[Federal Register Volume 89, Number 229 (Wednesday, November 27, 2024)]
[Notices]
[Pages 93709-93731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27764]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101696; File No. SR-FINRA-2024-019]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adjust FINRA Fees To Provide Sustainable
Funding for FINRA's Regulatory Mission
November 21, 2024.
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 November 8, 2024, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') 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 FINRA. FINRA has
designated the proposed rule change as ``establishing or changing a
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal
effective upon receipt of this filing by the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adjust FINRA fees to provide sustainable
funding for FINRA's regulatory mission.
The text of the proposed rule change is available on FINRA's
website at http://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA 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. FINRA 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
Overview
FINRA is submitting this proposed rule change to increase the
revenues that FINRA, as a not-for-profit self-regulatory organization
(``SRO''), relies upon to fund its regulatory mission. Over the past
year, FINRA has publicly stated many times its need to file a fee
change this year to increase its fees. Over the past several years,
FINRA has experienced significant expense growth resulting from rising
technology costs related to capital investments seeking long-term
efficiency gains for both FINRA and the industry, rising cloud hosting
costs, ongoing disaster recovery and cybersecurity requirements, and
elevated wage inflation and essential headcount increases necessitated
by the growing breadth and complexity of FINRA's responsibilities.
To sustain FINRA's regulatory capabilities, FINRA proposes to
increase fees related to FINRA's core regulatory functions as well as
select fees related to the use of FINRA programs and services. The
proposal is designed to closely align FINRA's revenues with its costs
while preserving the historical equitable allocation of fees among
FINRA members. In parallel, FINRA continues to implement operational
improvements to ensure FINRA's operations are effective and efficient.
Implementation of the proposed rule change would take place over
several years, with a minority of fees going into effect in 2025, most
fees implemented in 2026 or later, and several fees phased in over
several years between 2025 and 2029.
Thus, under the proposed rule change, FINRA would aim to collect more
than 90 percent of the revenue it seeks to raise in 2026 or later.
FINRA is submitting the proposed rule change now to provide members
with sufficient advance notice of the proposed fee changes for annual
budgeting and financial planning purposes. The proposed rule change is
intended to provide sustainable longer-term funding, in a manner
consistent with FINRA's public Financial Guiding Principles (``Guiding
Principles''),\5\ to enable FINRA to continue fulfilling its regulatory
mission.
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\5\ See FINRA's Financial Guiding Principles, https://www.finra.org/sites/default/files/finra_financial_guiding_principles_0.pdf.
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FINRA's Current Fee Structure
As a not-for-profit SRO, FINRA receives no taxpayer funding and
instead relies on a mix of fees that are intended to cover the overall
costs of FINRA's operations. The majority of FINRA's funding is derived
from three regulatory fees: the Gross Income Assessment (GIA), Trading
Activity Fee (TAF), and Personnel Assessment (PA). These fees,
respectively, reflect one of the three critical components driving
FINRA's regulatory costs with respect to a particular member: (1) the
size of the firm measured by firm revenue, (2) the firm's trading
activity, and (3) the number and role of persons registered with the
firm. FINRA also employs use-based fees for specific services it
provides to members and the public in support of its regulatory
mission. Several use-based fees, including registration fees,
qualification examination fees, and continuing education fees, among
others, align with a critical component of FINRA's regulatory costs
(i.e., the number and role of registered persons at a firm). As such,
FINRA considers those use-based fees part of its ``core'' regulatory
fees.
In addition, FINRA employs other use-based fees for certain
services it provides to members and the public. Examples include fees
associated with: reviewing public offering filings; reviewing
communications with the public; and operating the FINRA Dispute
Resolution Services (``DRS'') arbitration forum. As FINRA has explained
previously,\6\ when applying use-based fees, FINRA takes into account
three associated types of costs: direct costs for the program
associated with the use-based fee, such as program development and
operating expenses, and reinvestments and enhancements; indirect costs
for the program, including supporting services necessary for the
program's associated regulatory activity; and a contribution to FINRA's
overall regulatory operations, which promotes its mission of investor
protection.\7\ Thus, taken together, core regulatory
[[Page 93710]]
fees and other use-based fees allow FINRA to fund its regulatory
mission.\8\
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\6\ See Securities Exchange Act Release No. 90176 (October 14,
2020), 85 FR 66592 (October 20, 2020) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2020-032).
\7\ See supra note 6.
\8\ In addition to the services FINRA provides in furtherance of
its regulatory mission, FINRA also provides certain services on a
contract basis to third parties. These contract service fees
represent approximately 8% of FINRA's total revenues. Importantly,
these revenues pay in full for the services rendered under the
contracts, and FINRA's costs to perform these services are not
funded with any of the regulatory revenue discussed in this filing.
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FINRA has explained that numerous operations and services must be
funded by general revenue sources, which include both core regulatory
and other use-based fees.\9\ There are several reasons for this. For
instance, it is not feasible to associate a direct affiliated revenue
stream for each of FINRA's programs (e.g., examinations of members do
not have an associated revenue stream). Similarly, there is no one
consistent driver of costs of a particular regulatory program. Even
where one cost driver may, at times, align with a particular revenue
stream (e.g., as trading activity increases, certain Market Regulation
costs may increase), the relationship may not hold at other times. For
example, novel trading patterns in single or multiple securities may
not be associated with significant volume but may require comparatively
larger efforts in terms of regulatory oversight. Likewise, periods of
intense market volatility may influence regulatory costs independent of
the change in trading volume.
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\9\ See supra note 6.
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Further, in light of FINRA's diverse membership of firms that vary
greatly in size and business model, it is not feasible to develop a
comprehensive pricing structure that precisely accounts for the
particular costs associated with each member.\10\ Rather, FINRA's
current fee structure is designed to ensure sufficient funding to meet
all of its regulatory obligations in a manner that equitably allocates
fees among FINRA members, notwithstanding the fluctuations in different
revenue streams and cost drivers that are naturally expected to occur
over time. The Commission has historically agreed that this overall
cost-based 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.'' \11\
FINRA continues to believe that this approved approach to overall
pricing is the most reasonable and equitable way to provide sufficient
funding to meet its regulatory obligations as a not-for-profit SRO with
broad, diverse membership.
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\10\ See supra note 6.
\11\ See Securities Exchange Act Release No. 61042 (November 20,
2009), 74 FR 62616, 62620 (November 30, 2009) (Order Approving File
No. SR-FINRA-2009-057).
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As set out in the Guiding Principles, FINRA targets break-even cash
flows as a means to appropriately fund its mission of protecting
investors and promoting market integrity while facilitating vibrant
capital markets. Careful expense management is another key element of
the Guiding Principles. The Guiding Principles also explain the extent
to which FINRA relies on its financial reserves--originally derived
from the sale of Nasdaq--to help support its regulatory mission.\12\
The Guiding Principles also describe how FINRA uses fine monies--which
are not included in FINRA's operating budget--to promote compliance and
improve markets.\13\
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\12\ See supra note 5. Information about FINRA's financial
reserves is provided each year in FINRA's published annual financial
reports. See FINRA Financial Reports and Policies, available at
https://www.finra.org/about/annual-reports. FINRA strives to
maintain an appropriate level of reserves, which the FINRA Board of
Governors has determined to be at least one year of expenditures.
\13\ While fine monies are not included in FINRA's annual
operating budget, they are included in cash flow projections. For
purposes of its projections, FINRA assumed a conservative amount of
fine money for future years based on historical fine money receipt.
When FINRA imposes fines, the amounts are based on the facts and
circumstances of the misconduct and are guided by the principles set
forth in FINRA's Sanction Guidelines that are similar in nature--
fines are not based on revenue considerations, and FINRA does not
establish any minimum amount of fines that must be collected for
purposes of the annual operating budget. Fines collected are
accounted for separately, and the use of these monies is subject to
special governance procedures and restrictions on use, as set forth
in our Guiding Principles. See supra note 5. In accordance with the
Guiding Principles, FINRA issues a separate annual report detailing
use of fine monies as approved by the FINRA Board of Governors. See,
e.g., Report of Use of 2023 Fine Monies (June 14, 2024), available
at https://www.finra.org/about/annual-reports/report-use-2023-fine-monies.
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FINRA's most recent comprehensive fee increase included increases
to core regulatory fees from 2022 through 2024.\14\ Looking ahead,
FINRA projects that its current fees will not keep pace with its
projected future expenses in light of the continued growth in the
breadth and complexity of FINRA's regulatory obligations, described in
detail below. As FINRA noted recently in its 2024 Annual Budget
Summary, based on the current fee structure (inclusive of the fee
adjustments made from 2022 through 2024), FINRA projects it will
recognize an operating loss in 2024, with a drawdown on its financial
reserves of approximately $100 million.\15\ FINRA estimates that,
absent any action, its reserve balance will fall below its Board-
approved target level of one-year of operating costs by 2027. As
described in more detail below, FINRA has carefully managed its
expenses; however, careful expense management cannot suffice as a
sustainable financial strategy in the long term, particularly in the
context of rising systemic costs and FINRA's increasing regulatory
responsibilities.
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\14\ See supra note 6.
\15\ See FINRA 2024 Annual Budget Summary, https://www.finra.org/sites/default/files/2024-06/FINRA-2024-Annual-Budget-Summary.pdf, at 2. This potential loss is in line with FINRA's
previous multiyear strategic planning for financial sustainability,
which contemplates a series of annual losses in order to reduce the
size of FINRA's reserves. As discussed in the Guiding Principles,
FINRA has relied on its financial reserves, which were originally
derived from the sale of Nasdaq, to help support its regulatory
mission. See also Funding FINRA's Mission, available at https://www.finra.org/media-center/blog/funding-finras-mission.
FINRA has made reasonably conservative assumptions using a
variety of information points, including historical data and
anticipated trends. If FINRA's structural financial deficit is
materially reduced during this period, or if key assumptions change
materially, FINRA would consider various modifications as
appropriate. For example, FINRA has used rebates to support its
commitment to reasonable, cost-based fee assessments in instances
where revenues significantly exceed expenditures. These rebates are
approved by the FINRA Board of Governors. A number of factors must
be considered when determining whether to provide rebates, including
the amount of excess revenue for the year, whether budget
projections anticipate near-term revenue shortfalls, and the number
of firms that would be eligible to receive rebates. FINRA makes
information about these factors transparent to the public each year.
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Background
Over the past several years, FINRA's regulatory and oversight
responsibilities have grown significantly, and FINRA anticipates that
they will continue to grow over the rest of this decade, requiring
investments in technology and increased headcount. Simultaneously,
FINRA has experienced substantial systemic expense growth resulting
from, among other things, elevated wage inflation and increased
operating costs related to technology.\16\ Several factors have
contributed to these areas of growth, including: continued increases in
the volume and complexity of member activity; new investment products,
services, and market participants under FINRA's purview; the continuing
evolution of market structure and trading patterns; and the SEC's
adoption of significant new rules that require implementation by FINRA
and its expanded member oversight.
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\16\ FINRA's technology costs, for example, have risen by
approximately 11% per year over the last five years.
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For example, FINRA has made substantial investments to supervise or
comply with new and amended SEC rules, such as amendments to Disclosure
[[Page 93711]]
of Order Execution Information, Regulation M, Shortening the Securities
Transaction Settlement Cycle, Regulation Best Interest, Market Data
Infrastructure, and Minimum Pricing Increments, Access Fees, and
Transparency of Better Priced Orders. FINRA must also be prepared to
implement and supervise significant potential new and amended rules
that the SEC has proposed, including Regulation S-P, Conflicts of
Interest Associated with the Use of Predictive Data Analytics,
Regulation Systems Compliance and Integrity, Cybersecurity Risk
Management, Regulation Best Execution, and the Order Competition Rule.
Furthermore, FINRA is investing in preparation for its expanded role in
the oversight of a broader range of market participants under several
SEC rulemakings. For example, the SEC has narrowed the exemption for
certain exchange members under Exchange Act Rule 15b9-1, further
defined ``as part of a regular business'' \17\ in the definitions of
``dealer'' and ``government securities dealer'' under the Exchange Act,
and proposed to amend the definition of ``exchange'' under Exchange Act
Rule 3b-16 and amend Regulation ATS.
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\17\ The updated definition covers additional market
participants engaged in liquidity-providing activities that
generally would require SRO membership.
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FINRA is also investing to enable continued effective oversight
over evolving trading patterns, such as the significant growth in
retail trading, growth in smaller and fractional share trading, and
increased trading outside of regular trading hours. These and other
market developments, together with the evolution of new and evolving
products such as securities with crypto asset components and short-
dated options products, require increased oversight by FINRA staff.
FINRA is committed to a culture of continuous improvement, with a
rigorous focus on carefully managing costs and identifying new
efficiency opportunities, where consistent with its mission. FINRA has
exercised prudent expense control and managed costs through various
initiatives and technology investments that have helped to enhance
efficiency and effectiveness. Beginning with the FINRA360 \18\
initiative, which launched a comprehensive self-evaluation and
organizational improvement exercise in 2017 to ensure that FINRA was
maximizing its effectiveness, FINRA has implemented a number of
enhancements including: enforcement program consolidation; new external
transparency tools; the launch of the Small Firm Helpline; increased
examiner training; creation of an Innovation Outreach Initiative; and
the development of a program to evaluate and integrate advances in data
analytics.
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\18\ Detailed information about the FINRA360 initiative is
available at https://www.finra.org/about/finra-360.
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FINRA continues to invest in technology to better serve its mission
and to improve FINRA's ability to communicate with members. For
example, FINRA completed a multi-year digital platform upgrade that
improved system interfaces, including essential registration and
disclosure systems used by members.\19\ FINRA also continues to build
on its early use of cloud computing in regulation, and invested in an
Advanced Analytics Program that supports risk identification and other
regulatory efforts. In the interest of regulatory efficiency, FINRA
also recently discontinued a program requiring the reporting of
prescribed data by certain members based on availability of data from
alternative sources, resulting in millions of dollars in cost savings
benefits to members.\20\
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\19\ Detailed information about FINRA's ``Digital Experience
Transformation'' is available at https://www.finra.org/filing-reporting/dxt. FINRA built the capabilities of the Digital
Experience Transformation initiative in consultation with the
industry, and FINRA's investment is estimated to save the industry
more than $200 million annually in time and direct costs.
\20\ See Regulatory Notice 23-17 (October 2023).
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Further, cost savings have been accomplished in recent years
through supplementary expense reduction initiatives, including
conducting a comprehensive efficiency review of FINRA's core business
lines; establishing a framework for improving measurement of FINRA's
key performance results; voluntary retirement/incentive programs in
2020 and 2024; and strategic reductions in FINRA's corporate real
estate footprint.
Given this context, and despite the significant increase in the
breadth and complexity of FINRA's regulatory responsibilities, FINRA's
expense growth rate from 2013 through 2023 has been significantly lower
than that of the broader financial services industry. Specifically,
FINRA's costs increased by 41% cumulatively during this period compared
with 129% for the industry.\21\ Similarly, FINRA's total compensation
costs rose by 31% on a cumulative basis during this period as compared
with a 50% increase for the average U.S. financial services
employee.\22\ FINRA's restrained expense growth is the result of
careful management of both compensation costs, the largest driver of
FINRA's budget, and non-compensation costs, such as technology and real
estate.
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\21\ Based on FOCUS reporting.
\22\ FINRA total compensation represents business compensation,
excluding technology. Average U.S. employee wage growth represents
Finance and Business Services wage growth supplied by the Bureau of
Labor Statistics and Federal Reserve Bank of Atlanta. See Current
Population Survey, Bureau of Labor Statistics, and Federal Reserve
Bank of Atlanta Calculations at https://www.atlantafed.org/chcs/wage-growth-tracker.
