Rulemaking Items Discussed at the April 2012 Meeting
April 23, 2012
Dear Executive Representative:
The FINRA Board of Governors met last week to discuss a number of issues, including several rulemaking items. A summary of the rule proposals, as approved by the Board, is included below.
I want to provide some background on the pricing proposals that the Board discussed. The broader economic downturn continues to affect trading volumes and industry revenues, which in turn has led to a decrease in FINRA's revenues and resulted in a significant loss for fiscal year 2011. In light of this, we have taken a hard look at spending across FINRA to be sure we are operating as effectively and efficiently as possible. This review has resulted in significant spending reductions of $36 million that were implemented as part of our 2012 budget. Cumulative savings from this effort will reach nearly $60 million by the end of 2013.
Despite this effort, the cost of meeting our regulatory mandate is still expected to outpace our revenues. With input from the Small Firm Advisory Board, Board of Governors and a new Board pricing working group, we are proposing adjustments to a number of user-based fees, all of which have remained static for more than five years—with many of them not being adjusted in the last 10 years. We believe the proposed user fee adjustments offer the fairest approach to modernizing FINRA's revenue structure.
You'll see we're also proposing changes to branch office and membership application fees. These adjustments reflect the expansion of these programs and are necessary to keep pace with the cost of conducting branch exams and application reviews. In addition, we are proposing to increase the Trading Activity Fee, which we will adjust every six months (up or down), based on trading volumes.
Our goal in pursuing these proposals is, of course, to ensure that we are sufficiently capitalized to meet our regulatory responsibilities so that we can best protect investors. We will continue to update you on the proposals we bring to the Board, and the action it takes on these items.
In the meantime, I look forward to continuing our dialogue.
Richard G. Ketchum
Chairman and CEO
Rulemaking Items Discussed at the April 2012 Meeting
FOCUS Report Supplementary Schedule
The Board authorized FINRA to seek comment in a Regulatory Notice on a proposed supplementary schedule for derivatives and other off-balance sheet items. FINRA is proposing the supplementary schedule, issued pursuant to FINRA Rule 4524 (Supplemental FOCUS Information), to obtain more comprehensive and consistent information in order to understand carrying and clearing firms' off-balance sheet assets, liabilities and other commitments. This supplementary schedule would only apply to carrying and clearing firms.
Markups, Commissions and Fees
The Board authorized FINRA to seek comment in a Regulatory Notice on a revised proposal to adopt consolidated FINRA rules governing markups, commissions and fees that reflects changes based on comments to a proposal discussed in Regulatory Notice 11-08. Significant modifications to the prior proposal would retain the 5 percent policy as a guide, establish a rebuttable presumption that a markup or commission in excess of 5 percent is unfair, and delete the proposed requirement to provide equity commission schedules to retail customers.
OATS Reporting of Certain Market-Making and Customer Facilitation Orders
The Board authorized FINRA to file with the SEC proposed amendments to the Order Audit Trail System (OATS) rules. The proposed amendments narrow the scope of the market-making exemption and require that firms generally report to OATS market-making orders in National Market System (NMS) stocks if the firm has been registered as a Large Trader with the SEC under Rule 13h-1 for 90 days. The proposed amendments also require firms to report to OATS certain proprietary orders used to facilitate customer orders.
OCC Cleared OTC Options and Related Amendments
The Board authorized staff to file with the SEC proposed amendments to FINRA rules that would accommodate a proposal by the Options Clearing Corporation (OCC) to clear and guarantee certain over-the-counter options for certain institutional customers. First, FINRA Rule 2360 (Options) would be amended to treat over-the-counter options cleared by the OCC the same as all other over-the-counter options under the options rule. In addition, FINRA Rule 4210 (Margin Requirements) would be amended to treat over-the-counter options cleared by the OCC the same as listed options for purposes of the margin rule.
"Public" Arbitrator Definition
The Board authorized staff to file with the SEC proposed amendments to FINRA Rules 12100 and 13100 of the Customer and Industry Codes of Arbitration Procedure, respectively, to revise the definition of "public" arbitrator to exclude persons associated with a mutual fund or hedge fund from serving as public arbitrators. The public arbitrator definition currently excludes investment advisers and professionals whose firms derive substantial revenue from financial industry clients. Employees, directors or officers of an affiliate of an organization engaged in the securities business are also excluded. In addition, a person whose spouse or family member fits into one of the above capacities may not be a public arbitrator. The public arbitrator definition would be amended to require all of these individuals to wait for two years after ending their affiliation before serving as public arbitrators.
The Board authorized staff to file with the SEC proposed amendments to adjust the following user and regulatory fees in order to adequately fund FINRA's regulatory responsibility. FINRA is proposing to implement some of these changes in 2012 and others in 2013.
2012 Pricing Proposals
For regular filings, increase the minimum fee from $100 to $125 per filing and maintain the fee of $10 per page over 10 pages. For expedited filings, increase the minimum fee from $500 to $600 per filing and increase the fee from $25 to $50 per page over 10 pages.
Corporate Financing Fees
Maintain the current fee of $500 plus a percentage of the proposed maximum aggregate offering price, increasing that percentage from .01 to .015 percent and raising the not-to-exceed cap from $75K to $225K.
New Membership Application Fees
Revise and implement a fee structure that is tiered based on the size of the firm with a premium for self-clearing firms recognizing the added layer of complexity. Such an approach would be consistent with the fee structure of other SROs to more closely reflect the level of effort required by FINRA staff to process. Proposed fees range from $7,500 to $55,000 depending on the size of the firm applying for membership.
Change in Membership Application Fee
Implement a tiered fee structure to recover incurred costs of regulatory staff. Create separate fees for distinct activities such as mergers, change in ownership, transfer of assets and material change in business to align fee with complexity of application review.
Trading Activity Fee
Adjust the Trading Activity Fee (TAF) rate structure from $0.000095 per share for each sale of a covered equity security (with a cap of $4.75 per trade) to $0.000119 (with a cap of $5.95 per trade). The proposed rate adjustment is designed to ensure proper funding of FINRA's regulatory program given the continued decline in share volume and is based on a 2011 rule filing that outlined the future process for establishing the TAF rate.
2013 Pricing Proposals
Branch Office Assessment Fees
Restructure to establish a regressive tiered rate structure that recovers regulatory costs while continuing to maintain the one-branch-office-per-firm waiver.
Registration and Disclosure Fees
- Annual System Processing – increase from $30 to $45.
- Initial/Transfer/Non-Member Processing – increase from $85 to $100.
- Fingerprint Fee – increase from $13 to $30, and implement a 50 percent discount for electronic filings.
- Mass Transfers – eliminate current exceptions to the application of the mass transfer fee by implementing a charge for all types of mass transfers, including consolidation, merger or acquisition.
- Disclosure Review – increase from $95 to $110.
- Disclosure Review on Broker-Dealers – establish the disclosure review on BDs at the same rate as it is on individuals.
- Late Disclosure – increase from $10 to $100 for the first day late, and increase from $10 to $25 per subsequent day up to 60 days.
The Board authorized FINRA to file with the SEC proposed amendments to retain the current definition of "stop order" and "stop limit order" that require stop orders be triggered by a transaction at the stop price. The amendments would also permit explicitly alternative order types that use a trigger other than a transaction for activating the order, if such other order types are not labeled as a "stop order" or "stop limit order" and are clearly distinguishable from a stop order or stop limit order (e.g., labeled a "stop quotation order"). Firms offering other such order types would be required to disclose to customers, in paper or electronic form, a description of the order type(s) and the specific triggering event.