Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Establishing a Governmental Accounting Standards Board Accounting Support Fee, 1119-1124 [2012-84]
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Federal Register / Vol. 77, No. 5 / Monday, January 9, 2012 / Notices
member is the subject of a bankruptcy,
receivership or equivalent proceeding.
* * *
The proposed changes are consistent
with Section 17A of the Securities
Exchange Act of 1934, as amended,
because they are designed to permit
OCC to perform clearing services for
certain products that are subject to the
jurisdiction of the CFTC without
adversely affecting OCC’s obligations
with respect to the prompt and accurate
clearance and settlement of securities
transactions or the protection of
securities investors and the public
interest. In addition, as a CFTCregistered DCO, OCC is required to
comply with the CFTC’s core principles
applicable to DCOs. The proposed rule
change is not inconsistent with any
rules of OCC.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
OCC does not believe that the
proposed rule change would impose any
burden on competition.
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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 not and are
not intended to be solicited with respect
to the proposed rule change and none
have been received.
III. 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 may be
submitted by using the Commission’s
Internet comment form (https://
www.sec.gov/rules/sro.shtml), or send
an email to rule-comments@sec.gov.
Please include File No. SR–OCC–2011–
18 on the subject line.
• Paper comments should be sent in
triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–OCC–2011–18. 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 Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
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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 Web site 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 such filing
also will be available for inspection and
copying at the principal office of OCC.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–OCC–2011–18 and should
be submitted on or before January 30,
2012.
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
In its filing, OCC requested that the
Commission approve this request on an
accelerated basis for good cause shown.
OCC cites the reason for granting this
request on an accelerated basis as OCC’s
operations as a DCO, subject to
regulation by the CFTC under the CEA
and that these rule changes are being
made according to regulations
promulgated by the CFTC, which were
previously subject to notice and
comment. Not approving this request on
an accelerated basis will have a
significant impact on OCC’s operations
as a DCO.
Section 19(b) of the Act 3 directs the
Commission to approve a proposed rule
change of a self-regulatory organization
if it finds that such proposed rule
change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
such organization. The Commission
finds that the proposed rule change is
consistent with the requirements of the
Act, in particular the requirements of
Section 17A of the Act,4 and the rules
and regulations thereunder applicable to
OCC. Specifically, the Commission
finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of
the Act which requires, among other
things, that the rules of a clearing
3 15
U.S.C. 78s(b).
U.S.C. 78q–1. In approving this proposed
rule change, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
4 15
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1119
agency be designed to promote the
prompt and accurate clearance and
settlement of derivative agreements,
contracts, and transactions because it
should allow OCC to comply with new
CFTC regulatory requirements, thereby
promoting the prompt and accurate
clearance and settlement of derivative
agreements, contracts, and
transactions.5
The Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,6
for approving the proposed rule change
prior to the 30th day after the date of
publication of notice in the Federal
Register because as a registered DCO
OCC is required to comply with the new
CFTC regulations by the time they
become effective on January 9, 2012.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–OCC–2011–
18) is approved on an accelerated basis.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.7
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–96 Filed 1–6–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66080; File No. SR–FINRA–
2011–073]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change Relating to
Establishing a Governmental
Accounting Standards Board
Accounting Support Fee
January 3, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
19, 2011, 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. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
5 15
U.S.C. 78q–1(b)(3)(F).
U.S.C. 78s(b)(2).
7 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
6 15
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Federal Register / Vol. 77, No. 5 / Monday, January 9, 2012 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt Section
14 to Schedule A of the FINRA By-Laws
to establish an accounting support fee to
adequately fund the annual budget of
the Governmental Accounting
Standards Board (‘‘GASB’’).
The text of the proposed rule change
is available on FINRA’s Web site at
https://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
The GASB was established in 1984 by
agreement of the Financial Accounting
Foundation (‘‘FAF’’) and ten national
associations of state and local
government officials as an independent
organization that establishes and
improves standards of accounting and
financial reporting for U.S. state and
local governments.3 The GASB is
recognized by governments, the
accounting industry, and the capital
markets as the source for the
development and publication of the
generally accepted accounting
principles (‘‘GAAP’’) for state and local
governments.
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (‘‘DoddFrank Act’’) was signed into law by
President Obama on July 21, 2010.4 As
added by Section 978 of the Dodd-Frank
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3 The
GASB is not a government entity. It is an
operating component of the FAF, which is a
private-sector, not-for-profit entity. Funding for the
GASB comes in part from sales of publications and
in part from state and local governments and the
municipal bond community. Its standards are not
Federal laws or regulations, and the GASB does not
have enforcement authority. See Facts About GASB,
https://gasb.org.
4 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111–203, 124
Stat. 1376 (2010).
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Act, Section 19(g) of the Securities Act
of 1933 (‘‘Securities Act’’) gives the SEC
the authority to require a national
securities association to establish a
reasonable annual accounting support
fee to adequately fund the annual
budget of the GASB (‘‘GASB Accounting
Support Fee’’) and to draft the rules and
procedures necessary to equitably assess
the GASB Accounting Support Fee on
the association’s members.5 On May 11,
2011, the SEC exercised this authority
and issued an order requiring FINRA to
establish (a) a reasonable annual
accounting support fee to adequately
fund the annual budget of the GASB;
and (b) rules and procedures, in
consultation with the principal
organizations representing State
governors, legislators, local elected
officials, and State and local finance
officers, to provide for the equitable
allocation, assessment, and collection of
the accounting support fee from its
members, and the remittance of all such
accounting support fees to the FAF.6
In response to the SEC’s order of May
11, 2011, FINRA is proposing new
Section 14 (Accounting Support Fee for
Governmental Accounting Standards
Board) to Schedule A of the FINRA ByLaws to establish the GASB Accounting
Support Fee. After considering multiple
ways to assess the GASB Accounting
Support Fee on its members and issuing
Regulatory Notice 11–28 requesting
comment on the GASB Accounting
Support Fee, the proposed rule change
assesses the fee based on members’
municipal securities trading volume
reported to the Municipal Securities
Rulemaking Board (‘‘MSRB’’). FINRA
believes that basing the GASB
Accounting Support Fee on reliable and
timely reporting data will ensure the
accuracy of the fee and that using
transaction data to apportion the fee
will result in a fair and equitable
assessment across FINRA members.
However, because FINRA is statutorily
prohibited from collecting amounts in
excess of GASB’s recoverable annual
budgeted expenses and because a
transaction-based fee is inherently
variable due to the unpredictability of
transaction volume, FINRA is proposing
5 See 15 U.S.C. 77s(g). For purposes of the GASB
Accounting Support Fee, the annual budget of the
GASB is the annual budget reviewed and approved
according to the internal procedures of the FAF. See
15 U.S.C. 77s(g)(2). FINRA anticipates that the
GASB’s annual budget will include an
administrative fee to FINRA. The administrative fee
is intended to cover FINRA’s costs associated with
calculating, assessing, and collecting the GASB
Accounting Support Fee, and the amount will be
negotiated with the FAF each year. For the initial
year, the administrative fee will be $50,000.
6 Securities Exchange Act Release No. 64462 (May
11, 2011), 76 FR 28247 (May 16, 2011).