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Notwithstanding these efforts, as discussed, FINRA projects that
its current fees will not keep pace with its projected future expenses.
FINRA therefore proposes to increase its fees as described below.
Proposal
The proposed rule change would raise FINRA's core regulatory fees
\23\ as well as select use-based fees \24\ that fund various FINRA
services and programs. Consistent with the Guiding Principles, the
proposed rule change would more effectively allow FINRA to balance its
cash flow sources, operating expenses and capital expenditures, and
stabilize its financial reserves by 2029. As discussed above, a
minority of proposed fee increases would go into effect in 2025, while
most fees would be implemented in 2026 or later, and several fees would
be phased in over several years between 2025 and 2029.\25\ The
following table summarizes the proposed timeline for implementing each
fee increase: \26\
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\23\ For ease of reference in this filing, FINRA refers to the
following core regulatory fees: GIA; TAF; PA; Branch Office Fees;
Registration; Qualification Examination; Continuing Education
Regulatory Element Reporting; Late Disclosure; System Processing;
and Renewal Late Fee.
\24\ For ease of reference in this filing, FINRA refers to the
following select use-based fees: Corporate Financing Private
Placement Review; Corporate Financing Public Offering Review;
Advertising Regulation Review; DRS Arbitration; and Regulation T and
Exchange Act Rule 15c3-3(n) Requests for Extension of Time. The
proposed fee increase will apply to filings or submissions related
to these use-based services on or after the effective date.
\25\ FINRA considered feedback from members of FINRA's advisory
committees and other industry consultations that emphasized the
importance of advance notice of fee increases to permit member firms
to better plan for the proposed package of fee increases over
multiple budget cycles. FINRA also considered stakeholder feedback
that one-time increases for certain fees help reduce the
administrative burdens on members.
\26\ Fees listed in chronological order of initial
implementation. Unless specified otherwise in the table above, the
proposed fee increase would take effect on January 1 of the year
stated. This table does not include proposed conforming amendments
to two fees that impact funding portal members.
[[Page 93712]]
Fee Implementation Schedule
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Fee Implementation schedule
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Advertising Regulation Review.......... 2025.
DRS Arbitration........................ 2025.
Regulation T and Exchange Act Rule 15c3- 2025.
3(n) Requests for Extension of Time.
Corporate Financing Private Placement 2025 (Q3).
Review.
Corporate Financing Public Offering 2025 (Q3)-2029.
Review.
Branch Office Fees..................... 2026, 2028.
Continuing Education Regulatory Element 2026.
Late Disclosure........................ 2026.
Qualification Examination.............. 2026.
System Processing...................... 2026, 2028.
GIA.................................... 2026-2028.
TAF.................................... 2026-2029.
PA..................................... 2026-2029.
Registration........................... 2028.
Renewal Late Fee....................... 2028.
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Taken together, the proposed rule change is projected to generate
additional revenue of between $40 million and $160 million each year
compared to the previous year from 2025 through 2029. The amount of the
increase varies each year due to the phased implementation schedule
described above. Cumulatively, the proposed rule change would increase
FINRA's annual fee revenues by an estimated $450 million (once fully
implemented in 2029) as compared to the annual fee revenues that would
have existed in the absence of the proposed rule change. As such, the
proposed rule change is calibrated to cover FINRA's projected budget
deficit and achieve a balanced budget by 2029.\27\ This approach will
retain FINRA's reserve balance at its target level based on FINRA's
projected revenue and costs,\28\ while providing members advance notice
of fee increases, phasing some of the increases over multiple years,
and maintaining an equitable allocation of fees among FINRA members. As
discussed further below, under the proposed rule change, the current
proportion of fees borne by FINRA members based on firm size and
business model, respectively, would remain stable through 2029.\29\
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\27\ As discussed below, Chart 2, attached in Exhibit 3,
available on FINRA's website at http://www.finra.org, demonstrates
the difference between FINRA's projected cash flow sources and cash
flow uses through 2029, absent the proposed rule change.
\28\ Anticipated costs would not include potential costs
associated with new services that may be initiated or approved in
the future. FINRA may submit separate fee filings to cover program
costs for new services. FINRA notes this proposed rule change does
not include fees associated with the Consolidated Audit Trail
(``CAT'') or the Securities Lending and Transparency Engine
(``SLATE''), both of which are subject to separate proposed rule
changes with the Commission. See, e.g., Securities Exchange Act
Release No. 100920 (September 4, 2024), 89 FR 73457 (September 10,
2024) (Notice of Filing and Immediate Effectiveness of File No. SR-
FINRA-2024-011); Securities Exchange Act Release No. 100920
(September 4, 2024), 89 FR 73457 (September 10, 2024) (Notice of
Filing and Immediate Effectiveness of File No. SR-FINRA-2024-012).
Similarly, FINRA notes that program costs associated with the
reporting of transactions in U.S. Treasury Securities
(``Treasuries'') are not included in the targeted amount sought by
this proposal; currently, Treasuries transactions are exempted from
both TRACE transaction reporting fees and from the TAF. See
Securities Exchange Act Release No. 79116 (October 18, 2016), 81 FR
73167, 73176 (October 24, 2016) (Order Approving File No. SR-FINRA-
2016-027).
\29\ See Exhibit 3, Charts 5 and 6.
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In total, the proposed fee changes will result in a compounded
annualized growth rate (``CAGR'') of 5.3% across total FINRA fees
between 2025 and 2029.\30\ Excluding specific fees typically passed on
by members,\31\ the CAGR between 2025 and 2029 is projected to be 4.8%
for FINRA members. Further, assuming that the majority, if not all, of
TAF is also passed directly through to investors, the fee increase CAGR
falls to the 3% to 4% range for FINRA members.\32\ During the same
period, FINRA reasonably anticipates that its future expenses will grow
at a CAGR of 5.9%, with a portion of such expense growth covered by
anticipated cash flow sources other than the proposed fee increases.
FINRA's fees will continue to represent a small dollar proportion of
industry revenues as reported in FOCUS reports. FINRA estimates that
FINRA's total fees when the proposed fee increases are fully
implemented would represent approximately 0.31% of recent industry
revenues by 2029.\33\
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\30\ The CAGR provides a geometric average of the change in fees
over the implementation period. It is particularly useful for
comparing growth rates from various sets of data over the same
multi-year period.
\31\ Some of the fees discussed in this filing are or would be
absorbed by non-members, including Corporate Financing review fees
for public offerings and private placements, which are generally
passed through to issuers, and a portion of DRS fees that are paid
directly by customers.
\32\ Many members identify that they pass through TAF to
customers. Assuming 65% of TAF is passed to non-members, the fee
increase CAGR to membership falls to 3.9%. If 100% of TAF is passed
through, the fee increase CAGR to FINRA's membership falls to 3.1%.
\33\ Industry revenue projections for 2029 are based on
historical FOCUS revenue growth of 8.5% (2013-2023).
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In sum, the proposed rule change is designed to collect the
targeted revenue amount needed to address FINRA's projected budget
deficit through a combination of core regulatory and select use-based
fees that yield an equitable overall fee increase across member size
and type. The proposed rule change is thus designed to preserve the
same SEC-approved, equitable fee allocation across members that FINRA
has maintained for years by minimizing the change to distribution of
fees across members.
Each specific fee in the proposed rule change is described below.
Core Regulatory Fees
Gross Income Assessment
The GIA is a core regulatory fee designed to correlate to one of
the three critical components of FINRA's regulatory costs--the size of
a firm (based on revenue). Accordingly, the GIA is based on a firm's
annual gross revenue,\34\ employing a graduated seven-tier rate
structure that has applied since 2008.\35\
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\34\ Section 2 of Schedule A to the FINRA By-Laws defines gross
revenue for assessment purposes as total income as reported on FOCUS
form Part II or IIA, excluding commodities income.
\35\ The applicable GIA rate applies on a marginal basis to
annual gross revenues that exceed each applicable threshold. While
the GIA rate structure has not changed since 2008, FINRA made
modifications to the method of GIA calculation under the structure
in 2009 and 2014, and increased the GIA rate between 2022 and 2024.
In 2009, the Commission approved a GIA calculation modification
designed to mitigate year-to-year revenue volatility by assessing
members the greater of a GIA calculated based on the firm's annual
gross revenue from the preceding calendar year, or a GIA averaged
over the prior three years. See Order Approving SR-FINRA-2009-057,
supra note 11, 74 FR 62616, 62617. In 2014, FINRA refined the GIA
calculation method to provide limited relief for smaller member
firms from unintended effects of the 2009 calculation change; as a
result of the 2014 change, firms that have annual gross revenue of
$25 million or less pay the GIA based on preceding year revenue
without looking to a three-year average. See Securities Exchange Act
Release No. 73632 (November 18, 2014), 79 FR 69937 (November 24,
2014) (Notice of Filing and Immediate Effectiveness of File No. SR-
FINRA-2014-046). In 2020, FINRA proposed changes to the GIA tier
rates, which went into effect between 2022 and 2024. See Order
Approving SR-FINRA-2020-032, supra note 6, 85 FR 66592.
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[[Page 93713]]
Section 1(c) of Schedule A to the FINRA By-Laws sets forth the GIA.
The current rates, which reflect the fee adjustments made from 2022
through 2024, are as follows:
(1) $1,200.00 on annual gross revenue up to $1 million;
(2) 0.1732% of annual gross revenue greater than $1 million up to
$25 million;
(3) 0.3705% of annual gross revenue greater than $25 million up to
$50 million;
(4) 0.0738% of annual gross revenue greater than $50 million up to
$100 million;
(5) 0.0520% of annual gross revenue greater than $100 million up to
$5 billion;
(6) 0.0566% of annual gross revenue greater than $5 billion up to
$25 billion; and
(7) 0.1219% of annual gross revenue greater than $25 billion.
Thus, for example, under the current rates, for a member with
annual gross revenue of $30 billion, the GIA would be calculated as
follows: the first $1 million at the Tier 1 rate ($1,200), plus the
next $24 million at the Tier 2 rate (0.1732%), plus the next $25
million at the Tier 3 rate (0.3705%), plus the next $50 million at the
Tier 4 rate (0.0738%), plus the next $4.9 billion at the Tier 5 rate
(0.0520%), plus the next $20 billion at the Tier 6 rate (0.0566%), plus
the final $5 billion at the Tier 7 rate (0.1219%), for a total
assessment of $20,135,293.
FINRA is proposing the following changes to its GIA tier rates from
2026 through 2028.\36\
---------------------------------------------------------------------------
\36\ FINRA notes the Exhibit 5 to this proposed rule change,
available on FINRA's website at http://www.finra.org, is marked to
show the changes as they are proposed to take effect each year, as
described in this filing. Specifically, Exhibit 5A and 5B shows the
proposed changes that would take effect in 2025, Exhibit 5C shows
the proposed changes that would take effect in 2026, Exhibit 5D
shows the proposed changes that would take effect in 2027, Exhibit
5E shows the proposed changes that would take effect in 2028, and
Exhibit 5F shows the proposed changes that would take effect in
2029.
GIA--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025 (no
Tier (revenue) 2024 (current) change) 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
$0 to $1 million........................................ $1,200 $1,200 $1,200 $1,200 $1,200 $1,200
Greater than $1 million up to $25 million............... 0.1732% 0.1732% 0.1827% 0.2056% 0.2280% 0.2280%
Greater than $25 million up to $50 million.............. 0.3705% 0.3705% 0.3909% 0.4397% 0.4877% 0.4877%
Greater than $50 million up to $100 million............. 0.0738% 0.0738% 0.0779% 0.0876% 0.0972% 0.0972%
Greater than $100 million up to $5 billion.............. 0.0520% 0.0520% 0.0549% 0.0618% 0.0685% 0.0685%
Greater than $5 billion up to $25 billion............... 0.0566% 0.0566% 0.0597% 0.0672% 0.0745% 0.0745%
Greater than $25 billion................................ 0.1219% 0.1219% 0.1286% 0.1447% 0.1604% 0.1604%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Thus, for example, under the new rates once fully implemented in
2029, for a member with annual gross revenue of $30 billion, the GIA
would be calculated as follows: the first $1 million at the Tier 1 rate
($1,200), plus the next $24 million at the Tier 2 rate (0.2280%), plus
the next $25 million at the Tier 3 rate (0.4877%), plus the next $50
million at the Tier 4 rate (0.0972%), plus the next $4.9 billion at the
Tier 5 rate (0.0685%), plus the next $20 billion at the Tier 6 rate
(0.0745%), plus the final $5 billion at the Tier 7 rate (0.1604%), for
a total assessment of $26,502,945.
When the proposed GIA rates are fully implemented, they are
designed to generate an additional $80 million in annual revenue by
2029. The proposed GIA increase preserves the existing seven-tier
structure and calculation method while raising each tier
proportionately. With these proposed increases, the GIA structure would
continue to reflect the costs associated with performing regulatory
responsibilities across FINRA's diverse population of members. Notably,
the proposed rule change would not increase the flat $1,200 fee for
members with revenues of $1 million or less. Maintaining this fee level
for the smallest members preserves FINRA's existing approach to cost
distribution between members of varying sizes.
Further, FINRA seeks to preserve the historical proportionality
across fees associated with the three main components of FINRA's
regulatory costs--the size of the firm measured by firm revenue, the
firm's trading activity, and the number and role of persons registered
with the firm--with the aim of collecting a generally comparable amount
of revenue from fees associated with each of these components once the
proposed rule change is fully implemented. To that end, the proposed
rule change would increase the GIA at a reduced rate relative to the
other core regulatory fees. This is because, for 2024, GIA revenues
exceeded projections due to record aggregate industry revenues. As a
result, FINRA has proposed to phase in the proposed increases to the
GIA more gradually, and at a reduced rate, relative to the other core
regulatory fees to help preserve historical proportionality across
these fees and achieve a generally comparable revenue distribution.
FINRA believes this proportional approach to fee increases will provide
member firms a greater degree of certainty and predictability, as it
seeks to maintain consistency with FINRA's existing equitable fee
distribution. FINRA further believes its proportional approach reduces
the potential for unintended impacts on the services provided by member
firms, and the business models they adopt, that could arise from
significant changes to fee distribution.
Trading Activity Fee
The TAF is a core regulatory fee designed to correlate to a
critical component of FINRA's regulatory costs--the trading activity of
a firm.
[[Page 93714]]
FINRA initially adopted the TAF in 2002, modeled on the Commission's
transaction-based Section 31 fee.\37\ The TAF is generally assessed on
the sale of all exchange-listed securities wherever executed (except
debt securities that are not TRACE-Eligible Securities), over-the-
counter equity securities, security futures, TRACE-Eligible Securities
(provided that the transaction is a Reportable TRACE Transaction), and
all municipal securities subject to Municipal Securities Rulemaking
Board reporting requirements.\38\ The current TAF rates, which reflect
the fee adjustments made from 2022 through 2024, are:
---------------------------------------------------------------------------
\37\ See Securities Exchange Act Release No. 46416 (August 23,
2002), 67 FR 55901 (August 30, 2002) (Notice of Filing and Immediate
Effectiveness of File No. SR-NASD-2002-98).
\38\ Certain types of transactions are excluded from the TAF
(e.g., primary market transactions, proprietary transactions
executed by a member on a national securities exchange in the
member's capacity as an exchange specialist or market maker,
transactions effected by a proprietary trading firm on an exchange
of which such firm is a member, and transactions in U.S. Treasury
Securities). See FINRA By-Laws, Schedule A, Section 1(b)(2)
(providing full list of transactions exempt from the TAF). This
proposed rule change would not change the scope of any current TAF
exemptions.
