NASD Notice to Members 02-41 - July 2002

NASD Informs Members of Proposed Changes to NASD's Gross Income Assessment, Personnel Assessment, and Regulatory Fee

Executive Summary

NASD is issuing this Notice to Members to inform members that NASD's Board of Governors has approved proposed changes to NASD's Gross Income Assessment (GIA), Personnel Assessment, and Regulatory Fee. Under the current structure, these three types of fees and assessments are used to fund NASD's member regulatory activities. The proposed restructuring will be comprised of four important amendments: 1) eliminate the Regulatory Fee; 2) institute a new transaction-based Trading Activity Fee similar to the Securities and Exchange Commission's (SEC) Section 31 Fee; 3) increase the rates assessed to member firms under the Personnel Assessment; and 4) implement a simplified three-tiered flat rate for the GIA and eliminate current deductions and exclusions. The proposed changes are revenue neutral to NASD and strive to better align NASD's member regulatory fees with its functions, efforts, and costs. NASD will be filing these proposals with the SEC shortly. Previously, NASD proposed changes to the Regulatory Fee in Notice to Members 02-09 and requested comments. NASD received a number of comments on this proposal. As a result, the proposal set forth in Notice to Members 02-09 is not being pursued. Additionally, this revised proposal takes into consideration those comments received.

 

These fees assessed upon and paid by member firms are used by NASD to fund NASD's member regulatory activities, including the supervision and regulation of members through examinations, processing of membership applications, financial monitoring, policy, rulemaking, interpretive, and enforcement activities. These amendments to the current pricing structure are intended to serve the following purposes: 1) simplify NASD's fee structure; 2) ensure fairness in NASD's fee structure by assessing higher fees to those member firms that require more NASD regulatory services; 3) assess a transaction-based fee in a manner that, unlike the Regulatory Fee, does not influence where members choose to execute trades; 4) reduce where possible the cyclical nature of the current NASD fee structure; and 5) eliminate NASD's reliance on funds generated from the Regulatory Fee on transactions executed through Nasdaq. These changes will also enhance the diversity of revenue sources. This proposal was reviewed, discussed, and is strongly supported by the NASD Small Firm Advisory Board and a working group from the Securities Industry Association.

 

Currently, there is a lack of standardization, consistency, and uniformity in the manner in which the GIA is reported by and assessed on member firms. Therefore, NASD is proposing to eliminate deductions and exclusions, which have been subject to varying interpretations, and instead apply a three-tiered flat rate applied to gross FOCUS revenue. NASD also proposes to eliminate the existing Nasdaq market-based Regulatory Fee and institute a transaction-based Trading Activity Fee similar to the SEC's Section 31 Fee at a reduction of approximately 50% from current levels. The Trading Activity Fee would be assessed on the sell side of all member transactions in all covered securities regardless of where the trade is executed. To offset the proposed reduction in the Trading Activity Fee and reflect the vast size differential of NASD's member firms, the Personnel Assessment would be raised to a three-tiered rate structure of $65 to $75.

 

Although this proposal would be revenue neutral, there are impacts, both negative and positive, to individual firms due to the realignment of revenues with services rendered. The impact of restructuring these fees would be phased in over a three-year period in order to alleviate significant variances experienced by various member firms.

 

Questions concerning this Notice should be directed to NASD Finance, at (240) 386-5397, or Division of Regulatory Policy and Oversight, Office of General Counsel, at (202) 728-8071.