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a quarterly assessment based on GASB’s
annual budget.7 Under proposed
Section 14, the GASB Accounting
Support Fee will be allocated among
FINRA members on a quarterly basis
based on municipal securities
transactions reported to the MSRB.
Specifically, each calendar quarter, each
FINRA member would be required to
pay an assessment to FINRA of its
portion of one quarter of the annual
GASB Accounting Support Fee amount
that reflects the member’s portion of the
total par value of municipal securities
transactions reported by FINRA
members to the MSRB under MSRB
Rule G–14(b) 8 in the previous calendar
quarter. For example, if GASB’s
recoverable annual budgeted expenses
for a given year were $10 million,
FINRA would collect $2.5 million from
its members each quarter. Each
member’s fee would be based on the
member’s proportion of municipal
securities transactions (based on the par
value of reported transactions, not their
price) reported by all FINRA members
to the MSRB in the previous calendar
quarter.9 Thus, for example, if a member
reported transactions to the MSRB in a
given quarter that accounted for 10% of
the total par value amount of
transactions reported by all FINRA
members during the quarter, the
member’s assessment would be 10% of
one quarter of GASB’s annual budget (in
the above example, the member’s
quarterly assessment would be $250,000
(i.e., 10% of $2.5 million)).
To exclude members with de minimis
transactions in municipal securities in a
given quarter from being assessed the
fee, FINRA is proposing that members
with a quarterly assessment of less than
$25 would not be charged the fee for
that quarter. Any amounts originally
assessed to those members would be
reallocated among the members with an
assessment that quarter of $25 or more
based on the member’s portion of the
total par value of municipal securities
transactions reported by FINRA
members to the MSRB.
As required by Section 19(g) of the
Securities Act, any GASB Accounting
Support Fees collected by FINRA will
be remitted to the FAF 10 and used to
7 Section 19(g)(4) of the Securities Act, as added
by the Dodd-Frank Act, prohibits FINRA from
collecting GASB Accounting Support Fees for a
fiscal year in excess of GASB’s recoverable annual
budgeted expenses. See 15 U.S.C. 77s(g)(4).
8 MSRB Rule G–14(b) sets out municipal
securities transaction reporting requirements.
9 If a member does not engage in reportable
municipal securities transactions during a
particular calendar quarter, the member would not
be subject to the GASB Accounting Support Fee for
that quarter.
10 See 15 U.S.C. 77s(g)(1).
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support the efforts of the GASB to
establish standards of financial
accounting and reporting applicable to
state and local governments.11 In
accordance with Section 19(g)(5)(B) of
the Securities Act, collection of the
GASB Accounting Support Fee shall not
be construed to provide the SEC or
FINRA direct or indirect oversight of the
budget or technical agenda of the GASB
or to affect the setting of GAAP by the
GASB.12
As FINRA noted in Regulatory Notice
11–28, because some firms may seek to
pass the GASB Accounting Support Fee
onto customers engaged in municipal
securities transactions, FINRA proposes
to publish a Regulatory Notice each year
disclosing the total annual GASB
Accounting Support Fee FINRA will
collect for that year. In this annual
Notice, FINRA also anticipates setting
out an estimated fee rate (per $1,000 par
value) based on the GASB recoverable
annual budgeted expenses reported to
FINRA for that year and historical
municipal security trade reporting
volumes so that firms will have some
basis on which to establish a fee should
they choose to do so. The Notice will
also remind any firms choosing to pass
along the fee of the need for proper
disclosure of the GASB Accounting
Support Fee, including, if applicable,
the fact that the fee is an estimate and
that the firm ultimately may pay more
or less than the fee charged to the
customer. In addition, any disclosure
used by the firm cannot be misleading
and must comport with FINRA rules,
including just and equitable principles
of trade, as well as any applicable MSRB
rules.
The effective date of the proposed
rule change will be the date of SEC
approval. The initial fees assessed on
members will be based on trading
activity reported in the calendar quarter
during which the SEC approves the
proposed rule change. For example, if
the proposed rule change is approved
on February 1, 2012, FINRA will bill
members based on trading activity from
January 1, 2012, to March 31, 2012, to
cover one quarter of GASB’s 2012
budget. As a result, depending on the
date of SEC approval, the proposed
11 See 15 U.S.C. 77s(g)(3). Specifically, FINRA
anticipates establishing a separate bank account
specifically for the GASB Accounting Support Fee
and will coordinate with the FAF to establish a
process by which FINRA will wire the funds into
the FAF account for the GASB Accounting Support
Fee. Given the separate bank account, FINRA will
provide monthly account reconciliations and
accounts receivable aging reports, which will be
reviewed by FINRA management each month and
will be available for review by FAF and GASB
management upon request.
12 See 15 U.S.C. 77s(g)(5)(B).
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GASB fee may only cover a portion of
the 2012 GASB budget.
2. Statutory Basis
The proposed rule change is being
filed in response to the SEC’s order of
May 11, 2011, which was issued
pursuant to Section 19(g) of the
Securities Act. Section 19(g) gives the
SEC the authority to require a national
securities association to establish a
reasonable annual accounting support
fee to adequately fund the annual
budget of the GASB and to draft the
rules and procedures necessary to
equitably assess the GASB Accounting
Support Fee on the association’s
members. On May 11, 2011, the SEC
exercised this authority and issued an
order requiring FINRA to establish (a) a
reasonable annual accounting support
fee to adequately fund the annual
budget of the GASB; and (b) rules and
procedures, in consultation with the
principal organizations representing
State governors, legislators, local elected
officials, and State and local finance
officers, to provide for the equitable
allocation, assessment, and collection of
the accounting support fee from its
members, and the remittance of all such
accounting support fees to the FAF.
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(5) of the Act,13 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 believes that, given
the restrictions in Section 19(g) of the
Securities Act regarding the specific
amount FINRA must collect, a quarterly
transaction-based assessment with a
limited exception for firms with a de
minimis amount of reportable
municipal securities transactions is a
fair and equitable manner to assess the
fee. FINRA also believes that the $25 per
quarter exemption threshold strikes an
appropriate balance between exempting
those firms with truly de minimis
transactions and not imposing an undue
burden on other firms to recover the
amount that would be assessed on the
exempt firms.
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.
13 15
PO 00000
U.S.C. 78o–3(b)(5).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The proposed rule change was
published for comment in Regulatory
Notice 11–28 (June 2011). A copy of the
Regulatory Notice is attached as Exhibit
2a to the proposed rule change. The
comment period expired on August 1,
2011. FINRA received eleven comment
letters in response to the Regulatory
Notice.14 A list of the comment letters
received in response to the Regulatory
Notice is attached as Exhibit 2b to the
proposed rule change. Copies of the
comment letters received in response to
the Regulatory Notice are attached as
Exhibit 2c to the proposed rule change.
Of the eleven comment letters received,
five were generally in favor of the
proposed rule change and six were
generally opposed.