---------------------------------------------------------------------------
(1) $0.000166 per share for each sale of a covered equity security,
with a maximum charge of $8.30 per trade;
(2) $0.00279 per contract for each sale of an option;
(3) $0.00011 per contract for each round turn transaction of a
security future, provided there is a minimum charge of $0.014 per round
turn transaction;
(4) $0.00105 per bond for each sale of a covered TRACE-Eligible
Security (other than an Asset-Backed Security) and/or municipal
security, with a maximum charge of $1.05 per trade; and
(5) $0.00000105 times the value, as reported to TRACE, of a sale of
an Asset-Backed Security, with a maximum charge of $1.05 per trade.\39\
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\39\ If the execution price for a covered security is less than
the TAF rate ($0.000166 for covered equity securities, $0.00279 for
covered options contracts, or $0.014 for a security future) on a per
share, per contract, or round turn transaction basis, then no fee is
assessed.
---------------------------------------------------------------------------
FINRA is proposing the following changes to its TAF rates between
2026 and 2029:
TAF--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Security type 2024 (current) 2025 (no change) 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Covered Equity Security......... $0.000166 per $0.000166 per $0.000195 per $0.000232 per $0.000240 per $0.000249 per
share (up to share (up to share (up to share (up to share (up to share (up to
$8.30 max per $8.30 max per $9.79 max per $11.61 max per $12.05 max per $12.50 max per
trade). trade). trade). trade). trade). trade).
Options......................... $0.00279 per $0.00279 per $0.00329 per $0.00390 per $0.00404 per $0.00420 per
contract. contract. contract. contract. contract. contract.
Security Future................. $0.00011 per $0.00011 per $0.000135 per $0.00016 per $0.000166 per $0.000172 per
contract (with contract (with contract (with contract (with contract (with contract (with
$0.014 minimum $0.014 minimum $0.016 minimum $0.019 minimum $0.020 minimum $0.021 minimum
per round turn per round turn per round turn per round turn per round turn per round turn
transaction). transaction). transaction). transaction). transaction). transaction).
TRACE-Eligible Security (Other $0.00105 per bond $0.00105 per bond $0.00124 per bond $0.00147 per bond $0.00153 per bond $0.00158 per bond
than Asset-Backed Security) or (up to $1.05 max (up to $1.05 max (up to $1.24 max (up to $1.47 max (up to $1.53 max (up to $1.58 max
municipal security. per trade). per trade). per trade). per trade). per trade). per trade).
TRACE-Eligible Asset-Backed $0.00000105 times $0.00000105 times $0.00000124 times $0.00000147 times $0.00000153 times $0.00000158 times
Security. reported value reported value reported value reported value reported value reported value
(up to $1.05 max (up to $1.05 max (up to $1.24 max (up to $1.47 max (up to $1.53 max (up to $1.58 max
per trade). per trade). per trade). per trade). per trade). per trade).
--------------------------------------------------------------------------------------------------------------------------------------------------------
When the new TAF rates are fully implemented, they are designed to
generate an additional $186 million in annual revenue by 2029. The
proposed TAF changes reflect proportional increases in the amount
raised for each security type--meaning there is no anticipated change
in the percentage of overall TAF revenue collected from transactions in
each security type--phased in incrementally over the delayed four-year
implementation period. Accordingly, while TAF revenues are largely
derived from transactions in equity securities, like the SEC's Section
31 fee, this proposed rule change is intended to preserve the current
distribution of TAF fees among security types.
The aggregate TAF increases would generate more revenue relative to
the other core regulatory fees to preserve the historical
proportionality among the core regulatory fees associated with firm
trading activity and the other main components of FINRA's regulatory
costs--the size of the firms measured by firm revenue and the number
and role of persons registered with the firm--while seeking to collect
a generally comparable amount of revenue from fees associated with each
component. This is consistent with the proportional approach to fee
increases discussed throughout this filing, which seeks to maintain
consistency with FINRA's existing equitable fee distribution.
Personnel Assessment
The PA is a core regulatory fee designed to correlate to the third
critical component of FINRA's regulatory costs--the number and role of
registered persons at a firm. The PA currently is assessed on a three-
tiered rate structure: members with one to five registered
representatives and principals are assessed $210 for each such
registered person (``Reps'' in the table below); there is a $200 charge
for each of the next 20 registered persons (between 6 and 25); and a
$190 charge for each additional registered person beyond 25 registered
persons.
Section 1(e) of Schedule A to the FINRA By-Laws sets forth the PA.
These rates last increased between 2022 and 2024.\40\ FINRA is
proposing the following increases to its PA tier rates between 2026 and
2029:
---------------------------------------------------------------------------
\40\ See Order Approving SR-FINRA-2020-032, supra note 6, 85 FR
66592.
[[Page 93715]]
PA--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025 (no
Tier (number of reps) 2024 change) 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reps 0-5................................................ $210 $210 $245 $260 $270 $295
Reps 6-25............................................... 200 200 235 250 260 285
Reps 26 and greater..................................... 190 190 225 240 250 275
--------------------------------------------------------------------------------------------------------------------------------------------------------
When the proposed PA rates are fully implemented, they are designed
to generate an additional $52 million in annual revenue by 2029. The
proposed PA increases, together with the proposed increases to the use-
based fees aligned with the number and role of registered persons at a
firm discussed below, are calibrated to preserve the historical
proportionality among the core regulatory fees associated with the
three main components of FINRA's regulatory costs and collect a
generally comparable amount of revenue from fees associated with each
component. This is consistent with the proportional approach to fee
increases discussed throughout this filing, which seeks to maintain
consistency with FINRA's existing equitable fee distribution.
Branch Office Fees
FINRA members are assessed regulatory fees for registered branch
offices. These fees are related to firm size and structure. Section
4(a) of Schedule A to the FINRA By-Laws includes a branch office
registration fee and a branch office system processing fee upon the
initial registration of each branch office as defined in the By-Laws.
The initial branch office registration fee is waived for the first
branch office registered by a member. In addition, each member is
assessed an annual registration fee for each branch office registered
by the member. This fee has a tiered regressive rate structure that
assesses a per branch office annual registration fee depending on the
number of branch offices the firm has. Currently, each member is
assessed an annual registration fee of: (1) $175, for each of the first
250 branch offices registered by the member; (2) $150, for each of
branch offices 251 to 500 registered by the member; (3) $125, for each
of branch offices 501 to 1,000 registered by the member; (4) $100, for
each of branch offices 1,001 to 2,000 registered by the member; and (5)
$75, for every branch office greater than 2,000 registered by the
member. For one branch office per member per year, the annual branch
office registration fee and annual branch office system processing fee
is waived.
FINRA has not increased the branch office registration fee since
2013.\41\ FINRA is proposing to retain the tiered regressive rate
structure, but increase the branch office registration fee in 2026 as
follows:
---------------------------------------------------------------------------
\41\ See Regulatory Notice 12-32 (June 2012).
Branch Office Registration Fees--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025 (no
Fee 2024 (current) change) 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
FINRA Branch Registration Fee........................... $75 $75 $105 $105 $105 $105
Annual Registration Fee 1-250 branch offices registered 175 175 245 245 245 245
by the member..........................................
Annual Registration Fee 251-500 branch offices 150 150 210 210 210 210
registered by the member...............................
Annual Registration Fee 501-1000 branch offices 125 125 175 175 175 175
registered by the member...............................
Annual Registration Fee 1001-2000 branch offices 100 100 140 140 140 140
registered by the member...............................
Annual Registration Fee 2001+ branch offices registered 75 75 105 105 105 105
by the member..........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
When the proposed branch office registration fee changes are fully
implemented, they are designed to generate $7 million in annual revenue
by 2029.\42\ The proposed rule change would retain the same tiered
regressive rate structure that assesses a per branch office annual
registration fee depending on the number of branch offices of the firm,
but would raise the fee associated with each range of branch office
numbers. FINRA would continue to waive, for one branch office per
member per year, payment of the annual registration fee, but increase
the amount of the waiver from $175 to $245 to match the new rates.
---------------------------------------------------------------------------
\42\ The projected revenue from the proposed increased Branch
Office Fees assumes that the number of branch offices will remain at
2024 levels through 2029. Due to the COVID-19 pandemic, FINRA had
provided regulatory relief including a temporary suspension of the
requirements to maintain updated Form U4 information regarding the
office of employment address for registered persons who temporarily
relocated due to the pandemic, and the requirement to submit branch
office applications on Form BR for any newly opened temporary office
locations or space-sharing arrangements. See Regulatory Notice 20-08
(March 2020). In mid-2024, that relief ended and FINRA implemented
new Rule 3110.19, which exempts from branch office registration a
residential supervisory location (or RSL). An RSL is a private
residence at which an associated person engages in specified
supervisory activities, subject to certain safeguards and
limitations. See Regulatory Notice 24-02 (January 2024). FINRA
believes its assumptions are reasonable given the recency of these
changes. As noted, if key assumptions change materially, FINRA would
consider various modifications as appropriate, including rebates,
for example. See supra note 15.
---------------------------------------------------------------------------
FINRA has not increased the branch office system processing fee
since 2022.\43\ FINRA is proposing to increase the branch office system
processing fee in 2028 as follows:
---------------------------------------------------------------------------
\43\ See supra note 6.
[[Page 93716]]
Branch Office System Processing Fee--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025 (no 2026 (no 2027 (no
Fee 2024 (current) change) change) change) 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Branch Office System Processing Fee (initial and $75 $75 $75 $75 $105 $105
annual)..........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
When the proposed branch office system processing fee change is
fully implemented, it is designed to generate $4 million in annual
revenue by 2029.\44\ FINRA would continue to waive, for one branch
office per member per year, payment of the annual branch office system
processing fee, but increase the amount of the waiver from $75 to $105
to match the new rates. FINRA believes these proposed increases to the
branch office fees, which relate to firm size and structure, are
consistent with the proportional approach to fee increases discussed
throughout this filing.
---------------------------------------------------------------------------
\44\ See supra note 42.
---------------------------------------------------------------------------
Registration Fees
Registration fees are registered person-level fees that, while use-
based, also correlate to the third critical component of FINRA's
regulatory costs--the number and role of registered persons at a firm.
Section 4 of Schedule A to the FINRA By-Laws establishes fees connected
to FINRA's operation of the Central Registration Depository (``Web
CRD[supreg]'' or ``CRD system''), the central licensing and
registration system that FINRA operates for the benefit of FINRA, the
SEC, other SROs, state securities regulators, and broker-dealer firms.
The CRD system contains the registration records of broker-dealer firms
and their associated individuals including their qualification,
employment, and disclosure histories; it also facilitates the
processing of, among other things, form filings and facilitates the
making of fingerprint results available to the appropriate authorized
recipients.\45\ The CRD system enables individuals and firms seeking
registration with multiple states and SROs to do so by submitting a
single form and fee payment.\46\
---------------------------------------------------------------------------
\45\ Specified information reported to the CRD system is
displayed in BrokerCheck[supreg], an electronic system that provides
the public with information on the professional background, business
practices, and conduct of FINRA members and their associated
persons. Investors use BrokerCheck to help make informed choices
about the individuals and firms with which they currently conduct or
are considering conducting business.
\46\ FINRA outsources fingerprint processing to Sterling
Identity (``Sterling''), an FBI-approved channeler that processes
fingerprints for members on FINRA's behalf. This provides for a more
efficient and streamlined process with fewer fingerprint rejections,
secure electronic transmission of FBI results, and significantly
reduced turn-around times. Sterling assesses and collects all fees
for fingerprint collection and processing, including the FBI fee.
---------------------------------------------------------------------------
FINRA last increased associated registration fees between 2022 and
2024.\47\ FINRA has explained that these fees are important to fund
activities that help ensure the integrity of information in the CRD
system--information critical to FINRA and other regulators, as well as
to investors through BrokerCheck--and to support FINRA's overall
regulatory mission.\48\ FINRA is proposing to increase certain
registration fees \49\ in 2028 as follows:
---------------------------------------------------------------------------
\47\ See Order Approving SR-FINRA-2020-032, supra note 6, 85 FR
66592.
\48\ See Securities Exchange Act Release No. 67247 (June 25,
2012), 77 FR 38866 (June 29, 2012) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2012-030).
\49\ FINRA also proposes conforming changes to Section 15(g) of
Schedule A to the FINRA By-Laws to align this proposed fee change
with the same fees for Funding Portal members.
\50\ This fee applies for each initial or transfer Uniform
Application for Securities Industry Registration or Transfer (``Form
U4'') filed by a member in the CRD system to register an individual.
Section 4(b)(1) of Schedule A includes a discount in cases where a
member is transferring the registrations of individuals in
connection with the acquisition of all or part of another member's
business. The discount ranges from 10 to 50 percent, based on the
number of registered personnel being transferred. While FINRA is
proposing to increase the registration fee, it is not proposing to
make any changes to the discount schedule.
\51\ This fee applies for the additional processing of each
initial or amended Form U4, Form U5, or Form BD that includes the
initial reporting, amendment, or certification of one or more
disclosure events or proceedings.
\52\ This fee applies for processing and posting to the CRD
system each set of fingerprints submitted electronically by a member
to FINRA, plus any other charge that may be imposed by the United
States Department of Justice for processing each set of
fingerprints.
\53\ In 2024, the fee for funding portal members that submit
fingerprints electronically is $15. See Section 15(g) of Schedule A
to FINRA By-Laws.
\54\ As discussed below, FINRA proposes a conforming change in
2025 to Section 15(g) of Schedule A to the FINRA By-Laws to align
the fee for funding portal members that submit fingerprints
electronically with the same fee charged to broker-dealer members.
\55\ This fee applies for processing and posting to the CRD
system each set of fingerprints submitted in non-electronic format
by a member to FINRA, plus any other charge that may be imposed by
the United States Department of Justice for processing each set of
fingerprints.
Registration Fees--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fee 2024 (current) 2025 (no change) 2026 (no change) 2027 (no change) 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial/Transfer Registration $125.............. $125.............. $125.............. $125.............. $175.............. $175.
Form U4 filing \50\.
Termination U5 filing........... $50 (plus $100 if $50 (plus $100 if $50 (plus $100 if $50 (plus $100 if $70 (plus $140 if $70 (plus $140 if
late filed). late filed). late filed). late filed). late filed). late filed).
Disclosure review \51\.......... $155.............. $155.............. $155.............. $155.............. $215.............. $215.
Electronic Fingerprinting \52\.. $20 \53\.......... $20 \54\.......... $20............... $20............... $28............... $28.
Non-Electronic Fingerprinting $30............... $30............... $30............... $30............... $42............... $42.
\55\.
Fingerprinting Processed Through $30............... $30............... $30............... $30............... $42............... $42.
Another SRO.
--------------------------------------------------------------------------------------------------------------------------------------------------------
When these proposed registration fee changes are fully implemented,
they are designed to generate an additional $10 million in annual
revenue by 2029.
Renewal Late Fee
Members renew their registrations with FINRA, other SROs and
states/jurisdictions during the annual renewal program. Section 4(b)(8)
of Schedule A to the FINRA By-Laws sets forth the renewal late fee,
which applies if a member fails to timely pay the amount
[[Page 93717]]
indicated on its preliminary annual renewal statement.\56\ Where this
late fee applies, FINRA includes it as part of the final statement.
Currently, this fee is the greater of 10 percent of the member's final
annual renewal assessment or $100, with a maximum charge of $5,000.
