Fritz, CCO, MWA Financial Services, dated September 25, 
2009.
    27. Robert B. Lyons, CLU, ChFC, ING Financial Partners, dated 
September 25, 2009.
    28. Brian Perley, ChFC, CFP, Hammond Financial Inc., dated 
September 25, 2009.
    29. S. Ann Pugh, CFP, ING Financial Partners, dated September 25, 
2009.
    30. William Robbins, Registered Representative, Coordinated Capital 
Securities, Inc., dated September 25, 2009.
    31. Stephen Russell, Senior Vice President, VSR Financial Services, 
dated September 25, 2009.
    32. James G. Timpa, dated September 25, 2009.
    33. Sherri White, CPA/PFS, dated September 25, 2009.
    34. Martin Cohen, President, Balanced Financial Securities, dated 
September 26, 2009.
    35. Joel Dash, dated September 28, 2009.
    36. D.W. Hadley, Jr., Capital Analyst of NC Inc., dated September 
28, 2009.
    37. Michelle E. Heyne, CCO, McAdams Wright Ragen, Inc., dated 
September 28, 2009.
    38. Penn Rettig, Branch Manager, Multi Financial Securities Corp., 
dated September 28, 2009.
    39. Donna M. Stevenson, dated September 28, 2009.
    40. John Terry, President, High Street Securities Inc., dated 
September 28, 2009.
    41. Russell L. Bacon, MBA, CSA, Director, Montgomery Wealth 
Management, dated September 29, 2009.
    42. Robert Black, Jr., President, Legacy Planning Group, dated 
September 29, 2009.
    43. Nicholas C. Cochran, Vice President, American Investors 
Company, dated September 29, 2009.
    44. Pamela Goodall, dated September 29, 2009.
    45. Cynthia Iquinto, Registered Representative, FSC Securities 
Corporation, dated September 29, 2009.
    46. Jim Loessberg, Financial Advisor, Raymond James Financial, 
dated September 29, 2009.
    47. Sandra Hay Magdaleno, CFP, dated September 29, 2009 
(``Magdaleno Letter'').
    48. Edward Skelly, President, Sterling Financial Planners, dated 
September 29, 2009.
    49. Neal E. Nakagiri, President, CEO, CCO, NPB Financial Group LLC, 
dated September 30, 2009.
    50. Kevin Tucker, dated September 30, 2009.
    51. Paige W. Pierce, CEO, RW Smith Associates Inc., dated October 
1, 2009.
    52. Richard P. Woltman, CEO & Chairman, Girard Securities Inc., 
dated October 1, 2009.
    53. David E. Axtell, Compliance Director, State Farm Investment 
Management Corp, dated October 2, 2009 (``State Farm Letter'').
    54. Dale E. Brown, CAE, President & CEO, Financial Services 
Institute, Inc., dated October 2, 2009.
    55. Paul Cellupica, Chief Counsel, Securities Regulation & 
Corporate Services, MetLife, Inc., dated October 2, 2009 (``MetLife 
Letter'').

[[Page 62623]]

    56. James M. Clous, Registered Representative, dated October 2, 
2009.
    57. Gerard P. Gloisten, President, GBS Financial Corp, dated 
October 2, 2009 (``GBS Financial Letter'').
    58. Ronald C. Long, Director, Regulatory Affairs, Wells Fargo 
Advisors, dated October 2, 2009.
    59. Debra G. McGuire, CPA, McGuire Dyke Investment Group, dated 
October 2, 2009.
    60. E. John Moloney, Chairman, SIFMA Small Firms Committee, 
Securities Industry and Financial Markets Association, dated October 2, 
2009 (``SIFMA Letter'').
    61. Kevin L. Palmer, CEO/President, World Group Securities Inc., 
dated October 2, 2009 (``World Group Letter'').
    62. Mark J. Schlafly, President & CEO, FSC Securities Corporation, 
dated October 2, 2009 (``FSC Securities Letter'').
    63. Sutherland Asbill & Brennan LLP, on behalf of Committee of 
Annuity Insurers, dated October 2, 2009 (``Committee of Annuity 
Insurers Letter'').
    64. John S. Watts, SVP & Chief Counsel, PFS Investment Inc., dated 
October 2, 2009 (``PFS Investment Letter'').
    65. Edward Wiles, SVP & CCO, Genworth Financial Securities Corp, 
dated October 2, 2009.
    66. Cuneo, Gilbert & Laduca LLP and Greenfield & Goodman LLC, on 
behalf of Standard Investment Chartered Inc., dated October 5, 2009.
    67. Elliott Harris, dated October 5, 2009.
    68. Daniel W. Roberts, President/CEO, Roberts & Ryan Investments 
Inc., dated October 5, 2009.
    69. Mark E. Larson, Esquire, CPA, Academic Director of the 
Certificate in Financial planning Program at Marquette University, 
dated October 13, 2009.

[FR Doc. E9-28472 Filed 11-27-09; 8:45 am]
BILLING CODE 8011-01-P