Several commenters expressed the
view that broker-dealers, and
specifically FINRA members, should not
be forced to shoulder the entire burden
of funding the GASB because many
other market participants, issuers, and
other people who benefit from GASB
accounting standards are not registered
broker-dealers or FINRA members.15 For
example, one commenter stated that
‘‘many other end users of GASB’s
accounting and financial reporting
standards * * * get a ‘free ride’ under
FINRA’s proposed methodology.’’ 16
Another commenter suggested that a
proportionate share of the revenue
necessary to fund the GASB come from
municipal financial advisors, which are
registered with the SEC and the MSRB,
although not always with FINRA.17
Another commenter suggested that the
MSRB, rather than FINRA, should
14 See Letter from Brown & Brown Financial
Services, Inc., dated July 5, 2011 (‘‘B&B’’); letter
from Third Party Marketers Association, dated July
26, 2011 (‘‘3PM’’); letter from NPB Financial Group,
LLC, dated July 27, 2011 (‘‘NPB’’); letter from City
of Bay City, Michigan, dated July 28, 2011 (‘‘Bay
City’’); letter from Bond Dealers of America, dated
August 1, 2011 (‘‘BDA’’); letter from Government
Finance Officers Association, dated August 1, 2011
(‘‘GFOA’’); letter from National Association of State
Auditors, Comptrollers and Treasurers, dated
August 1, 2011 (‘‘NASACT’’); letter from Roosevelt
& Cross Incorporated, dated August 1, 2011
(‘‘R&C’’); letter from Securities Industry and
Financial Markets Association, dated August 1,
2011 (‘‘SIFMA’’); letter from National Association of
Independent Broker/Dealers, dated August 2, 2011
(‘‘NAIBD’’); letter from Hartfield Titus & Donnelly,
LLC, dated August 11, 2011 (‘‘HT&D’’).
15 See BDA, HT&D, NAIBD, SIFMA, R&C.
16 See SIFMA. The commenter specifically
identified non-debt issuing municipalities, financial
advisors, banks, bank dealers, insurance companies,
rating agencies, mutual funds, legislative/
governmental staff, and taxpayer organizations. See
also HT&D.
17 See NAIBD.
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Federal Register / Vol. 77, No. 5 / Monday, January 9, 2012 / Notices
administer the fee because bank dealers
are members of the MSRB but are not
members of FINRA.18
Although FINRA recognizes the
concerns raised by the commenters
regarding the specification of FINRA
members as the funding source for the
GASB, Section 19(g) of the Securities
Act, under which the SEC issued its
order, substantially limits the
parameters of the GASB Accounting
Support Fee. Section 19(g)(1)(B) of the
Securities Act provides that the SEC
may require a registered national
securities association 19 to assess and
collect the accounting support fee ‘‘from
the members of the association.’’ 20
Consequently, the order issued by the
SEC pursuant to Section 19(g) of the
Securities Act requires FINRA to collect
the GASB Accounting Support Fee from
its members, and FINRA has no
authority to collect the fee from nonFINRA members.21
Three commenters expressed concern
that there was no independent oversight
of the GASB’s annual budget and
asserted that this lack of oversight
provides no incentive for transparency
or fiscal discipline.22 One commenter
noted that the recent Government
Accountability Office report on the
GASB 23 observed that some
stakeholders ‘‘were concerned with the
level and nature of GASB’s
expenditures—such as the amounts
spent on staff salaries and office space—
as well as a perceived lack of
transparency associated with its budget
process.’’ 24
The commenters are correct that
although FINRA has been ordered to
assess and collect the GASB Accounting
Support Fee, FINRA has no authority
under Section 19(g) of the Securities Act
to review the GASB’s budget. In fact,
Section 19(g)(5)(B)(i) of the Securities
Act specifically provides that collection
of the GASB Accounting Support Fee
does not provide FINRA with any direct
or indirect oversight of the budget or
technical agenda of the GASB.25
18 See
SIFMA.
is the only national securities
association registered with the Commission.
20 15 U.S.C. 77s (g)(1)(B).
21 FINRA estimates that over 95 percent of
municipal transactions reported to the MSRB are
reported by FINRA members.
22 See BDA, HT&D, SIFMA.
23 See Report of the United States Government
Accountability Office, Dodd-Frank Wall Street
Reform Act: Role of the Governmental Accounting
Standards Board in Municipal Securities Markets
and its Past Funding (January 18, 2011), available
at https://www.gao.gov/new.items/d11267r.pdf.
24 See SIFMA.
25 See 15 U.S.C. 77s(g)(5)(B)(i).
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19 FINRA
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One commenter 26 suggested that
FINRA has not met the statutory
requirement in Section 19(g)(1)(B) of the
Securities Act that it consult with
certain groups when establishing the
rules and procedures regarding the
GASB Accounting Support Fee.27 The
commenter claims that ‘‘FINRA did not
consult with any state and local
government associations before
submitting a notice for public comment
regarding the rules and procedures for
establishing the GASB fee.’’ The
commenter also asserts that ‘‘Section
978 of the [Dodd-Frank Act] expressly
requires prior consultation with the
‘principal organizations representing
State governors, legislators, local elected
officials, and State and local finance
officers.’ ’’
Contrary to the commenter’s
conclusion that FINRA failed to consult
with the specified organizations, FINRA
departed from its standard practice and
provided nineteen different
organizations representing State
governors, legislators, local elected
officials, and State and local finance
officers with a draft of Regulatory Notice
11–28 before the Notice was published
for public comment.28 In addition, after
receipt of the GFOA comment letter,
FINRA participated in a conference call
with representatives of GFOA,
NASACT, NASBO, and the NGA where
those groups reiterated the issues set
forth in the GFOA and NASACT
comment letters. Moreover, FINRA’s
publication of a Regulatory Notice
requesting comment on a proposal
26 See
GFOA.
19(g)(1)(B) of the Securities Act states
that the Commission may require FINRA to
‘‘establish * * * rules and procedures, in
consultation with the principal organizations
representing State governors, legislators, local
elected officials, and State and local finance
officers, to provide for the equitable allocation,
assessment, and collection of the [GASB
Accounting Support Fee].’’ 15 U.S.C. 77s(g)(1)(B).
28 Specifically, on Thursday, June 9, 2011, FINRA
provided a draft of the Regulatory Notice to
representatives of the National Governors
Association (‘‘NGA’’); the Council of State
Governments; the National Conference of State
Legislatures; the National Association of Counties;
the U.S. Conference of Mayors; the National League
of Cities; the Association of Government
Accountants; the Government Finance Officers
Association; the International City/County
Management Association; the National Association
of State Auditors, Comptrollers and Treasurers
(‘‘NASACT’’); the National Association of State
Budget Officers (‘‘NASBO’’); the National
Association of State Retirement Administrators; the
Native American Finance Officers Association; the
National Federation of Municipal Analysts; the
Association of Local Government Auditors; the
National Association of State Treasurers; the
National Council of State Housing Agencies; the
National Association of Local Housing Financing
Agencies; and the Council of Infrastructure
Financing Authorities. The Notice was posted
publicly on June 16, 2011.
27 Section
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Sfmt 4703
before it is filed with the SEC is itself
an additional form of consultation.
Indeed, two organizations representing
state and local finance officers
submitted formal comment letters
expressing their views on the
proposal.29 To provide a further
opportunity for all interested parties
(including those organizations specified
in Section 19(g) of the Securities Act) to
raise any concerns and express their
views, FINRA has elected to file the
proposed rule change for full notice and
comment under Section 19(b) of the
Act.30 Given the multiple forms of
consultation that have taken place
regarding the proposed rule change,
FINRA has met the consultation
requirements set forth in Section 19(g)
of the Securities Act.