FINRA has not increased the renewal late fee since it was established
in 2002.\57\
---------------------------------------------------------------------------
\56\ Members receive a preliminary annual renewal statement that
reflects approved registrations at the time the statement is
generated. The statement also includes a date by which members must
make full payment available to FINRA.
\57\ See Securities Exchange Act Release No. 46466 (September 6,
2002), 67 FR 58092 (September 13, 2002) (Notice of Filing and
Immediate Effectiveness of File No. SR-NASD-2002-100).
---------------------------------------------------------------------------
FINRA is proposing to increase the renewal late fee in 2028 as
follows:
Renewal Late Fee--Proposed Implementation
[The Renewal Late Fee is 10 percent of a member's cumulative final renewal statement with the following minimums and maximums]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025 (no 2026 (no 2027 (no
Fee 2024 (current) change) change) change) 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
The minimum late fee FINRA will assess is............... $100 $100 $100 $100 $140 $140
The maximum late fee FINRA will assess is............... 5,000 5,000 5,000 5,000 7,000 7,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
FINRA notes that it collects all applicable renewal fees on behalf
of itself and participating regulators, which enables members to submit
their total renewal payment to FINRA instead of to each regulator.
Among other reasons noted, FINRA believes this proposed fee increase
would further encourage members to submit such fees on time. When the
proposed renewal late fee changes are fully implemented, they are
designed to generate an additional $100,000 in annual revenue by 2029.
Late Disclosure Fee
Related to the registration functions described above, FINRA
charges a fee for each day that a new disclosure event or a change in
the status of a previously reported disclosure event is not timely
filed on an initial or amended Form U5 or an amended Form U4. Section
4(h) of Schedule A to the FINRA By-Laws sets forth the late disclosure
fee. This fee is assessed starting on the day following the last date
on which the event or change in status was required to be reported.
Timely and complete reporting of all information required by the
FINRA By-Laws and rules, as well as the federal securities laws, is
critical to investor protection. The SEC, FINRA, other SROs and state
securities regulators use the information to make licensing and
registration decisions, among other things. FINRA also publishes
information in FINRA BrokerCheck, which investors use for researching
the professional backgrounds of firms and brokers.
FINRA has not increased the late disclosure fee since 2013.\58\
Currently, disclosures filed more than 60 days following the last date
on which the event was required to be reported under FINRA rules
account for 50 percent of volume and 78 percent of revenues related to
late filing fees.
---------------------------------------------------------------------------
\58\ See Regulatory Notice 12-32, supra note 41.
---------------------------------------------------------------------------
FINRA is proposing to increase the late disclosure fee \59\ in 2026
as follows:
---------------------------------------------------------------------------
\59\ FINRA also proposes conforming changes to Section 15(e) of
Schedule A to the FINRA By-Laws to align this proposed fee change
with the same fee for Funding Portal members.
Late Disclosure Fee--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025 (no
Fee 2024 (current) change) 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
First Day............................................... $100 $100 $100 $100 $100 $100
Subsequent Days......................................... 25 25 40 40 40 40
Maximum Fee............................................. 1,575 1,575 2,460 2,460 2,460 2,460
--------------------------------------------------------------------------------------------------------------------------------------------------------
FINRA believes this proposed fee increase would further encourage
firms to file timely and complete initial Forms U4 and U5 and
amendments to these forms, while also generating additional revenue as
part of the overall proposal to increase fees to fund FINRA's
regulatory mission. When the proposed late disclosure fee changes are
fully implemented, they are designed to generate an additional $3
million in annual revenue by 2029.\60\
---------------------------------------------------------------------------
\60\ Projected revenue from the proposed increased Late
Disclosure Fees assumes approximately 53% late filings based on the
historical average (2018-2023) and is based on other reasonably
conservative assumptions using a variety of information points,
including historical data and anticipated trends. See supra note 15.
---------------------------------------------------------------------------
System Processing Fee
FINRA currently assesses an annual system processing fee for each
of the member's registered persons. Like the registration fees
described above, this fee correlates to the third critical component of
FINRA's regulatory costs--the number and role of registered persons at
a firm. Section 4(b)(7) of Schedule A to the FINRA By-Laws sets forth
the system processing fee. Under the current fee structure, a flat $70
fee applies to each registered person of a member. Many registered
persons are registered with one or more securities regulators (i.e.,
with jurisdictions as a broker-dealer agent and with SROs as a
representative or principal).\61\ The median number of other SROs and
jurisdictions with which each registered person of a member is
registered, in addition to their FINRA registration, is 11, with an
average of 20.
---------------------------------------------------------------------------
\61\ The term broker-dealer agent (or AG) is the designation
used in Form U4 to identify a person who has been approved to sell
securities in a particular jurisdiction.
---------------------------------------------------------------------------
FINRA's costs and resources allocated to processing this
information for members' registered persons depends, in part, on the
number of securities regulators with which each registered person is
registered (whether as a broker-dealer agent with one or more
[[Page 93718]]
jurisdictions or as a representative or principal with one or more
SROs). To account for this variability, FINRA proposes to replace the
current flat fee structure with a tiered rate structure in 2026 as
described below. In addition, FINRA proposes to increase the proposed
tiers in 2028. These proposed changes are summarized as follows:
System Processing Fee--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of securities regulators with which each
registered person of a member is registered, excluding 2024 (current) 2025 (no 2026 2027 (no 2028 2029 (no
registration as an investment adviser representative change) change) change)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1-5..................................................... $70 $70 $70 $70 $100 $100
6-20.................................................... 70 70 95 95 125 125
21-40................................................... 70 70 110 110 140 140
41+..................................................... 70 70 125 125 155 155
--------------------------------------------------------------------------------------------------------------------------------------------------------
The fee would be calculated based on the total number of securities
regulators with which each registered person of a member is registered
(whether as a broker-dealer agent with one or more jurisdictions or as
a representative or principal with one or more SROs). A registered
person's registration as an investment adviser representative would not
be considered.
FINRA believes this use-based fee will support FINRA's overall
regulatory mission while reflecting the resources FINRA allocates to
its securities licensing and registration operations for registered
persons of members. Further, as noted above, this fee relates to the
number and role of registered persons at a firm, which is one of the
three critical components of FINRA's regulatory costs.
FINRA proposes to implement the proposed tiered rate structure in
2026. To allow members additional time to adjust and plan, FINRA
proposes to defer implementation of proposed increases to this fee
until 2028. When this proposed rule change, including implementation of
the tiered structure and the proposed increase are fully implemented,
it is designed to generate an additional $31 million in annual revenue
by 2029.
Qualification Examination Fees
Like registration fees, qualification examination fees are
registered person-level fees that, while use-based, also correlate to
the third critical component of FINRA's regulatory costs--the number
and role of registered persons at a firm. Section 4(c) of Schedule A to
the FINRA By-Laws sets forth the fees associated with the qualification
examinations that FINRA administers. Persons engaged in the investment
banking or securities business of a FINRA member who function as
principals or representatives are required to register with FINRA in
each category of registration appropriate to their functions. Such
individuals must pass an appropriate qualification examination or
obtain a waiver before their registration can become effective. These
qualification examinations cover a broad range of subjects regarding
financial markets and products, individual responsibilities, securities
industry rules, and regulatory structure.
FINRA develops, maintains, and delivers all qualification
examinations for individuals who are registered or seeking registration
with FINRA.\62\ FINRA last increased its examination fees between 2022
and 2024.\63\ FINRA is proposing to increase its examination fees in
2026 as follows:
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\62\ FINRA also administers and delivers examinations sponsored
(i.e., developed) by the Municipal Securities Rulemaking Board
(``MSRB'') and other SROs, the North American Securities
Administrators Association, and the Federal Deposit Insurance
Corporation. The fees charged for these examinations are set
according to contracts with the examination sponsors, and FINRA is
not proposing any changes to fees associated with those examinations
at this time.
\63\ See Order Approving SR-FINRA-2020-032, supra note 6, 85 FR
66592.
Qualification Examination Fees--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025 (no
Examination number and name 2024 (current) change) 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Securities Industry Essentials (SIE) Examination........ $80 $80 $100 $100 $100 $100
Series 4: Registered Options Principal Examination...... 155 155 200 200 200 200
Series 6: Investment Company Products and Variable 75 75 100 100 100 100
Contracts Representative Examination...................
Series 7: General Securities Representative Examination. 300 300 395 395 395 395
Series 9: General Securities Sales Supervisor 130 130 175 175 175 175
Examination--Options Module............................
Series 10: General Securities Sales Supervisor 175 175 235 235 235 235
Examination--General Module............................
Series 14: Compliance Official Examination.............. 350 350 450 450 450 450
Series 16: Supervisory Analyst Examination.............. 245 245 325 325 325 325
Series 22: Direct Participation Programs Representative 60 60 100 100 100 100
Examination............................................
Series 23: General Securities Principal Examination-- 105 105 135 135 135 135
Sales Supervisor Module................................
[[Page 93719]]
Series 24: General Securities Principal Examination..... 175 175 235 235 235 235
Series 26: Investment Company Products and Variable 150 150 200 200 200 200
Contracts Principal Examination........................
Series 27: Financial and Operations Principal 175 175 235 235 235 235
Examination............................................
Series 28: Introducing Broker-Dealer Financial and 150 150 195 195 195 195
Operations Principal Examination.......................
Series 39: Direct Participation Programs Principal 100 100 200 200 200 200
Examination............................................
Series 57: Securities Trader Examination................ 80 80 105 105 105 105
Series 79: Investment Banking Representative Examination 300 300 395 395 395 395
Series 82: Private Securities Offering Representative 60 60 100 100 100 100
Examination............................................
Series 86: Research Analyst Examination--Analysis....... 225 225 295 295 295 295
Series 87: Research Analyst Examination--Regulatory..... 150 150 195 195 195 195
Series 99: Operations Professional Examination.......... 60 60 100 100 100 100
--------------------------------------------------------------------------------------------------------------------------------------------------------
FINRA is proposing a one-time fee increase across examinations in
2026 designed to generate an additional $14 million in revenue across
all examinations by 2029. In addition, FINRA has determined the amount
of each examination fee increase based on the frequency with which the
examination is administered, as well as the average fee per hour of
examination length. Examinations that are administered more frequently
or are longer in duration typically require more effort and cost to
develop, maintain, and update. As a result, FINRA is generally
proposing greater increases for those examinations, and smaller
increases for others to preserve the broad and equitable distribution
of proposed fee increases, as discussed throughout this filing.
Continuing Education Regulatory Element Fee
Continuing education fees are also registered person-level fees
that, while use-based, correlate to the third critical component of
FINRA's regulatory costs--the number and role of registered persons at
a firm. In conjunction with other SROs and the Securities Industry/
Regulatory Council on Continuing Education, FINRA administers the
continuing education (CE) program for the securities industry.\64\ The
Regulatory Element of the CE program provides training on significant
rule changes and other regulatory developments relevant to each
registration category. Registered persons must complete the Regulatory
Element annually by December 31 for each registration that they
hold.\65\
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\64\ See FINRA Rule 1240.
\65\ See FINRA Rule 1240; see also Securities Exchange Act
Release No. 93097 (September 21, 2021), 86 FR 53358 (September 27,
2021) (Order Approving File No. SR-FINRA-2021-015).
---------------------------------------------------------------------------
Section 4(f) of Schedule A to the FINRA By-Laws sets forth the fees
associated with the Regulatory Element requirement. FINRA has not
increased the fee for the web-based delivery of the Regulatory Element
since it was established in 2015.\66\ FINRA is proposing to increase
the Regulatory Element fee in 2026 as follows:
---------------------------------------------------------------------------
\66\ See Securities Exchange Act Release No. 75581 (July 31,
2015), 80 FR 47018 (August 6, 2015) (Order Approving File No. SR-
FINRA-2015-015). After FINRA adopted amendments to require
registered persons to complete the Regulatory Element of CE annually
rather than every three years, FINRA revised the Regulatory Element
fee from a $55 fee paid once every three years, to an $18 fee paid
annually. See Securities Exchange Act Release No. 93928 (January 7,
2022), 87 FR 2193, 2194 (January 13, 2022) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2021-034). Thus, the
Regulatory Element fee has not substantially changed since 2015.
Continuing Education Fee--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025 (no
Fee 2024 (current) change) 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Continuing Education.............................. $18 $18 $25 $25 $25 $25
--------------------------------------------------------------------------------------------------------------------------------------------------------
When the proposed regulatory element fee rate is fully implemented,
it is designed to generate an additional $4 million in annual revenue
by 2029.
Select Use-Based Fees
Corporate Financing Private Placement Review Fee
FINRA Rule 5122 (Private Placements of Securities Issued by
Members) imposes requirements regarding disclosure, filing, and use of
offering proceeds for members that sell a private placement of
securities issued by a member or a control entity, subject to various
exemptions. Pursuant to FINRA Rule 5122, members that offer or sell
their own securities or those of a control
[[Page 93720]]
entity must file with FINRA's Corporate Financing Department
(``Corporate Financing'') a private placement memorandum, term sheet or
other offering document and any retail communication that promotes or
recommends the member private offering at or prior to the first time
the documents are provided to any prospective investor.
Its companion rule, FINRA Rule 5123 (Private Placement of
Securities), requires members that sell any other type of private
placement to file with Corporate Financing a copy of any private
placement memorandum, term sheet or other offering document, and any
retail communication that promotes or recommends the private placement.
Such filing must occur within 15 calendar days of the first sale,
subject to various exemptions.
FINRA has historically performed the review of such filings at no
cost since the program was created approximately 15 years ago.\67\ This
program requires substantial resources, and the volume of filings has
increased significantly in recent years.\68\ FINRA thus proposes to
establish the following fees related to private placement review in
July 2025 as follows:
---------------------------------------------------------------------------
\67\ FINRA Rule 5122 became effective on June 17, 2009; FINRA
Rule 5123 became effective on December 3, 2012.
\68\ See Regulatory Notice 23-08 (May 2023) (``In recent years,
the unregistered offering market outpaced the public market. . . .
In 2021, for example, members submitted over 3,800 unique filings
for private placements pursuant to FINRA Rules 5122 and 5123, which
require filings for private placements generally sold to
individuals, in comparison to roughly 2,000 submissions in 2013.'').
Corporate Financing Private Placement Review Fee--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025
Private placements (offerings >$25M) 2024 (current) (effective 7/1/ 2026 (million) 2027 (million) 2028 (million) 2029 (million)
25) (million)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Flat Fee................................................ $0 $300 $300 $300 $300 $300
% of Offering........................................... 0% 0.008% 0.008% 0.008% 0.008% 0.008%
Offering Cap............................................ $0 $500 $500 $500 $500 $500
--------------------------------------------------------------------------------------------------------------------------------------------------------
The proposed fee is designed to be similar to the current fee for
public offering reviews. Like the public offering review fee, this
proposed fee would consist of both a flat fee and a percentage of the
maximum offering proceeds. However, to reduce the impact on smaller
issuers and broker-dealers, FINRA proposes to apply this fee only to
private placement offerings of greater than $25 million and to cap the
fee at $40,300 (0.008% of $500,000,000 offering + $300 flat fee). In
general, FINRA believes that such fees would be paid for by, or passed
through to, issuers.\69\ This proposed new use-based fee is structured
to take into account associated types of costs, including the
substantial resources such reviews require.\70\ When the proposed new
fee for private placement review is fully implemented, it is designed
to generate $6 million in annual revenue by 2029.
---------------------------------------------------------------------------
\69\ FINRA's belief is informed by its experience with the
public offering fee, described below, and based on discussions with
FINRA advisory committees and other industry participants.