One commenter questioned the
administrative fee GASB will pay to
FINRA for calculating, assessing, and
collected the GASB Accounting Support
Fee.31 As FINRA noted in Regulatory
Notice 11–28, FINRA has negotiated an
administrative fee with the FAF of
$50,000 for the initial year that the
GASB Accounting Support Fee is in
place that is intended to cover FINRA’s
estimated costs associated with
calculating, assessing, and collecting the
GASB Accounting Support Fee. The
commenter asserted that the fee was
‘‘unwarranted’’ because ‘‘FINRA already
has a process for collecting its own
Trading Activity Fee from broker
dealers, and could easily amend this
process to include the GASB
Accounting Support Fee.’’ 32 The
commenter also suggested that the
MSRB could administer the fee for
minimal costs if FINRA moves forward
with a fee based on underwritings or
transactions.
The commenter’s statements are
misplaced, and FINRA disagrees that
the fee is unwarranted. The
commenter’s analogy to FINRA’s
Trading Activity Fee (‘‘TAF’’) is
inappropriate for several reasons.
First, FINRA does not believe that the
use of a self-reporting model like the
TAF is appropriate for the GASB
Accounting Support Fee.33 FINRA
believes that the transaction information
available through the MSRB serves as a
29 See
GFOA, NASACT.
19(b)(3)(A) of the Act and Rule 19b–
4(f)(2) thereunder permit FINRA to file a proposed
rule change for immediate effectiveness if the
proposed rule change establishes or changes a due,
fee, or other charge. See 15 U.S.C. 78s(b)(3)(A); 17
CFR 240.19b–4(f)(2).
31 See SIFMA.
32 See SIFMA.
33 The TAF is self-reported to FINRA by members
on a monthly basis on the clearing firm level. See
Trading Activity Fee FAQ Q100.5, available at
https://www.finra.org/taf/faq.
30 Section
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more timely and reliable source of
transaction information than selfreported aggregate quarterly data
calculated by the various members
subject to the fee. Moreover, FINRA
believes that requiring self-reporting
could increase compliance costs for
firms and increase costs to FINRA. As
proposed, FINRA will rely on
transaction data that is already reported
by members to the MSRB (i.e., there will
be no increased compliance efforts
necessary for members since, as
discussed below, FINRA does not
believe that the calculations members
currently undertake for reporting the
TAF would be the same as those for the
GASB Accounting Support Fee). For
FINRA, a self-reporting model raises
two primary complications. First,
FINRA would need to audit members to
ensure that their self-reporting was
accurate and timely, which could
increase FINRA’s costs in administering
the fee. Second, Section 19(g) of the
Securities Act requires FINRA to collect
exact amounts, thus creating an inability
to remedy potential over- or underpayments by members that self-report
erroneous data.
Second, FINRA does not believe that
the exceptions from the TAF should
apply to the assessment of the GASB
Accounting Support Fee, and the TAF is
currently charged only to the sell side
of a transaction. Although municipal
securities subject to MSRB reporting
requirements are generally subject to the
TAF, the TAF rules contain exceptions
for certain transactions (e.g., primary
market transactions). The goal of the
GASB Accounting Support Fee
assessment is to equitably allocate a
specific amount of money among
participants in the municipal securities
market; consequently, FINRA believes it
is not appropriate to exclude any subset
of reportable transactions from factoring
into the fee assessment for purposes of
allocating the GASB Accounting
Support Fee.34 In addition, and as
discussed below, FINRA does not
believe it is appropriate to charge only
one side of a transaction when two
members are involved and are required
to report the transaction to the MSRB.
For the foregoing reasons, FINRA does
not believe that the TAF would serve as
an appropriate model in assessing the
GASB Accounting Support Fee. In
addition, the amount of the
administrative fee to FINRA was
negotiated with the FAF and based on
estimated costs to FINRA, including
initial start-up technology costs,
administrative costs, and the costs of
personnel and other resources needed to
34 See
Schedule A to the FINRA By-Laws § 1(b).
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process and implement the fee. FINRA
anticipates that the amount of the
administrative fee will be reviewed and
evaluated each year by FINRA and by
the FAF in light of FINRA’s experience
in assessing and collecting the GASB
Accounting Support Fee and in the
context of actual costs incurred by
FINRA. Following the review, the
amount of the administrative fee will be
increased or decreased if necessary.
Commenters expressed opposing
views on FINRA’s proposal to base the
GASB Accounting Support Fee on
transactions in municipal securities
reported to the MSRB. Although several
commenters believed the proposed
assessment method was reasonable and
equitable,35 other commenters opposed
a transaction-based assessment.36
Among the objections to the proposal,
commenters stated that an assessment
based on trade reporting volume would
disproportionately affect lead
underwriters 37 and brokers’ brokers 38
and would result in broker-to-broker
transactions being assessed multiple
times.39 In addition, one commenter
noted that the proposal ‘‘makes no
distinction between bonds issued by
GASB obligors, bonds issued by FASB
obligors and bonds with obligors who
follow neither set of standards.’’ 40
After considering the objections
raised by the commenters, FINRA
continues to believe that a proportionate
fee based on reported trading volume
remains a reasonable and fair method to
allocate the GASB Accounting Support
Fee. As noted above, FINRA believes
that using reported transaction data to
calculate the fee ensures that the fee is
based on accurate, reliable information.
Because the fee is assessed on a
proportionate basis, rather than being
assessed each time a transaction is
reported to the MSRB (e.g., a fixed fee
charged on each reported transaction
like those charged in connection with
reporting trades to a FINRA trade
reporting facility 41), there are not
multiple assessments on broker-tobroker transactions. Rather, both brokers
reporting the same trade will have the
volume of that trade factored into their
share of total trade reporting volume for
that quarter. The goal of the assessment
is to equitably allocate a specific
amount of money among participants in
the municipal securities market;
35 See
3PM, NASACT, Bay City.
HT&D, R&C, SIFMA.
37 See R&C.
38 See HT&D, SIFMA.
39 See SIFMA. The commenter noted that in
broker-to-broker transactions, both brokers report
the trade to the MSRB.
40 SIFMA.
41 See, e.g., FINRA Rules 7620A, 7710.
36 See
PO 00000
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1123
consequently, FINRA believes it is
appropriate that both brokers in a
broker-to-broker transaction be
considered as participating in that
market with respect to such a
transaction, rather than only use one
side of the trade in calculating the fee
(e.g., charging only the broker on the
sell side). For similar reasons, FINRA
also believes that the proposal does not
disproportionately affect lead
underwriters or brokers’ brokers; to the
extent such firms have high trading
volumes reported to the MSRB under
applicable reporting rules, FINRA
believes that this accurately reflects
those firms’ participation in the
municipal securities markets, whether
those firms act as underwriters, brokers’
brokers, or simply as buyers or sellers of
municipal securities.42
FINRA also declines to distinguish
between issues based on whether the
obligor has followed FASB standards,
GASB standards, or neither. This
information is not required to be
reported to the MSRB, is not available
on an automated basis, and it would be
impractical for FINRA to attempt to
maintain a comprehensive and accurate
listing of those issues where the obligor
has followed GASB standards.
Several commenters expressed views
concerning the application of the GASB
Accounting Support Fee to small firms
and the exemption proposed in
Regulatory Notice 11–28 for firms with
a quarterly assessment of less than $25.