\70\ As discussed above, when applying use-based fees, FINRA
takes into account direct costs for the program, indirect costs for
the program, and a contribution to FINRA's overall regulatory
operations. See supra note 7 and accompanying text.
---------------------------------------------------------------------------
Corporate Financing Public Offering Review Fee
Corporate Financing reviews the underwriting terms and arrangements
of proposed public offerings of securities for compliance with the
requirements of FINRA Rule 5110 (Corporate Financing Rule--Underwriting
Terms and Arrangements). Pursuant to Rule 5110, no member firm or
person associated with a member firm may participate in a public
offering subject to the rule, or to FINRA Rules 5121 (Public Offerings
of Securities With Conflicts of Interest) and 2310 (Direct
Participation Programs), unless the documents and information specified
in the rule have been filed with and reviewed by Corporate Financing.
The documents Corporate Financing reviews include registration
statements, underwriting agreements, engagement letters and other
relevant supporting documentation for public offerings. Corporate
Financing's review is complementary to the SEC's registration process,
which covers a larger set of filings than FINRA's program.\71\
---------------------------------------------------------------------------
\71\ The SEC's current filing fee rate for filings made pursuant
to Sections 6(b) of the Securities Act of 1933 and Sections 13(e)
and 14(g) of the Exchange Act is $147.60 per $1,000,000. See https://www.sec.gov/edgar/filer/filing-fees/filing-fee-rate.
---------------------------------------------------------------------------
Section 7 of Schedule A to the FINRA By-Laws sets forth the fees
associated with filing documents pursuant to the Corporate Financing
Rule. It currently provides for a flat fee of $500 plus .015% of the
proposed maximum aggregate offering price or other applicable value of
all securities registered on an SEC registration statement or included
on any other type of offering document (where not filed with the SEC),
with a cap of $225,500; or a fee of $225,500 for an offering of
securities filed with the SEC and offered pursuant to Securities Act
Rule 415 by a Well-Known Seasoned Issuer (``WKSI'') as defined in
Securities Act Rule 405. The fee associated with any amendment or other
change to the documents initially filed with Corporate Financing is
also subject to the current $225,500 cap. FINRA has not raised the fee
cap since 2012.\72\
---------------------------------------------------------------------------
\72\ See Securities Exchange Act Release No. 67241 (June 22,
2012), 77 FR 38698 (June 28, 2012) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2012-029); see also Regulatory
Notice 12-32 (June 2012).
---------------------------------------------------------------------------
FINRA is proposing to increase and modify the fee cap beginning in
July 2025 as follows:
[[Page 93721]]
Corporate Financing Public Offering Review Fee Cap--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025
IPO 2024 (current) (effective 7/1/ 2026 2027 2028 2029
25)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-WKSI................................................ $225,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000 $1,125,000
WKSI.................................................... 225,000 270,000 324,000 389,000 467,000 560,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
This proposed rule change would raise the fee cap to $1,125,000,
which would account for the significant growth in the size of offerings
since the cap was last raised in 2012. However, for WKSIs, the cap
would be raised to $560,000 over a period of five years. FINRA notes
that raising the caps would also create more consistency with the SEC
IPO review fee, which has no cap.\73\ FINRA projects that increasing
the cap as proposed would capture 81% of the incremental revenues if
there were no cap while bounding the impact on WKSIs whose offerings
tend to be less resource intensive for Corporate Financing to review.
FINRA believes such fees are and would continue to be paid for by, or
passed through to, issuers.\74\ When the proposed fee increase is fully
implemented, it is designed to generate an additional $31 million in
annual revenue by 2029.\75\
---------------------------------------------------------------------------
\73\ See supra note 71.
\74\ See supra note 69.
\75\ The proposed rule change would remove the language ``on an
automatically effective Form S-3 or F-3 registration statement''
because WKSIs may use other registration forms. See, e.g.,
Securities Offering Reform for Closed-End Investment Companies,
Investment Company Act Release No. 33836 (April 8, 2020), 85 FR
33290 (June 1, 2020).
---------------------------------------------------------------------------
Advertising Regulation Review Fee
One way that FINRA protects investors is by having its Advertising
Regulation Department review specified broker-dealers' communications
for compliance with FINRA's communications with the public rules, and
similar rules of \76\ the SEC, MSRB and Securities Investor Protection
Corporation. FINRA rules require that member communications be based on
principles of fair dealing and good faith, be fair and balanced, and
provide a sound basis for evaluating the facts in regard to any
particular security or type of security, industry or service. Among
other things, FINRA rules prohibit member firm communications from
including false, exaggerated, unwarranted or misleading statements or
claims.
---------------------------------------------------------------------------
\76\ See generally FINRA Rule 2200 Series. FINRA also will
review communications filed voluntarily.
---------------------------------------------------------------------------
Section 13 of Schedule A to the FINRA By-Laws sets forth the fees
associated with review of communications filed with FINRA. Despite
rising costs to administer the Advertising Regulation Department review
program, FINRA has not increased these fees since 2012.\77\ FINRA is
proposing an increase to the regular review charge in 2025 as follows:
---------------------------------------------------------------------------
\77\ See Securities Exchange Act Release No. 67239 (June 22,
2012), 77 FR 38692 (June 28, 2012) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2012-028).
Advertising Regulation Review--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fee 2024 (current) 2025 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Regular Review Charge (non-expedited)............. $125 $300 $300 $300 $300 $300
--------------------------------------------------------------------------------------------------------------------------------------------------------
When the proposed fee increase is fully implemented, it is designed
to generate an additional $11 million in annual revenue by 2029.\78\
Under the proposed rule change, the $600 expedited fee would not
change.
---------------------------------------------------------------------------
\78\ FINRA currently charges a $10 fee for the review of each
printed page or web page in excess of 10 pages, and for each minute
of tape reviewed in excess of 10 minutes of video or audio media.
This would not change under the proposed rule change.
---------------------------------------------------------------------------
Dispute Resolution Services Arbitration Fees
DRS operates the largest securities arbitration forum in the United
States, to assist in the resolution of disputes involving customers,
members and associated persons. As discussed in turn below, FINRA
proposes to raise the (1) hearing session fees, (2) filing fees, (3)
member surcharge, and (4) member process fee, as set forth in the Code
of Arbitration Procedure for Customer Disputes (``Customer Code'') and
Code of Arbitration Procedure for Industry Disputes (``Industry Code'')
(together, the ``Codes'').\79\
---------------------------------------------------------------------------
\79\ The Customer Code is the FINRA Rule 12000 Series; the
Industry Code is the FINRA Rule 13000 Series. The proposed fee
increases described, below, would be implemented in both Codes.
---------------------------------------------------------------------------
FINRA believes that the cost of arbitration should be borne by the
users of the forum, without imposing a significant barrier to public
customers who bring arbitration claims to the forum. Thus, the current
DRS arbitration fees are designed to be borne 85 percent by members and
15 percent by customers.\80\ The proposed rule change would maintain
that pricing structure. It would also maintain a sliding scale fee
structure in which the member surcharge and process fees increase
across the board, while the hearing session fees and filing fees
increase more for higher value claims. Taken together, the proposed
increase in DRS' arbitration fees would aim to partially recover
increasing costs to operate the forum, without placing an undue burden
on users of the forum, particularly customers or claimants with small
claims. When the proposed DRS arbitration fee increases are fully
implemented, they are designed to generate an additional $10 million in
annual revenue by 2029.
---------------------------------------------------------------------------
\80\ See Securities Exchange Act Release No. 90227 (October 20,
2020), 85 FR 67794 (October 26, 2020) (Notice of Filing File No. SR-
FINRA-2020-035).
---------------------------------------------------------------------------
Hearing Session Fees
Under FINRA Rules 12902 and 13902, hearing session fees are charged
for each hearing session based on the amount in dispute. In the award,
the panel determines the amount of each hearing session fee that each
party must pay. The arbitrators may apportion the fees in any manner,
including assessing the entire amount against one party.\81\
---------------------------------------------------------------------------
\81\ See FINRA Rules 12902(a)(1) and 13902(a)(1).
---------------------------------------------------------------------------
FINRA proposes to raise hearing session fees in 2025 as follows:
[[Page 93722]]
Hearing Session Fees--Proposed Implementation
----------------------------------------------------------------------------------------------------------------
2024 (current) 2025-2029
----------------------------------------------------------------
Amount of claim (exclusive of interest and Hearing
expenses) Hearing Hearing session Hearing session w/
session w/ one w/ three session w/ one three
arbitrator arbitrators arbitrator arbitrators
----------------------------------------------------------------------------------------------------------------
Up to $2,500................................... $50 N/A $50 N/A
$2,500.01 to $5,000............................ 125 N/A 125 N/A
$5,000.01 to $10,000........................... 250 N/A 250 N/A
$10,000.01 to $25,000.......................... 450 N/A 450 N/A
$25,000.01 to $50,000.......................... 450 $600 450 $600
$50,000.01 to $100,000......................... 450 750 450 750
$100,000.01 to $500,000........................ 450 1,125 675 1,690
$500,000.01 to $1,000,000...................... 450 1,325 675 1,990
$1,000,000.01 to $5,000,000.................... 450 1,435 675 2,160
Over $5,000,000................................ 450 1,575 675 2,370
Non-Monetary/Not Specified..................... 450 1,150 675 1,725
----------------------------------------------------------------------------------------------------------------
To minimize the impact of the proposed rule change on customers or
claimants with small claims, the proposed fee increase would only apply
to claims of more than $100,000 and claims for non-monetary or
unspecified damages. The tiered structure of this fee would not change
under the proposed rule change.
FINRA notes the hearing session fee may not be assessed under
certain circumstances. For example, if the parties timely settle the
arbitration, the parties will not be assessed hearing session fees.\82\
During settlement negotiations, parties have the opportunity to
determine how to share any hearing session fees, if hearings are
held.\83\ For cases that result in an award, the panel has discretion
to assess hearing session fees as part of the award,\84\ which allows
them to consider numerous factors to determine each party's appropriate
share and assign the costs accordingly. The proposed rule change would
not change a party's ability to settle or arbitrators' discretion to
assess the hearing session fees.
---------------------------------------------------------------------------
\82\ See FINRA Rules 12701 and 13701.
\83\ See FINRA Rules 12701(b) and 13701(b).
\84\ See FINRA Rules 12902(a)(1) and 13902(a)(1).
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Filing Fees
Filing Fees Paid by Customers, Associated Persons or Other Non-Members
Filing fees are due when a claim is filed. FINRA Rule 12900(a) sets
forth the filing fee schedule for customers, associated persons and
other non-members who file a claim, counterclaim, cross claim or third
party claim in a customer dispute. FINRA Rule 13900(a) sets forth the
filing fee schedule for associated persons who file a claim,
counterclaim, cross claim or third party claim in an industry dispute.
The filing fee is based on the claim amount or type of damages
requested.
FINRA proposes to raise filing fees in 2025 as follows:
Filing Fee (Customers, Associated Persons, and other Non-Members)--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Amount of claim (exclusive of interest and expenses) 2024 (current) 2025 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
$.01 to $1,000.......................................... $50 $50 $50 $50 $50 $50
$1,000.01 to $2,500..................................... 75 75 75 75 75 75
$2,500.01 to $5,000..................................... 175 175 175 175 175 175
$5,000.01 to $10,000.................................... 325 325 325 325 325 325
$10,000.01 to $25,000................................... 425 425 425 425 425 425
$25,000.01 to $50,000................................... 600 600 600 600 600 600
$50,000.01 to $100,000.................................. 975 975 975 975 975 975
$100,000.01 to $500,000................................. 1,425 1,790 1,790 1,790 1,790 1,790
$500,000.01 to $1,000,000............................... 1,740 2,175 2,175 2,175 2,175 2,175
$1,000,000.01 to $5,000,000............................. 2,025 2,540 2,540 2,540 2,540 2,540
Over $5,000,000......................................... 2,300 2,875 2,875 2,875 2,875 2,875
Non-Monetary/Not Specified.............................. 1,600 2,000 2,000 2,000 2,000 2,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
To minimize the impact of the proposed rule change on customers or
claimants with small claims, and consistent with the current claim
amount tier structure, the proposed fee increase would only apply to
claims of more than $100,000 and claims for non-monetary or unspecified
damages. The tiered structure of this fee would not change under the
proposed rule change.
Filing Fees Paid by Members
FINRA Rules 12900(b) and 13900(b) set forth the filing fee schedule
for members filing a claim, counterclaim, cross claim, or third party
claim in customer and industry cases, respectively. FINRA proposes to
increase the member filing fee in 2025 as follows:
[[Page 93723]]
Filing Fee (Members)--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Amount of claim (exclusive of interest and expenses) 2024 (current) 2025 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
$.01 to $1,000.......................................... $225 $225 $225 $225 $225 $225
$1,000.01 to $2,500..................................... 350 350 350 350 350 350
$2,500.01 to $5,000..................................... 525 525 525 525 525 525
$5,000.01 to $10,000.................................... 750 750 750 750 750 750
$10,000.01 to $25,000................................... 1,050 1,050 1,050 1,050 1,050 1,050
$25,000.01 to $50,000................................... 1,450 1,450 1,450 1,450 1,450 1,450
$50,000.01 to $100,000.................................. 1,750 1,750 1,750 1,750 1,750 1,750
$100,000.01 to $500,000................................. 2,125 2,660 2,660 2,660 2,660 2,660
$500,000.01 to $1,000,000............................... 2,650 3,320 3,320 3,320 3,320 3,320
$1,000,000.01 to $5,000,000............................. 3,550 4,440 4,440 4,440 4,440 4,440
Over $5,000,000......................................... 4,200 5,250 5,250 5,250 5,250 5,250
Non-Monetary/Not Specified.............................. 1,800 2,250 2,250 2,250 2,250 2,250
--------------------------------------------------------------------------------------------------------------------------------------------------------
Partial Refund of Filing Fee
If a claim is settled or withdrawn more than 10 days before the
date of the hearing on the merits, a party paying a filing fee will
receive a partial refund of the filing fee in the amount specified
under FINRA Rule 12900(c) for customer cases and FINRA Rule 13900(c)
for industry cases. FINRA proposes to increase the partial filing fee
refund in 2025 as follows:
Partial Filing Fee Refund--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Amount of claim (exclusive of interest and expenses) 2024 (current) 2025 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
$.01 to $1,000.......................................... $25 $25 $25 $25 $25 $25
$1,000.01 to $2,500..................................... 50 50 50 50 50 50
$2,500.01 to $5,000..................................... 125 125 125 125 125 125
$5,000.01 to $10,000.................................... 250 250 250 250 250 250
$10,000.01 to $25,000................................... 300 300 300 300 300 300
$25,000.01 to $50,000................................... 450 450 450 450 450 450
$50,000.01 to $100,000.................................. 750 750 750 750 750 750
$100,000.01 to $500,000................................. 1,125 1,410 1,410 1,410 1,410 1,410
$500,000.01 to $1,000,000............................... 1,300 1,625 1,625 1,625 1,625 1,625
$1,000,000.01 to $5,000,000............................. 1,400 1,750 1,750 1,750 1,750 1,750
Over $5,000,000......................................... 1,500 1,875 1,875 1,875 1,875 1,875
Non-Monetary/Not specified.............................. 1,200 1,500 1,500 1,500 1,500 1,500
--------------------------------------------------------------------------------------------------------------------------------------------------------
Member Surcharge
FINRA assesses a surcharge against each member that (a) files a
claim, counterclaim, cross claim or third party claim under the Codes;
(b) is named as a respondent in a claim, counterclaim, cross claim, or
third party claim filed and served under the Codes; or (c) employed, at
the time the dispute arose, an associated person who is named as a
respondent in a claim, counterclaim, cross claim, or third party claim
filed and served under the Codes.
FINRA Rules 12901 and 13901 set forth the schedule of the member
surcharge, which is assessed based on the amount of the claim,
exclusive of interest and expenses. The member is assessed one
surcharge per arbitration case.\85\ Member surcharges are intended to
allocate the costs of administering the arbitration case to the firms
that are involved in those cases. Thus, each member is assessed a
member surcharge, based on the aggregate claim amount, when it is
brought into the case, whether through a claim, counterclaim, cross
claim or third party claim. The member surcharge is the responsibility
of the member party and cannot be allocated to any other party (``non-
allocable'').
---------------------------------------------------------------------------
\85\ See FINRA Rules 12901(a)(6) and 13901(f).
---------------------------------------------------------------------------
FINRA proposes to increase the member surcharge in 2025 as follows:
Member Surcharge--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Amount of claim (exclusive of interest and expenses) 2024 (current) 2025 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
$.01 to $5,000.......................................... $150 $165 $165 $165 $165 $165
$5,000.01-$10,000....................................... 325 360 360 360 360 360
$10,000.01-$25,000...................................... 450 495 495 495 495 495
$25,000.01-$50,000...................................... 750 975 975 975 975 975
$50,000.01-$100,000..................................... 1,100 1,430 1,430 1,430 1,430 1,430
$100,000.01-$250,000.................................... 1,700 2,210 2,210 2,210 2,210 2,210
$250,000.01-$500,000.................................... 2,025 2,640 2,640 2,640 2,640 2,640
$500,000.01-$1,000,000.................................. 2,625 3,420 3,420 3,420 3,420 3,420
$1,000,000.01-$5,000,000................................ 3,200 4,800 4,800 4,800 4,800 4,800
$5,000,000.01-$10,000,000............................... 3,850 5,775 5,775 5,775 5,775 5,775
[[Page 93724]]
Over $10,000,000........................................ 4,325 6,490 6,490 6,490 6,490 6,490
Non-Monetary/Not Specified.............................. 2,000 2,600 2,600 2,600 2,600 2,600
--------------------------------------------------------------------------------------------------------------------------------------------------------
The member surcharge would remain non-allocable under the proposed
rule change and, therefore, would not result in any additional costs to
other parties to the arbitration, including customers.
Member Process Fee
Under the Codes, each member that is a party to an arbitration or
employed an associated person who is a party to an arbitration in which
more than $25,000, exclusive of interest and expenses, is in dispute
must pay a non-refundable process fee.\86\
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\86\ See FINRA Rules 12903 and 13903. If a claim amount is
$25,000 or less, the member would not be assessed any process fees.
---------------------------------------------------------------------------
FINRA Rules 12903 and 13903 set forth the process fee schedule.
FINRA assesses the member the applicable process fee when the parties
are sent the arbitrator lists or notification of the hearing. Like the
member surcharge, the process fee is non-allocable to other parties to
the arbitration.\87\
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\87\ See FINRA Rules 12903(d) and 13903(d). See also FINRA Rules
12701(b) and 13701(b).
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FINRA proposes to increase the process fee in 2025 as follows:
Member Process Fee--Proposed Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Amount of claim (exclusive of interest and expenses) 2024 (current) 2025 2026 2027 2028 2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
$.01-$25,000............................................ $0 $0 $0 $0 $0 $0
$25,000.01-$50,000...................................... 1,750 2,275 2,275 2,275 2,275 2,275
$50,000.01-$100,000..................................... 2,250 2,925 2,925 2,925 2,925 2,925
$100,000.01-$250,000.................................... 3,250 4,225 4,225 4,225 4,225 4,225
$250,000.01-$500,000.................................... 3,875 5,040 5,040 5,040 5,040 5,040
$500,000.01-$1,000,000.................................. 5,225 6,800 6,800 6,800 6,800 6,800
$1,000,000.01-$5,000,000................................ 6,375 9,570 9,570 9,570 9,570 9,570
$5,000,000.01-$10,000,000............................... 7,050 10,575 10,575 10,575 10,575 10,575
Over $10,000,000........................................ 7,300 10,950 10,950 10,950 10,950 10,950
Non-Monetary/Not Specified.............................. 3,850 5,005 5,005 5,005 5,005 5,005
--------------------------------------------------------------------------------------------------------------------------------------------------------
The member process fee would remain non-allocable under the
proposed rule change and, therefore, would not result in any additional
costs to other parties to the arbitration, including customers.
Regulation T and Exchange Act Rule 15c3-3(n) Requests for Extension of
Time Fee
Section 8 of Schedule A to the FINRA By-Laws governs the service
charge for each extension of time request pursuant to Sections 220.4(c)
and 220.8(d) of Regulation T \88\ of the Board of Governors of the
Federal Reserve System (``Regulation T'') and Exchange Act Rule 15c3-
3(n).\89\ FINRA has not increased this fee since 2006.\90\ FINRA
proposes to raise the fee in 2025 as follows:
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\88\ 12 CFR 220.4(c) and 220.8(d), respectively.
\89\ 17 CFR 240.15c3-3.
\90\ See Securities Exchange Act Release No. 53982 (June 14,
2006), 71 FR 35720 (June 21, 2006) (Notice of Filing and Immediate
Effectiveness of File No. SR-NASD-2006-063). See also Notice to
Members 06-30 (June 2006).
Regulation T and Exchange Act Rule 15c3-3(n) Requests for Extension of Time--Proposed Implementation
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2024 (current) 2025 2026 2027 2028 2029
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
$4 per request................. $8 per request................. $8 per request................ $8 per request................ $8 per request................ $8 per request.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Based on current annual extension filing volumes, the current fee
does not cover the estimated personnel and technology costs necessary
to process extension requests. The proposal to increase the fee would
recover some of those costs. When the proposed service charge for
Regulation T and Exchange Act Rule 15c3-3(n) requests for extension of
time increases are fully implemented, they are designed to generate an
additional $640,000 in annual revenue by 2029.
Further, to streamline Section 8, FINRA proposes to eliminate
current paragraph (a), which is not needed in light of the specific fee
amount language set forth in paragraph (b) of that Section. The
proposed rule change would also make minor technical corrections. As
such, the proposed rule change would amend Section 8 to read: ``The
service charge for processing each initial extension of time request
and for all subsequent extension of time requests (1) involving the
same transaction under Regulation T or (2) involving an extension of
time previously granted pursuant to SEA Rule 15c3-3(n) shall be $8.00
per request.''
Proposed Conforming Changes To Select Funding Portal Member Fees
Section 15 of Schedule A to the FINRA By-Laws sets forth the fees
that
[[Page 93725]]
govern funding portals that are FINRA members. These fees became
effective in 2016. At the time they were proposed, the funding portal
fees related to eligibility proceedings and fingerprint processing,
among others, were ``identical to those charged to broker-dealer
members.'' \91\ Though amendments to the fees charged to broker-dealer
members related to eligibility proceedings and fingerprint processing
have since occurred, those same fees for funding portal members have
not been amended, and thus, are no longer aligned.
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\91\ See Securities Exchange Act Release No. 76238 (October 22,
2015), 80 FR 66342 (October 28, 2015) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2015-041).
---------------------------------------------------------------------------
This proposed rule change would amend Section 15(f)(1) and Section
15(g) to conform the fees for members that are funding portals with the
same fees that are charged to broker-dealer members. Specifically, in
2025, the proposed rule change would raise the funding portal member
fee for filing an application to initiate eligibility proceedings from
$1,500 to $5,000 to conform with the same fee that currently applies to
broker-dealer members. Also in 2025, the proposed rule change would
raise the funding portal member fee for fingerprints submitted
electronically from $15 to $20 to conform with the same fee that
currently applies to broker-dealer members.\92\
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\92\ See supra note 54.
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FINRA has filed the proposed rule change for immediate
effectiveness. Implementation of the proposed rule change will be
phased in gradually over a five-year period beginning on January 1,
2025, with full implementation of all proposed fee changes by 2029.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(5) of the Act,\93\ which requires, among
other things, that FINRA 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 FINRA operates or
controls. FINRA further believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act, which
requires, among other things, that FINRA rules are not designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.\94\
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\93\ 15 U.S.C. 78o-3(b)(5).
\94\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
Reasonableness of the Proposed Fees
As discussed above, FINRA's longstanding approach to funding
employs a variety of fees designed to meet FINRA's overall costs. As a
not-for-profit SRO with a diverse membership, FINRA designs its mix of
fees to seek recovery of its overall regulatory costs in a manner that
is fair, reasonable, and equitably allocated among FINRA's members and
users of FINRA's services. As FINRA has explained in the past, it is
not feasible to associate a direct affiliated revenue stream for each
of its programs (for example, FINRA collects no revenues in connection
with its examinations of members), and thus numerous operations and
services must be funded by other revenue sources, which include both
core regulatory fees and other use-based fees. FINRA continues to
believe that its overall Commission-approved cost-based pricing
structure is reasonable, achieves general equity across its membership,
and correlates fees with those firm components that drive FINRA's
regulatory costs to the extent feasible.
The reasonableness of this proposal is reinforced by three key cost
discipline mechanisms: oversight, transparency, and rebates.
First, FINRA's funding and operations are subject to several layers
of oversight, including by the FINRA Board of Governors \95\ and the
Commission. As discussed in FINRA's 2024 annual budget summary, FINRA's
efforts to manage its expenses responsibly while appropriately funding
its mission includes Board oversight of its annual budget,
compensation, and capital initiatives. This oversight is spearheaded by
key Board committees (such as its Finance, Operations and Technology
Committee), and includes requirements for Board or relevant Committee
approval with respect to various financial matters, such as the annual
budget, the allocation and use of fine monies, the incurring of any
expenses above certain pre-established thresholds, the amount of any
annual merit or incentive compensation, and the compensation of certain
key employees. The Board also relies on expert external consultants
where appropriate. Notably, this Board oversight complements various
staff level controls over routine costs, including expense policies
that are enforced with systemic checks and escalating management
approval requirements for expense requests, with the effectiveness of
these policies further subject to review by FINRA's Internal Audit
Department.
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\95\ The FINRA Board of Governors is composed of a mix of public
and industry representatives and uses its diverse expertise to
oversee management in the administration of FINRA's affairs and the
promotion of FINRA's welfare, objectives, and its public service
mission to protect investors and uphold the integrity of markets.
---------------------------------------------------------------------------
FINRA is also extensively supervised by the Commission throughout
the year. The SEC's Division of Examinations maintains dedicated staff
as part of its FINRA and Securities Industry Oversight (``FSIO'')
program who are devoted exclusively to overseeing FINRA and the MSRB--
the two not-for-profit regulatory SROs--including with respect to
FINRA's overall financial management and the adequacy of the resources
devoted to its regulatory programs. In addition, rules or fees adopted
by FINRA are subject to review by the Commission's Division of Trading
and Markets. The Commission's oversight of FINRA, in turn, is itself
subject to Congressional oversight and evaluation by the United States
Government Accountability Office (``GAO'') every three years. By
statute, the GAO evaluates ten specific aspects of the Commission's
oversight of FINRA, including FINRA governance, executive compensation,
and the use of funding to support FINRA's mission, including the
methods and sufficiency of funding, how FINRA invests funds pending
use, and the impact of these aspects on FINRA's regulatory enforcement.
The GAO reports the results of its evaluation to Congress.\96\
---------------------------------------------------------------------------
\96\ See GAO Report to Congressional Committees (November 2023),
available at https://www.gao.gov/assets/d24106578.pdf.
---------------------------------------------------------------------------
Second, FINRA's commitment to reasonable funding in support of its
mission is further reinforced by the transparency it has committed to
provide on an ongoing basis--pursuant to its Guiding Principles--
regarding its financial performance. Each year, FINRA publishes an
extensive Annual Financial Report regarding its operations, prepared in
accordance with GAAP. In addition, FINRA publishes annual reports on
its budget and its use of fine monies. FINRA's Board also reviews and
affirms its Financial Guiding Principles bi-annually and re-publishes
these as well. FINRA also files with the IRS the Form 990 mandated for
all not-for-profit organizations. Collectively, these reports provide
extensive and comprehensive information regarding FINRA's policies and
operations with respect to its budgets, revenues, costs, financial
reserves, use of fine monies, capital and strategic initiatives, and
compensation of senior executives, among other information. FINRA
maintains a dedicated web page that consolidates its
[[Page 93726]]
annual reports in a readily accessible place.\97\
---------------------------------------------------------------------------
\97\ See FINRA Financial Reports and Policies, available at
https://www.finra.org/about/annual-reports.
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Third, as a not-for-profit organization, FINRA is committed to
aligning its revenues with its mission-driven costs. If revenues exceed
costs on a sustained basis, and FINRA's reserves are sustained
appropriately, FINRA will assess the merit of providing rebates. This
approach helps ensure that the revenues from these proposed fee changes
will not exceed FINRA's reasonable regulatory costs and reserve needs
on an ongoing basis. As discussed above, FINRA will continue to be
guided by its historical approach to rebates if its revenue in future
years exceeds its costs and reserves needs by a material amount.
Together, these mechanisms help ensure the ongoing reasonableness
of FINRA's costs and the level of fees assessed to support those costs.
The effectiveness of these mechanisms is demonstrated by FINRA's
experience over the last decade, during which, FINRA was able to
undertake expanding regulatory responsibilities while limiting
cumulative cost growth to a rate that was lower than inflation and cost
growth experienced by members.
The Proposed Fees Are Equitable and Not Unfairly Discriminatory
As discussed throughout this filing, this proposed rule change is
designed to increase the fees FINRA relies on to fund its regulatory
mission in a manner that preserves an equitable and not unfairly
discriminatory fee allocation among FINRA members and users of FINRA
services. Notably, through this proposed rule change, FINRA is seeking
to preserve the carefully calibrated mix of core regulatory fees and
select use-based fees to fund its regulatory mission that the
Commission previously approved as equitably allocated among its large
and diverse membership. In addition, based on feedback from members of
FINRA's advisory committees and other industry consultations that
emphasized the importance of advance notice and clarity of any fee
increases for budget planning, implementation of the proposed rule
change would take place over several years, with some fees going into
effect in 2025, others implemented in 2026 or later, and some phased in
over several years between 2025 and 2029.
The fees included in this proposed rule change were selected to
address the impending funding deficit by raising fees in a way that
maintains proportionality across members with minimal distributional
impacts across firm sizes and business models. FINRA projects an
aggregate dispersion level for the rate of increase realized across
members to be 2.3% once the proposal is fully implemented.\98\ In other
words, in choosing among options according to the principles described
above, FINRA also sought to have minimal impact on the distribution of
fee rate changes across members by firm size and business model, as
measured by the standard deviation of the rate of the fee increases.
Given this limited distributional impact, FINRA believes the proposed
rule change will preserve the same equitable and not unfairly
discriminatory fee allocation that has long served as the foundation
for FINRA's funding model and has been approved by the Commission.
---------------------------------------------------------------------------
\98\ See generally Exhibit 3, Charts 7 through 10.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA 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.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to analyze the regulatory need for the proposed rule change, its
potential economic impacts, including anticipated costs, benefits, and
distributional and competitive effects, relative to the current
baseline, and the alternatives FINRA considered in assessing how best
to meet FINRA's regulatory objectives.