Two commenters suggested that FINRA
increase the quarterly threshold from
$25 to $1,000,43 and one commenter
suggested that ‘‘smaller firms’’ be
exempt from the fee.44 In contrast, one
FINRA member suggested that any firm
with a stake in GASB accounting
standards should be charged a small
assessment, even if the firm had no
assessable transactions in a given
quarter.45
FINRA proposed a quarterly
minimum threshold of $25 in order to
exempt from the GASB Accounting
42 FINRA notes that basing the GASB Accounting
Support Fee on underwriting, rather than
transactions, would increase the burden on lead
underwriters and would disproportionately affect
those market participants engaged in underwriting
activities rather than in trading in the secondary
market. Moreover, basing the fee on underwriting
would wholly exempt secondary market
participants from paying the fee and would be
assessed only on future municipal issues and would
‘‘grandfather’’ in previous issues. FINRA does not
believe this is a more equitable way to assess the
fee than a transaction-based approach.
43 See 3PM, NAIBD.
44 See BDA. The commenter did not define
‘‘smaller firms’’ and stated that it was not in a
position to recommend a figure for the exemption
because it did not have trading data available to it.
45 See NPB.
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Support Fee those firms that do a de
minimis amount of trading activity in
municipal securities in a given quarter.
There are approximately 1,100 FINRA
members eligible to conduct business in
municipal securities, and FINRA
estimates that a de minimis threshold of
$25 per quarter would eliminate
approximately 600 firms—
approximately 55 percent of firms—per
quarter from paying the fee. FINRA
estimates that raising the level to $1,000
per quarter would exempt
approximately 90 percent of the firms
reporting transactions to the MSRB from
the fee each quarter.
As discussed above, FINRA is
required to collect a specific amount of
money each year to adequately fund the
annual budget of the GASB. Because of
this unique requirement, unlike other
fees assessed by FINRA, any amount
that one member is exempt from paying
must be assessed on other members so
that FINRA can meet its statutory
obligation and collect the total amount
needed to adequately fund the GASB’s
annual budget. Consequently, FINRA
believes that a de minimis threshold of
$25 per quarter achieves a fair and
reasonable balance between exempting
those members that do a small amount
of trading in municipal securities and
ensuring that other members are not
shouldering a disproportionate amount
of the GASB Accounting Support Fee
and being allocated amounts
significantly above their proportion of
reported trading activity. For the same
reasons FINRA is not increasing the
quarterly exemption amount, FINRA
also declines to adopt an across-theboard ‘‘small firm exemption.’’
In Regulatory Notice 11–28, FINRA
noted that ‘‘some firms may seek to pass
the GASB Accounting Support Fee on to
customers engaged in municipal
securities transactions.’’ This was an
acknowledgement that, in many
instances, members pass through FINRA
fees and assessments to their customers.
Some commenters expressed concern
that members could pass the fee on to
issuers of municipal securities and
asked FINRA to clarify or mandate that
members could not pass the fee along to
issuers.46 Other commenters suggested
that FINRA make it easier for members
to pass the fee along to customers,
including issuers.47 One commenter
suggested that the GASB Accounting
Support Fee should be structured as an
underwriting assessment because
‘‘[p]rinciples of fundamental fairness
would dictate dealers be allowed to pass
through any GASB support fee to
46 See
Bay City, GFOA, NASACT.
47 See BDA, SIFMA.
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municipal bond issuers instead of or in
addition to investors.’’ 48
As discussed above, FINRA continues
to believe that an equitable way to
structure the fee is through a quarterly
assessment based on trading volume
with an exception for members whose
assessment in a particular quarter would
be less than $25. FINRA has long
recognized that members pass fees
through to the customers whose
transactions generate those fees, and
FINRA rules generally do not address
the commercial allocation of fees
between members and their customers,
provided such fees are fair, reasonable,
and accurately disclosed. Although
FINRA is not encouraging members to
pass all or part of the GASB Accounting
Support Fee to their customers, that
decision is ultimately one for each
member, subject to the conditions and
requirements noted. FINRA also
declines to give a blanket exemption for
issuers of municipal securities whose
transactions may result in an increase to
a member’s allocation of the GASB
Accounting Support Fee. FINRA notes,
however, that transactions from a
municipal securities issuer to an
underwriter are not reported to the
MSRB and thus would not generally be
counted toward a member’s quarterly
assessment.49
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
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.
48 SIFMA.
49 To the extent commenters are concerned that
FINRA members acting as underwriters for
municipal securities may increase their
underwriting fees to recoup part of the assessment,
FINRA generally considers fee negotiations between
an issuer and an underwriter to be within each
party’s business decision-making process.
PO 00000
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Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–FINRA–2011–073 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2011–073. 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 Web site (https://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 Web site 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 such filing
also will be available for inspection and
copying at the principal office of
FINRA. All comments received will be
posted without change; the Commission
does not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–FINRA–2011–073 and
should be submitted on or before
January 30, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012–84 Filed 1–6–12; 8:45 am]
BILLING CODE 8011–01–P
50 17
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[Federal Register Volume 77, Number 5 (Monday, January 9, 2012)]
[Notices]
[Pages 1119-1124]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-84]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66080; File No. SR-FINRA-2011-073]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
Establishing a Governmental Accounting Standards Board Accounting
Support Fee
January 3, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 19, 2011, 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.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 1120]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt Section 14 to Schedule A of the FINRA
By-Laws to establish an accounting support fee to adequately fund the
annual budget of the Governmental Accounting Standards Board
(``GASB'').
The text of the proposed rule change is available on FINRA's Web
site at https://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
The GASB was established in 1984 by agreement of the Financial
Accounting Foundation (``FAF'') and ten national associations of state
and local government officials as an independent organization that
establishes and improves standards of accounting and financial
reporting for U.S. state and local governments.\3\ The GASB is
recognized by governments, the accounting industry, and the capital
markets as the source for the development and publication of the
generally accepted accounting principles (``GAAP'') for state and local
governments.
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\3\ The GASB is not a government entity. It is an operating
component of the FAF, which is a private-sector, not-for-profit
entity. Funding for the GASB comes in part from sales of
publications and in part from state and local governments and the
municipal bond community. Its standards are not Federal laws or
regulations, and the GASB does not have enforcement authority. See
Facts About GASB, https://gasb.org.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') was signed into law by President Obama on July 21,
2010.\4\ As added by Section 978 of the Dodd-Frank Act, Section 19(g)
of the Securities Act of 1933 (``Securities Act'') gives the SEC the
authority to require a national securities association to establish a
reasonable annual accounting support fee to adequately fund the annual
budget of the GASB (``GASB Accounting Support Fee'') and to draft the
rules and procedures necessary to equitably assess the GASB Accounting
Support Fee on the association's members.\5\ On May 11, 2011, the SEC
exercised this authority and issued an order requiring FINRA to
establish (a) a reasonable annual accounting support fee to adequately
fund the annual budget of the GASB; and (b) rules and procedures, in
consultation with the principal organizations representing State
governors, legislators, local elected officials, and State and local
finance officers, to provide for the equitable allocation, assessment,
and collection of the accounting support fee from its members, and the
remittance of all such accounting support fees to the FAF.\6\
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\4\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
\5\ See 15 U.S.C. 77s(g). For purposes of the GASB Accounting
Support Fee, the annual budget of the GASB is the annual budget
reviewed and approved according to the internal procedures of the
FAF. See 15 U.S.C. 77s(g)(2). FINRA anticipates that the GASB's
annual budget will include an administrative fee to FINRA. The
administrative fee is intended to cover FINRA's costs associated
with calculating, assessing, and collecting the GASB Accounting
Support Fee, and the amount will be negotiated with the FAF each
year. For the initial year, the administrative fee will be $50,000.