Regulatory Need
Based on an analysis of its funding sources, anticipated costs, and
expanding responsibilities, FINRA has determined that it will require
additional revenues to continue to effectively meet its regulatory
obligations. FINRA anticipates that the absence of stable funding at
the levels proposed here may have material negative impacts on its
regulatory program, weakening investor protections. Specifically, FINRA
may be unable to maintain its current capabilities at their current
standards or respond to a significant market event requiring
unanticipated funding. In the absence of a fee increase, eventually
FINRA may not be able to hire and retain staff with the appropriate
expertise to conduct its regulatory activities (including examinations,
market surveillance and investigations, enforcement, regulatory policy
and rulemaking, qualification examinations and credentialing, and
providing transparency for markets, members and registered persons), or
make the necessary investments in the technology needed to support
these activities.
Economic Baseline
The baseline for this proposed rule change includes FINRA's
historical costs and revenues, the current schedule of fees assessed by
FINRA, and the direct and indirect allocation of those fees across
members, associated persons, third parties, and investors. The baseline
also encompasses the scope of activities conducted by FINRA to meet its
mission, and FINRA's current ability to address changing market
activities and conditions through investment in staff, infrastructure,
and technology.
As a not-for-profit organization, FINRA targets break-even cash
flows that allow it to appropriately fund its regulatory mission, and
maintains a reasonable financial reserve necessary to meet
unanticipated circumstances. Between 2013 and 2023, FINRA's cost
increase CAGR was 3.5%, or 41% over the entire period.\99\ Over the
same period, members' reported cost increase CAGR was 8.7%, or a total
increase of 129%.\100\
---------------------------------------------------------------------------
\99\ Based on figures drawn from FINRA's public Annual Financial
Reports, which include FINRA subsidiaries.
\100\ Based on FOCUS reports.
---------------------------------------------------------------------------
At the same time, capital markets have grown in size, complexity,
and retail investor participation, in part, through an increase in the
number of self-directed accounts and rapid technological changes.
Partly in response to these changes, FINRA's regulatory
responsibilities have, and continue to, grow as described above. There
have been substantial increases in equity and options trading volume
(respectively, over 70% and 160% increases since 2013) and in corporate
and agency bond trading volume (over 230% increase since 2013). There
has also been growth in the complexity of the securities markets (the
number of registered national securities exchanges significantly
increased since 2013, from 14 to 24 \101\) and trading of new and
evolving products, such as security-based swaps and securities with
crypto asset components, has increased. These changes have led to a
more complex
[[Page 93727]]
trading environment. This, in turn, has required enhancements to
oversight by FINRA staff. In addition, as discussed above, FINRA has
made substantial investments in its surveillance and examinations
programs in response to new and amended SEC rules.
---------------------------------------------------------------------------
\101\ See https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml. Additional registered national
securities exchanges may contribute to more complex order lifecycles
and trade reporting scenarios.
---------------------------------------------------------------------------
Over the past several years, FINRA has observed changes in the
number of registered persons and members. Between 2013 and 2023, the
number of registered persons was essentially unchanged (627,468 and
628,392, respectively).\102\ In contrast, over the same period, the
number of members decreased from 4,146 to 3,298, a decrease of
approximately 20%.\103\
---------------------------------------------------------------------------
\102\ See Table 1.2.2 of the FINRA Industry Snapshot, available
at https://www.finra.org/media-center/reports-studies/2024-industry-snapshot. As FINRA notes when it publishes industry snapshots, FINRA
regularly updates historical data series due to data revisions by
reporting firms.
\103\ See Table 2.2.3 of the FINRA Industry Snapshot.
---------------------------------------------------------------------------
FINRA believes that the number of registered persons remained
fairly constant because persons from exiting members migrated to other
members, requiring FINRA regulatory resources to shift accordingly.
FINRA staff's quarterly reviews of departing firms find that on average
about 75% of their associated persons remain registered after their
firm exits the securities business, either by remaining with an
affiliate firm or moving to a new firm. In the last quarter of 2023,
the retention rate was closer to 90%. The difference in the decline in
the number of members versus registered persons is also related to the
fact that most exiting firms are small,\104\ such that their departure
has relatively less impact on the total number of registered persons.
---------------------------------------------------------------------------
\104\ FINRA By-laws define the size of a member firm by the
number of associated registered representative as the following:
small--150 or fewer registered representatives; mid-size--151 to 500
registered representatives; and large--more than 500 registered
representatives. A subgroup of the small firms are known as micro
firms, firms with 10 or fewer registered representatives.
---------------------------------------------------------------------------
Despite its increased responsibilities and changes in FINRA's own
oversight by the SEC, FINRA achieved relatively low expense growth
through a variety of cost-saving mechanisms.\105\ Staffing generates
the majority of FINRA's expenses and was relatively flat until recent
years, commensurate with increases in FINRA's responsibilities. As
discussed above, since 2013, FINRA's total compensation costs rose by
31% on a cumulative basis as compared with a 50% increase for the
average U.S. financial services employee.\106\ In aggregate, since
2013, FINRA's expenses have grown less rapidly than those of members,
with the ratio of member expenses to FINRA expenses gradually
increasing over time. Chart 1, attached in Exhibit 3, presents these
findings.\107\
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\105\ As discussed above, cost savings have been accomplished in
recent years through expense reduction initiatives, including
conducting a comprehensive efficiency review of FINRA's core
business lines; establishing a framework for improving measurement
of FINRA's key objectives and results; voluntary retirement/
incentive programs in 2020 and 2024; and strategic reductions in
FINRA's corporate real estate footprint.
\106\ See supra note 22.
\107\ As with Chart 1, all of the charts discussed below are
attached in Exhibit 3, available on FINRA's website at http://www.finra.org.
---------------------------------------------------------------------------
Over the period between 2013 and 2023, FINRA's total regulatory and
use-based fee CAGR was 3.9%. These revenues remained effectively flat
from 2013 through 2019 due to a limited number of fee increases. A
previously implemented fee increase was phased in between 2022 to 2024
and has resulted in increased levels of operating revenue. However,
FINRA projects that increases in revenue will either remain flat or
slightly decrease after 2024.
Chart 2 provides a view of actual revenues and expenses for 2013 to
2023 and anticipated revenue and expenses for 2024 to 2029 if no
changes to the fee structure are made.\108\ Chart 2 also includes
historical and projected ``excess reserves.'' FINRA maintains a reserve
fund as part of its funding framework, and excess reserves are reserves
in excess of the minimum determined by the FINRA Board of Governors as
appropriate, which is one year of expenditures.\109\ FINRA has
strategically relied on its reserves to help fund operating deficits in
the past and will continue to strategically draw on its reserves where
consistent with the Guiding Principles. Chart 2 illustrates, however,
that without a fee increase, FINRA is projected to exhaust excess
reserves and deplete its reserve balance below minimum target levels in
the coming years.
---------------------------------------------------------------------------
\108\ The revenues and expenses presented in Chart 2 in terms of
Cash Flow Sources and Cash Flow Uses--both historical and
projected--do not include subsidiaries other than FINRA Regulation
and FINRA Dispute Resolution, which was merged into FINRA Regulation
at the end of 2015. Cash Flow Sources includes Operating Revenues,
Investment Returns and Fines. Cash Flow Uses includes Operating
Expenses and Capital Initiatives.
\109\ See supra note 12.
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Although FINRA's revenues would remain near current levels without
any changes in the fee structure, FINRA reasonably anticipates that its
future expenses will continue to grow at a pace of 5.9% on average per
year based on the compounding impact of annual wage inflation,
technology costs, and future capital initiatives.\110\ In this
scenario, revenues would increasingly fall behind anticipated costs.
While FINRA's reserves may continue to cover the shortfall in the near-
term, the reserves will reach their minimum prudent level of one year
of operating costs within three to four years based on current
projections if no corrective action is taken.
---------------------------------------------------------------------------
\110\ As discussed above, FINRA has made reasonably conservative
assumptions using a variety of information points, including
historical data and anticipated trends. See supra note 15. This
estimate is based on the following assumptions for FINRA and
excludes the independent budgeting of all of FINRA's active
subsidiaries other than FINRA Regulation--specifically, FINRA CAT,
LLC and the FINRA Investor Education Foundation: (1) wage inflation
at an annual rate between 4% and 6%, consistent with the financial
industry over the last five years; (2) technology expense growth:
capital investments seeking long-term efficiency gains for both
FINRA and the industry, rising cloud hosting costs driven by volume
increases, maintaining technology labor competitiveness, and ongoing
disaster recovery and cybersecurity requirements; and (3) rise in
regulatory efforts and associated costs for FINRA's regulatory
programs.
---------------------------------------------------------------------------
As described above, FINRA funds its regulatory and other related
activities through a combination of regulatory fees and use-based fees.
GIA, TAF, PA and Branch Office Fees, taken together, represent
approximately 69% of 2023 revenues, while use-based fees represent
approximately 31% of 2023 revenues. The specific fees that would be
increased under this proposal represent approximately 89% of 2023
revenues.\111\
---------------------------------------------------------------------------
\111\ Following the implementation of the proposed rule change,
GIA, TAF, PA and Branch Office Fees, together, would represent
approximately 72% of revenues, while use-based fees would represent
approximately 28%.
---------------------------------------------------------------------------
All core regulatory and use-based fees mentioned above are assessed
directly to members. FINRA understands that many members shift at least
some of the fees to other parties. For instance, it is regular practice
among clearing and trading firms to ``pass-through'' the TAF to the
underlying firm executing the trade. Further, FINRA understands that
the executing firms commonly pass the TAF directly on to their
customers submitting orders. Typically, TAF fees are reflected on the
confirmation statement received by customers.\112\
---------------------------------------------------------------------------
\112\ FINRA conducted a study of a sample of members, which
included approximately 25 retail investor focused broker-dealers and
approximately 15 institutional investor focused broker-dealers, to
better understand practices of TAF pass through. The research found
that the majority of the retail focused firms did pass through the
TAF to their customers. FINRA does not know the full extent of this
practice across all members.
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Similarly, FINRA understands that many firms regularly pass-through
to registered persons assessments such as the PA, registration fees,
and qualification examination fees. FINRA understands that there may be
[[Page 93728]]
differences in this practice across firms depending on each firms'
business model. Competitive markets for the provision of brokerage and
related financial intermediation services, along with difficulty in
allocating certain fees to specific transactions, can limit the extent
to which these fees can be passed-through.
Core regulatory fees are calibrated so that larger, more active and
more geographically dispersed members are assessed higher fees,
reflecting regulatory resource allocation. Likewise, the use-based fees
that are part of core regulatory fees are designed to capture some of
the costs associated with core regulatory activities in addition to the
direct and indirect costs of the associated services. For example,
FINRA believes it is appropriate that registration and qualification
examination fees help defray the costs of regulating registered persons
because members employing more persons require more regulatory effort
on FINRA's part. This approach is consistent with a structure where the
fees paid increase with the size of the firm's revenues (GIA) and the
amount of trading activity it conducts (TAF). In addition, core
regulatory fees tend to be correlated with member size and structure.
As such, core regulatory fees are designed cohesively and
comprehensively such that they should be evaluated in aggregate and not
on a fee-by-fee or service-by-service basis.
The fee structure is also designed, purposefully, to account for
diversity in firm size. Compliance and regulatory oversight naturally
represent a larger relative cost to small firms. Because FINRA wants to
prevent regulatory costs from either creating a barrier to entry for
small firms, or over-burdening existing small firms, the current fee
structure includes a level of cross-subsidization by larger firms.
FINRA believes that this practice supports two objectives. First,
it is important that retail investors have access to diverse types of
financial services intermediaries, including members of varying size.
For example, some investors may prefer to engage registered persons
associated with smaller firms. Second, the extent to which firms
benefit from well-regulated markets is relative to firm size. Under
well-regulated markets, investors are more willing to trust financial
intermediaries because they are confident that they are treated fairly
in their access to securities markets and products. Greater
participation in the financial markets by investors allows firms to
grow larger and become more diversified, leading to cost savings and
reduced risk through economies of scale and scope. The concentration in
both retail and institutional investor activity at larger firms
suggests that larger firms reap substantial benefits from strong
regulation and should therefore provide a substantial portion of the
fees that support this regulation. At the same time, the impact of
widespread misconduct at a larger firm may impair investor confidence
more broadly than similar misconduct at a smaller firm. This lends
further support to the practice of assessing higher fees on larger
firms.
Chart 3 presents the distribution in 2024 of FINRA's regulatory and
use-based fee revenue and the proportion of FINRA's examination time,
along with the proportion of firms and registered persons, by firm-size
category as defined in the FINRA By-Laws.\113\ Small firms, including
micro firms, account for 89% of the firms in the industry, 10% of total
registered persons, 57% of FINRA's total firm examination time, and 12%
of FINRA's revenues. Large firms, conversely, represent less than 5% of
firms, over 80% of registered persons, 32% of FINRA's firm examination
effort, and approximately 67% of FINRA's revenues. The remaining
portions of firm examination time and revenues are attributable to mid-
size firms.
---------------------------------------------------------------------------
\113\ The revenue in Charts 3-10 excludes Corporate Financing
fees, which are generally passed through to issuers, and a portion
of DRS fees that are paid directly by customers. See supra note 31.
The revenue in these charts also excludes MAP fees, which are
incurred irregularly. See also supra note 8 and accompanying text.
---------------------------------------------------------------------------
Chart 4 presents the same measures as in Chart 3 by the business
model category. The categories of capital markets and retail firms
account for 80% of the firms in the industry, 72% of total registered
persons, 55% of FINRA's total examination time, and 33% of FINRA's
regulatory and use-based fee revenues.\114\ The category of diversified
firms, including most of the largest firms, accounts for approximately
5% of firms in the industry, almost 25% of total registered persons,
over 27% of FINRA's total examination time, and 44% of FINRA's
revenues. The remaining portions are attributable to the category of
trading firms and the category of clearing firms.
---------------------------------------------------------------------------
\114\ See supra note 113. Here, business model represents the
primary type of services provided by the member firm.
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Economic Impact
FINRA's fee proposal is intended to ensure that FINRA can continue
to meet its mission of promoting investor protection and market
integrity in a manner that facilitates vibrant capital markets. This
proposed rule change preserves FINRA's ability to be a robust and
effective SRO, protecting investors from manipulation, exploitation,
and other harms. Adequate funding allows FINRA to develop regulatory
approaches that are effective and efficient, and to revise its rules
through, among other ways, its robust retrospective review process.
Through appropriate funding, FINRA will be better situated to adapt to
changing markets, market behaviors, and expanding responsibilities. A
stable and reliable funding model also permits members to better
anticipate and plan for FINRA's fees. These benefits accrue to current
and prospective investors, firms, issuers, and others participating in
financial intermediation.
FINRA notes that academic literature has provided evidence of the
linkage between strong regulation in securities markets and improved
outcomes, including more trading, lower transaction costs, and greater
investor participation in the markets.\115\ Bruggemann, et al. [2018]
study the impact of differences in state regulation on OTC stocks. They
find that firms issuing in the OTC market subject to stricter
regulation are more liquid and are subject to lower ``crash risk.''
Cazier, et al. [2023] examine the effect of the SEC's initiative to
prevent fraud in OTC markets by suspending inactive shell companies
that could be targeted by market manipulators. The authors find that
these suspensions are associated with fraud deterrence among other OTC
firms operating within the same regulatory jurisdiction as the
suspended firm. Silvers [2016] studies the impact of SEC enforcement
actions against foreign cross-listed issuers. He shows evidence that
other cross-listed issuers (not cited by the SEC) experienced positive
returns, suggesting that increased regulatory attention increases
valuation. Silvers [2020] and Lang et al.