\6\ Securities Exchange Act Release No. 64462 (May 11, 2011), 76
FR 28247 (May 16, 2011).
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In response to the SEC's order of May 11, 2011, FINRA is proposing
new Section 14 (Accounting Support Fee for Governmental Accounting
Standards Board) to Schedule A of the FINRA By-Laws to establish the
GASB Accounting Support Fee. After considering multiple ways to assess
the GASB Accounting Support Fee on its members and issuing Regulatory
Notice 11-28 requesting comment on the GASB Accounting Support Fee, the
proposed rule change assesses the fee based on members' municipal
securities trading volume reported to the Municipal Securities
Rulemaking Board (``MSRB''). FINRA believes that basing the GASB
Accounting Support Fee on reliable and timely reporting data will
ensure the accuracy of the fee and that using transaction data to
apportion the fee will result in a fair and equitable assessment across
FINRA members. However, because FINRA is statutorily prohibited from
collecting amounts in excess of GASB's recoverable annual budgeted
expenses and because a transaction-based fee is inherently variable due
to the unpredictability of transaction volume, FINRA is proposing a
quarterly assessment based on GASB's annual budget.\7\ Under proposed
Section 14, the GASB Accounting Support Fee will be allocated among
FINRA members on a quarterly basis based on municipal securities
transactions reported to the MSRB. Specifically, each calendar quarter,
each FINRA member would be required to pay an assessment to FINRA of
its portion of one quarter of the annual GASB Accounting Support Fee
amount that reflects the member's portion of the total par value of
municipal securities transactions reported by FINRA members to the MSRB
under MSRB Rule G-14(b) \8\ in the previous calendar quarter. For
example, if GASB's recoverable annual budgeted expenses for a given
year were $10 million, FINRA would collect $2.5 million from its
members each quarter. Each member's fee would be based on the member's
proportion of municipal securities transactions (based on the par value
of reported transactions, not their price) reported by all FINRA
members to the MSRB in the previous calendar quarter.\9\ Thus, for
example, if a member reported transactions to the MSRB in a given
quarter that accounted for 10% of the total par value amount of
transactions reported by all FINRA members during the quarter, the
member's assessment would be 10% of one quarter of GASB's annual budget
(in the above example, the member's quarterly assessment would be
$250,000 (i.e., 10% of $2.5 million)).
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\7\ Section 19(g)(4) of the Securities Act, as added by the
Dodd-Frank Act, prohibits FINRA from collecting GASB Accounting
Support Fees for a fiscal year in excess of GASB's recoverable
annual budgeted expenses. See 15 U.S.C. 77s(g)(4).
\8\ MSRB Rule G-14(b) sets out municipal securities transaction
reporting requirements.
\9\ If a member does not engage in reportable municipal
securities transactions during a particular calendar quarter, the
member would not be subject to the GASB Accounting Support Fee for
that quarter.
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To exclude members with de minimis transactions in municipal
securities in a given quarter from being assessed the fee, FINRA is
proposing that members with a quarterly assessment of less than $25
would not be charged the fee for that quarter. Any amounts originally
assessed to those members would be reallocated among the members with
an assessment that quarter of $25 or more based on the member's portion
of the total par value of municipal securities transactions reported by
FINRA members to the MSRB.
As required by Section 19(g) of the Securities Act, any GASB
Accounting Support Fees collected by FINRA will be remitted to the FAF
\10\ and used to
[[Page 1121]]
support the efforts of the GASB to establish standards of financial
accounting and reporting applicable to state and local governments.\11\
In accordance with Section 19(g)(5)(B) of the Securities Act,
collection of the GASB Accounting Support Fee shall not be construed to
provide the SEC or FINRA direct or indirect oversight of the budget or
technical agenda of the GASB or to affect the setting of GAAP by the
GASB.\12\
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\10\ See 15 U.S.C. 77s(g)(1).
\11\ See 15 U.S.C. 77s(g)(3). Specifically, FINRA anticipates
establishing a separate bank account specifically for the GASB
Accounting Support Fee and will coordinate with the FAF to establish
a process by which FINRA will wire the funds into the FAF account
for the GASB Accounting Support Fee. Given the separate bank
account, FINRA will provide monthly account reconciliations and
accounts receivable aging reports, which will be reviewed by FINRA
management each month and will be available for review by FAF and
GASB management upon request.
\12\ See 15 U.S.C. 77s(g)(5)(B).
---------------------------------------------------------------------------
As FINRA noted in Regulatory Notice 11-28, because some firms may
seek to pass the GASB Accounting Support Fee onto customers engaged in
municipal securities transactions, FINRA proposes to publish a
Regulatory Notice each year disclosing the total annual GASB Accounting
Support Fee FINRA will collect for that year. In this annual Notice,
FINRA also anticipates setting out an estimated fee rate (per $1,000
par value) based on the GASB recoverable annual budgeted expenses
reported to FINRA for that year and historical municipal security trade
reporting volumes so that firms will have some basis on which to
establish a fee should they choose to do so. The Notice will also
remind any firms choosing to pass along the fee of the need for proper
disclosure of the GASB Accounting Support Fee, including, if
applicable, the fact that the fee is an estimate and that the firm
ultimately may pay more or less than the fee charged to the customer.
In addition, any disclosure used by the firm cannot be misleading and
must comport with FINRA rules, including just and equitable principles
of trade, as well as any applicable MSRB rules.
The effective date of the proposed rule change will be the date of
SEC approval. The initial fees assessed on members will be based on
trading activity reported in the calendar quarter during which the SEC
approves the proposed rule change. For example, if the proposed rule
change is approved on February 1, 2012, FINRA will bill members based
on trading activity from January 1, 2012, to March 31, 2012, to cover
one quarter of GASB's 2012 budget. As a result, depending on the date
of SEC approval, the proposed GASB fee may only cover a portion of the
2012 GASB budget.
2. Statutory Basis
The proposed rule change is being filed in response to the SEC's
order of May 11, 2011, which was issued pursuant to Section 19(g) of
the Securities Act. Section 19(g) gives the SEC the authority to
require a national securities association to establish a reasonable
annual accounting support fee to adequately fund the annual budget of
the GASB and to draft the rules and procedures necessary to equitably
assess the GASB Accounting Support Fee on the association's members. On
May 11, 2011, the SEC exercised this authority and issued an order
requiring FINRA to establish (a) a reasonable annual accounting support
fee to adequately fund the annual budget of the GASB; and (b) rules and
procedures, in consultation with the principal organizations
representing State governors, legislators, local elected officials, and
State and local finance officers, to provide for the equitable
allocation, assessment, and collection of the accounting support fee
from its members, and the remittance of all such accounting support
fees to the FAF.