[[Page 93729]]
[2020] further show that cross-border cooperation between securities
regulators reduces the cost of liquidity provision and increases cross-
border investment in the capital markets of participating countries.
Finally, Christensen et al. [2019] and Aghanya et al. [2020] study the
impact of the introduction of the European Union's Market Abuse
Directive and MiFID. These studies conclude that these initiatives,
designed to enhance investor protections, have led to higher household
ownership of equities, higher liquidity, and higher stock price
informativeness.
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\115\ See, e.g., U. Bruggemann, A. Kaul, C. Leuz & I. Werner,
The Twilight Zone: OTC Regulatory Regimes and Market Quality, 31(3)
The Review of Financial Studies, 898-942 (2018); R. Cazier, J. Huang
& F. Zhou, Regulatory Spillover Effects in OTC Markets, Review of
Accounting Studies, 1-33 (2023); Roger Silvers, The Valuation Impact
of SEC Enforcement Actions on Nontarget Foreign Firms, 54 (1)
Journal of Accounting Research, 187-234 (2016); Roger Silvers,
Cross-Border Cooperation between Securities Regulators, 69 (2-3)
Journal of Accounting and Economics, 101301 (2020); M. Lang, M.
Maffett, J.D. Omartian & R. Silvers, Regulatory Cooperation and
Foreign Portfolio Investment, 138 (1) Journal of Financial Economics
138-158 (2020); H. Christensen, M. Maffett & L. Vollon, Securities
Regulation, Household Equity Ownership, and Trust in the Stock
Market, 24 (3) Review of Accounting Studies, 824-859 (2019); and D.
Aghanya, V. Agarwal & S. Poshakwale. Market in Financial Instruments
Directive (MiFID), Stock Price Informativeness and Liquidity, 113
Journal of Banking & Finance, 105730 (2020).
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The proposed rule change would implement fee changes that would
maintain the current distribution of total fees allocated across
members by size and business model. Based on FINRA's projections of fee
increases from 2024 to 2029, approximately 67% of the fee increases
would be borne by large firms, 22% by mid-size firms, 9% by small
firms, 1% by micro firms and the remaining 1% by non-members.\116\
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\116\ The firm size categories are defined above, see supra note
104.
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Chart 5 describes the proportion of regulatory and use-based fees
anticipated to be collected under the proposed rule change across firm
size categories during the period from 2024 through 2029.\117\ In each
year, 66%-68% of the fee is expected to be borne by large firms, 16%-
17% by mid-size firms, 11%-12% by small firms, approximately 1% by
micro firms, and 3-4% by non-members. Therefore, the overall allocation
of fees by firm size is expected to remain relatively unchanged with
the implementation of the increase in fees.
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\117\ See supra note 113.
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Chart 6 describes the proportion of regulatory and use-based fees
anticipated to be collected across firm business models during the
period from 2024 through 2029.\118\ In each year, approximately 70% of
the fees are expected to be borne by diversified and retail firms, with
the remaining fees distributed relatively evenly across trading,
capital markets, and clearing firms. As with FINRA's analysis of the
proposed fee increases by firm size, the chart demonstrates that the
overall allocation by firm business models is expected to remain
unchanged with the implementation of the increase in fees.
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\118\ See supra note 113.
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Taken together, these charts indicate that the proposed fee
increases are designed to allocate the growth in fees in an equitable
manner, all else held equal, by maintaining a similar allocation of
fees across firm sizes and business models, both overall and year-by-
year.
As discussed, while potentially material, FINRA fees represent a
small dollar amount relative to industry activity. Since 2013, as a
percentage of member revenue, FINRA's total fees have ranged between
0.2% and 0.4%, with an average of 0.30%. Under the assumption that
members' revenues resume growth at a level commensurate with recent
history,\119\ FINRA's fees would be 0.31% percent by 2029.\120\ This
share of member revenue is close to the historical average of 0.30%.
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\119\ This 2029 industry revenue projection is based on
historical FOCUS revenue growth of 8.5% (2013-2023).
\120\ See supra note 33 and accompanying text.
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The amount of the fee increase borne by members depends on the
extent to which they shift the burden of these fees to their associated
persons and customers. As discussed above, FINRA understands that of
the fees addressed by this proposal, the fee most likely to be passed
through to customers is TAF, which is directly tied to customer trading
activities. Despite the pass-through, FINRA believes the proposed TAF
increase would not significantly affect customer trading behavior as
TAF represents a small proportion of the average value of customer
transactions. In 2023, TAF per share traded was 0.031 basis points
(0.00031%) of the average price of the traded shares. When the new
rates are fully implemented in 2029, TAF per share traded would be
approximately 0.058 basis points of the average price of traded
shares.\121\
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\121\ The average share price estimate is based on the number of
shares and dollar trading volume from CBOE. See https://www.cboe.com/data_and_access_solutions for details.
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To better understand the impact of the proposed fee increases
across members within each firm size category, FINRA analyzed the
expected distribution of fee increases for all existing firms under the
proposed fee structure, based on the expected rate of dispersion.
Dispersion is a way to compare the anticipated growth rate in fees
across a range of firms. Lower dispersion is associated with a higher
degree of consistency in terms of the impact of the proposed fee
increases and can be interpreted as more firms in a given group
experiencing similar rates of growth. By seeking to limit dispersion,
the proposal is effectively limiting the potential for inequitable
treatment across members. This approach also reduces the potential for
the proposed fee increase to create unintended impacts on the provision
of financial services by members and the business models adopted by
them.
FINRA's analysis examines the level of dispersion based on the CAGR
of the expected fee increase. CAGR is measured in this analysis
relative to FINRA's projection of total fees in 2024.\122\ CAGR
provides a standard metric to compare the relative impact of the fee
increases within and across subgroups. Because the number of registered
persons, trading and other business activities, and resulting aggregate
fee dollar amounts vary significantly across firms and firm sizes,
benchmarking to CAGR permits FINRA to closely compare the magnitude of
the distribution across firms.
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\122\ We exclude firms that are not assessed GIA in the base
year from CAGR distribution analysis. Since GIA in the base year
drives the denominator of the CAGR formula, firms that are not
assessed GIA would have inflated CAGRs by construction. Therefore,
we exclude these firms to ensure that the tails of our distribution
reflect a more accurate measure of fee growth.
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As discussed, implementation of the proposed rule change would take
place over several years, with a minority of fees going into effect in
2025, most fees implemented in 2026 or later, and several fees phased
in over several years between 2025 and 2029. Due to the variability in
when fees are implemented, and whether they are implemented at one time
or phased in, FINRA believes that considering dispersion by firm size
category over the five-year period is more useful than on an annual
basis.
Charts 7 through 10 provide a view on the distribution of fee
increases within each firm size category. These charts also report the
median increase in FINRA fees that are the subject of this proposal
over the full period from 2025 through 2029 by firm size. Within the
charts, each of the four central bars represents one standard deviation
from the median, so that the two most central dark blue bars together
would theoretically represent approximately 67% of all firms evaluated
(plus or minus one standard deviation) and approximately 95% of firms
evaluated should be represented under the four most central dark blue
and mid-blue bars (plus or minus two standard deviations) presented in
the charts.
While it is not feasible to eliminate the possibility that some
members will experience a rate of fee growth that is outside of the two
standard deviation range, FINRA sought to limit the number of firms
falling into this category when structuring this proposal. These charts
demonstrate that the proposal significantly limits the number of firms
that fall beyond two standard deviations from the median increase. In
particular, the proposal limits those
[[Page 93730]]
firms that would be expected to experience a materially higher fee
increase than the median (as defined by two standard deviations). When
considering all the fees in this proposal, FINRA estimates that fewer
than 2.5% of members would experience a fee increase greater than two
standard deviations from the median. When only core regulatory fees are
considered (i.e., excluding select use-based fees that only impact the
users of those programs or services) fewer than 1% of firms would
experience a fee increase greater than two standard deviations from the
median.\123\
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\123\ As discussed above, the select use-based fees include
Corporate Financing Private Placement Review; Corporate Financing
Public Offering Review; Advertising Regulation Review; DRS
Arbitration; and Regulation T and Exchange Act Rule 15c3-3(n)
Requests for Extension of Time. See supra note 24.
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Based on this analysis, FINRA concludes the following:
For micro firms, the median firm would anticipate an
annual increase of 3.4%, translating to a dollar increase of $625.
Approximately three-quarters of these firms would experience an annual
increase between 1.4% and 5.4% between 2025 and 2029. Holding revenues
constant at 2024 levels, total regulatory and use-based fees would
increase from 0.26% to 0.31% of FOCUS reported revenues on average.
This group includes 1,538 firms and represents 46.5% of all FINRA
members.
For other small firms, the median firm would anticipate an
annual increase of 3.9%, translating to a dollar increase of
approximately $4,135. Approximately 80% of these firms would experience
an annual increase in fees between 1.3% and 6.4% between 2025 and 2029.
Holding revenues constant at 2024 levels, total regulatory and use-
based fees would increase from 0.23% to 0.29% of FOCUS reported
revenues on average. This group includes 1,414 firms and represents
42.8% of all FINRA members.
For mid-size firms, the median firm would anticipate a 5%
annual increase, translating to a dollar increase of approximately
$82,500. Approximately three-quarters of these firms would experience
an annual increase between 2.9% and 7.1% between 2025 and 2029. Holding
firm revenues constant at 2024 levels, total regulatory and use-based
fees would increase from 0.26% to 0.36% of FOCUS reported revenues on
average. This group includes 212 firms and represents 6.4% of all FINRA
members.
For large firms, the median firm would anticipate a 5.4%
annual increase, translating to a dollar increase of approximately
$415,000. Approximately three-quarters of these firms would experience
an annual increase between 4.0% and 6.9% between 2025 and 2029. Holding
revenues constant at 2024 levels, total regulatory and use-based fees
would increase from 0.18% to 0.23% of FOCUS reported revenues on
average. This group includes 141 firms and represents 4.3% of all FINRA
members.
FINRA notes that 1.7% of micro firms would experience a fee
increase greater than two standard deviations above the median. Because
the median increase is relatively low ($625), small dollar increases in
fees can result in a large change in CAGR and its distribution.
FINRA also notes that the 2.5% of small firms that would experience
a fee increase greater than two standard deviations are mostly firms
that would incur new or increased use-based fees for FINRA services
that are not core regulatory activities. If only core regulatory fees
are considered, only 1.1% of small firms would experience a fee
increase greater than two standard deviations from the median increase.
The 2.4% of mid-size firms that would experience a fee increase
greater than two standard deviations above the median are mostly firms
that incur a significant increase in TAF. If TAF is excluded, only 1.4%
of mid-size firms would experience a fee increase greater than two
standard deviations from the median increase. As mentioned above, FINRA
understands that the TAF is typically passed-through to customers.
As part of its analysis, FINRA also considered the broad potential
impacts on competition under this proposal. The analysis considers the
impact across all FINRA members, across members based on size or
business model, and between members and other financial services
providers.
FINRA does not anticipate that the proposal will materially impact
competition among members. The proposal is designed to maintain the
current funding model and the relative allocation of fees across its
core regulatory fees and select use-based fees. In other words, each of
the affected fees would increase commensurate with fees charged under
the current framework; no individual fee would be raised such that it
may create inordinate hardships for some firms and benefit others.
Implementation of the proposed rule change would not require
significant system or process changes by firms.
Similarly, FINRA does not anticipate that the proposed rule change
will materially impact competition across members of different sizes or
business models. The analysis of distributions within firm size
indicates that firms may anticipate some differences in fee increases
based on the services they provide and the way they provide those
services. Nevertheless, as designed, the proposal maintains the
relative allocation of fees across firm size and business model,
meaning the proposed rule change is designed to preserve a consistent
rate of growth in fee increases across firm size and business model. As
noted above, this approach is designed to limit the likelihood that any
specific fee change may create hardships for some firms and benefit
others. Further, this proposed rule change maintains the current
approach for cross-subsidization of the cost of regulatory oversight of
members of different sizes.
FINRA can identify two potential impacts of this proposal on the
competition between its members and other providers of financial
services. Although these increases are calibrated to limit the impact
on individual members, at the margin, some members may find these
increases material to their business. Further, where members may have
the ability to provide similar services, or a subset of services, under
an alternative business model that does not require FINRA membership,
increased FINRA costs may increase the likelihood that these firms
withdraw from FINRA in favor of the alternative business model. Based
on the information available to it today, FINRA does not have an
accurate measure of the number of members that may choose to withdraw
registration as a FINRA member as a result of this proposed rule
change.\124\
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\124\ FINRA notes that because of the time lapse between
proposal, adoption and implementation of fee increases, combined
with changing business environments over time, it is difficult to
reliably estimate the number of firms that might have exited
historically because of previous fee increases.
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The proposed rule change may have an additional impact on
competition through funding FINRA's regulatory activities. As discussed
above, strong and effective surveillance and regulation of securities
markets has been shown to increase investor confidence in the fairness
of the market. This has been measured by an increase in retail
participation in the securities markets, greater liquidity, and higher
securities valuations. Given the presence of substitutes to broker-
dealers for retail clients--e.g., investment advisory services, issuers
selling directly to the public, or certain market-linked insurance
products--it may be reasonable to expect that effective regulation by
FINRA would continue to
[[Page 93731]]
be a positive externality to those competitors. That is, increased
confidence by retail investors due to FINRA's activities may increase
business opportunities and lower transaction costs in the securities
industry as a whole. This would benefit non-FINRA member competitors,
especially in instances where investors do not recognize these
competitors are not regulated by FINRA.
Alternatives Considered
In developing this proposal, FINRA considered several options.
First, FINRA considered making all the fee changes effective in 2025.
FINRA did not pursue this alternative because it believed that, where
possible, members should be provided an extended time period to plan
for the proposed fee increase. In light of uncertainty and volatility
in the markets, FINRA believes that implementing the proposed fee
increase at one time would impose a greater burden on members than
phasing in the implementation of the fee increases, as proposed.
FINRA also considered making all of the fee changes effective in
2026, but decided against that approach for many of the same reasons
noted above. However, FINRA believes that deferring implementation of
all fees in this proposed rule change is unnecessary and would hinder
FINRA's ability to support its regulatory mission. As discussed, the
uncertainty in the markets, which creates challenges for members and
investors, also impacts FINRA. For example, market volatility increases
the risk that FINRA's reserve portfolio will fall below the appropriate
minimum.\125\ This limits FINRA's flexibility in relying on its
reserves to cover funding gaps and indicates the need for stable
funding as soon as practicable.
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\125\ See supra note 12.
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Further, FINRA notes that consistent investor protection is of
vital importance, particularly in times of uncertainty, where FINRA has
seen an increase in customer complaints and alerts from its
surveillance programs.\126\ Financial limitations that constrain
FINRA's ability to carry out its mission would have material negative
implications for investors and the financial markets. Taking these
concerns into account, FINRA believes that the most prudent course of
action is to start increasing some fees in 2025, but to stagger the
implementation over multiple years.
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\126\ In the first quarter of 2020, FINRA saw an increase in
alerts generated through its market surveillance of over 250%
compared to the same quarter in 2019.
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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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \127\ and paragraph (f)(2) of Rule 19b-4
thereunder.\128\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
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\127\ 15 U.S.C. 78s(b)(3)(A).
\128\ 17 CFR 240.19b-4(f)(2).
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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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2024-019 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-FINRA-2024-019. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of the filing also will be available for inspection and
copying at the principal office of FINRA. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection.
All submissions should refer to file number SR-FINRA-2024-019 and
should be submitted on or before December 18, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\129\
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\129\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27764 Filed 11-26-24; 8:45 am]
BILLING CODE 8011-01-P