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(5) of the Act,\13\ 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 believes that, given the restrictions in Section 19(g)
of the Securities Act regarding the specific amount FINRA must collect,
a quarterly transaction-based assessment with a limited exception for
firms with a de minimis amount of reportable municipal securities
transactions is a fair and equitable manner to assess the fee. FINRA
also believes that the $25 per quarter exemption threshold strikes an
appropriate balance between exempting those firms with truly de minimis
transactions and not imposing an undue burden on other firms to recover
the amount that would be assessed on the exempt firms.
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\13\ 15 U.S.C. 78o-3(b)(5).
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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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Regulatory
Notice 11-28 (June 2011). A copy of the Regulatory Notice is attached
as Exhibit 2a to the proposed rule change. The comment period expired
on August 1, 2011. FINRA received eleven comment letters in response to
the Regulatory Notice.\14\ A list of the comment letters received in
response to the Regulatory Notice is attached as Exhibit 2b to the
proposed rule change. Copies of the comment letters received in
response to the Regulatory Notice are attached as Exhibit 2c to the
proposed rule change. Of the eleven comment letters received, five were
generally in favor of the proposed rule change and six were generally
opposed.
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\14\ See Letter from Brown & Brown Financial Services, Inc.,
dated July 5, 2011 (``B&B''); letter from Third Party Marketers
Association, dated July 26, 2011 (``3PM''); letter from NPB
Financial Group, LLC, dated July 27, 2011 (``NPB''); letter from
City of Bay City, Michigan, dated July 28, 2011 (``Bay City'');
letter from Bond Dealers of America, dated August 1, 2011 (``BDA'');
letter from Government Finance Officers Association, dated August 1,
2011 (``GFOA''); letter from National Association of State Auditors,
Comptrollers and Treasurers, dated August 1, 2011 (``NASACT'');
letter from Roosevelt & Cross Incorporated, dated August 1, 2011
(``R&C''); letter from Securities Industry and Financial Markets
Association, dated August 1, 2011 (``SIFMA''); letter from National
Association of Independent Broker/Dealers, dated August 2, 2011
(``NAIBD''); letter from Hartfield Titus & Donnelly, LLC, dated
August 11, 2011 (``HT&D'').
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Several commenters expressed the view that broker-dealers, and
specifically FINRA members, should not be forced to shoulder the entire
burden of funding the GASB because many other market participants,
issuers, and other people who benefit from GASB accounting standards
are not registered broker-dealers or FINRA members.\15\ For example,
one commenter stated that ``many other end users of GASB's accounting
and financial reporting standards * * * get a `free ride' under FINRA's
proposed methodology.'' \16\ Another commenter suggested that a
proportionate share of the revenue necessary to fund the GASB come from
municipal financial advisors, which are registered with the SEC and the
MSRB, although not always with FINRA.\17\ Another commenter suggested
that the MSRB, rather than FINRA, should
[[Page 1122]]
administer the fee because bank dealers are members of the MSRB but are
not members of FINRA.\18\
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\15\ See BDA, HT&D, NAIBD, SIFMA, R&C.
\16\ See SIFMA. The commenter specifically identified non-debt
issuing municipalities, financial advisors, banks, bank dealers,
insurance companies, rating agencies, mutual funds, legislative/
governmental staff, and taxpayer organizations. See also HT&D.
\17\ See NAIBD.
\18\ See SIFMA.
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Although FINRA recognizes the concerns raised by the commenters
regarding the specification of FINRA members as the funding source for
the GASB, Section 19(g) of the Securities Act, under which the SEC
issued its order, substantially limits the parameters of the GASB
Accounting Support Fee. Section 19(g)(1)(B) of the Securities Act
provides that the SEC may require a registered national securities
association \19\ to assess and collect the accounting support fee
``from the members of the association.'' \20\ Consequently, the order
issued by the SEC pursuant to Section 19(g) of the Securities Act
requires FINRA to collect the GASB Accounting Support Fee from its
members, and FINRA has no authority to collect the fee from non-FINRA
members.\21\
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\19\ FINRA is the only national securities association
registered with the Commission.
\20\ 15 U.S.C. 77s (g)(1)(B).
\21\ FINRA estimates that over 95 percent of municipal
transactions reported to the MSRB are reported by FINRA members.
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Three commenters expressed concern that there was no independent
oversight of the GASB's annual budget and asserted that this lack of
oversight provides no incentive for transparency or fiscal
discipline.\22\ One commenter noted that the recent Government
Accountability Office report on the GASB \23\ observed that some
stakeholders ``were concerned with the level and nature of GASB's
expenditures--such as the amounts spent on staff salaries and office
space--as well as a perceived lack of transparency associated with its
budget process.'' \24\
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\22\ See BDA, HT&D, SIFMA.
\23\ See Report of the United States Government Accountability
Office, Dodd-Frank Wall Street Reform Act: Role of the Governmental
Accounting Standards Board in Municipal Securities Markets and its
Past Funding (January 18, 2011), available at https://www.gao.gov/new.items/d11267r.pdf.
\24\ See SIFMA.
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The commenters are correct that although FINRA has been ordered to
assess and collect the GASB Accounting Support Fee, FINRA has no
authority under Section 19(g) of the Securities Act to review the
GASB's budget. In fact, Section 19(g)(5)(B)(i) of the Securities Act
specifically provides that collection of the GASB Accounting Support
Fee does not provide FINRA with any direct or indirect oversight of the
budget or technical agenda of the GASB.\25\
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\25\ See 15 U.S.C. 77s(g)(5)(B)(i).
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One commenter \26\ suggested that FINRA has not met the statutory
requirement in Section 19(g)(1)(B) of the Securities Act that it
consult with certain groups when establishing the rules and procedures
regarding the GASB Accounting Support Fee.\27\ The commenter claims
that ``FINRA did not consult with any state and local government
associations before submitting a notice for public comment regarding
the rules and procedures for establishing the GASB fee.'' The commenter
also asserts that ``Section 978 of the [Dodd-Frank Act] expressly
requires prior consultation with the `principal organizations
representing State governors, legislators, local elected officials, and
State and local finance officers.' ''
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\26\ See GFOA.
\27\ Section 19(g)(1)(B) of the Securities Act states that the
Commission may require FINRA to ``establish * * * rules and
procedures, in consultation with the principal organizations
representing State governors, legislators, local elected officials,
and State and local finance officers, to provide for the equitable
allocation, assessment, and collection of the [GASB Accounting
Support Fee].'' 15 U.S.C. 77s(g)(1)(B).
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Contrary to the commenter's conclusion that FINRA failed to consult
with the specified organizations, FINRA departed from its standard
practice and provided nineteen different organizations representing
State governors, legislators, local elected officials, and State and
local finance officers with a draft of Regulatory Notice 11-28 before
the Notice was published for public comment.\28\ In addition, after
receipt of the GFOA comment letter, FINRA participated in a conference
call with representatives of GFOA, NASACT, NASBO, and the NGA where
those groups reiterated the issues set forth in the GFOA and NASACT
comment letters. Moreover, FINRA's publication of a Regulatory Notice
requesting comment on a proposal before it is filed with the SEC is
itself an additional form of consultation. Indeed, two organizations
representing state and local finance officers submitted formal comment
letters expressing their views on the proposal.\29\ To provide a
further opportunity for all interested parties (including those
organizations specified in Section 19(g) of the Securities Act) to
raise any concerns and express their views, FINRA has elected to file
the proposed rule change for full notice and comment under Section
19(b) of the Act.\30\ Given the multiple forms of consultation that
have taken place regarding the proposed rule change, FINRA has met the
consultation requirements set forth in Section 19(g) of the Securities
Act.
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\28\ Specifically, on Thursday, June 9, 2011, FINRA provided a
draft of the Regulatory Notice to representatives of the National
Governors Association (``NGA''); the Council of State Governments;
the National Conference of State Legislatures; the National
Association of Counties; the U.S. Conference of Mayors; the National
League of Cities; the Association of Government Accountants; the
Government Finance Officers Association; the International City/
County Management Association; the National Association of State
Auditors, Comptrollers and Treasurers (``NASACT''); the National
Association of State Budget Officers (``NASBO''); the National
Association of State Retirement Administrators; the Native American
Finance Officers Association; the National Federation of Municipal
Analysts; the Association of Local Government Auditors; the National
Association of State Treasurers; the National Council of State
Housing Agencies; the National Association of Local Housing
Financing Agencies; and the Council of Infrastructure Financing
Authorities. The Notice was posted publicly on June 16, 2011.
\29\ See GFOA, NASACT.
\30\ Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(2)
thereunder permit FINRA to file a proposed rule change for immediate
effectiveness if the proposed rule change establishes or changes a
due, fee, or other charge. See 15 U.S.C. 78s(b)(3)(A); 17 CFR
240.19b-4(f)(2).
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One commenter questioned the administrative fee GASB will pay to
FINRA for calculating, assessing, and collected the GASB Accounting
Support Fee.\31\ As FINRA noted in Regulatory Notice 11-28, FINRA has
negotiated an administrative fee with the FAF of $50,000 for the
initial year that the GASB Accounting Support Fee is in place that is
intended to cover FINRA's estimated costs associated with calculating,
assessing, and collecting the GASB Accounting Support Fee. The
commenter asserted that the fee was ``unwarranted'' because ``FINRA
already has a process for collecting its own Trading Activity Fee from
broker dealers, and could easily amend this process to include the GASB
Accounting Support Fee.'' \32\ The commenter also suggested that the
MSRB could administer the fee for minimal costs if FINRA moves forward
with a fee based on underwritings or transactions.
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\31\ See SIFMA.
\32\ See SIFMA.
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The commenter's statements are misplaced, and FINRA disagrees that
the fee is unwarranted. The commenter's analogy to FINRA's Trading
Activity Fee (``TAF'') is inappropriate for several reasons.
First, FINRA does not believe that the use of a self-reporting
model like the TAF is appropriate for the GASB Accounting Support
Fee.\33\ FINRA believes that the transaction information available
through the MSRB serves as a
[[Page 1123]]
more timely and reliable source of transaction information than self-
reported aggregate quarterly data calculated by the various members
subject to the fee. Moreover, FINRA believes that requiring self-
reporting could increase compliance costs for firms and increase costs
to FINRA. As proposed, FINRA will rely on transaction data that is
already reported by members to the MSRB (i.e., there will be no
increased compliance efforts necessary for members since, as discussed
below, FINRA does not believe that the calculations members currently
undertake for reporting the TAF would be the same as those for the GASB
Accounting Support Fee). For FINRA, a self-reporting model raises two
primary complications. First, FINRA would need to audit members to
ensure that their self-reporting was accurate and timely, which could
increase FINRA's costs in administering the fee. Second, Section 19(g)
of the Securities Act requires FINRA to collect exact amounts, thus
creating an inability to remedy potential over- or under-payments by
members that self-report erroneous data.
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\33\ The TAF is self-reported to FINRA by members on a monthly
basis on the clearing firm level. See Trading Activity Fee FAQ
Q100.5, available at https://www.finra.org/taf/faq.
---------------------------------------------------------------------------
Second, FINRA does not believe that the exceptions from the TAF
should apply to the assessment of the GASB Accounting Support Fee, and
the TAF is currently charged only to the sell side of a transaction.
Although municipal securities subject to MSRB reporting requirements
are generally subject to the TAF, the TAF rules contain exceptions for
certain transactions (e.g., primary market transactions). The goal of
the GASB Accounting Support Fee assessment is to equitably allocate a
specific amount of money among participants in the municipal securities
market; consequently, FINRA believes it is not appropriate to exclude
any subset of reportable transactions from factoring into the fee
assessment for purposes of allocating the GASB Accounting Support
Fee.\34\ In addition, and as discussed below, FINRA does not believe it
is appropriate to charge only one side of a transaction when two
members are involved and are required to report the transaction to the
MSRB.
---------------------------------------------------------------------------
\34\ See Schedule A to the FINRA By-Laws Sec. 1(b).
---------------------------------------------------------------------------
For the foregoing reasons, FINRA does not believe that the TAF
would serve as an appropriate model in assessing the GASB Accounting
Support Fee. In addition, the amount of the administrative fee to FINRA
was negotiated with the FAF and based on estimated costs to FINRA,
including initial start-up technology costs, administrative costs, and
the costs of personnel and other resources needed to process and
implement the fee. FINRA anticipates that the amount of the
administrative fee will be reviewed and evaluated each year by FINRA
and by the FAF in light of FINRA's experience in assessing and
collecting the GASB Accounting Support Fee and in the context of actual
costs incurred by FINRA. Following the review, the amount of the
administrative fee will be increased or decreased if necessary.
Commenters expressed opposing views on FINRA's proposal to base the
GASB Accounting Support Fee on transactions in municipal securities
reported to the MSRB. Although several commenters believed the proposed
assessment method was reasonable and equitable,\35\ other commenters
opposed a transaction-based assessment.\36\ Among the objections to the
proposal, commenters stated that an assessment based on trade reporting
volume would disproportionately affect lead underwriters \37\ and
brokers' brokers \38\ and would result in broker-to-broker transactions
being assessed multiple times.\39\ In addition, one commenter noted
that the proposal ``makes no distinction between bonds issued by GASB
obligors, bonds issued by FASB obligors and bonds with obligors who
follow neither set of standards.'' \40\
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\35\ See 3PM, NASACT, Bay City.
\36\ See HT&D, R&C, SIFMA.
\37\ See R&C.
\38\ See HT&D, SIFMA.
\39\ See SIFMA. The commenter noted that in broker-to-broker
transactions, both brokers report the trade to the MSRB.
\40\ SIFMA.
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After considering the objections raised by the commenters, FINRA
continues to believe that a proportionate fee based on reported trading
volume remains a reasonable and fair method to allocate the GASB
Accounting Support Fee. As noted above, FINRA believes that using
reported transaction data to calculate the fee ensures that the fee is
based on accurate, reliable information. Because the fee is assessed on
a proportionate basis, rather than being assessed each time a
transaction is reported to the MSRB (e.g., a fixed fee charged on each
reported transaction like those charged in connection with reporting
trades to a FINRA trade reporting facility \41\), there are not
multiple assessments on broker-to-broker transactions. Rather, both
brokers reporting the same trade will have the volume of that trade
factored into their share of total trade reporting volume for that
quarter. The goal of the assessment is to equitably allocate a specific
amount of money among participants in the municipal securities market;
consequently, FINRA believes it is appropriate that both brokers in a
broker-to-broker transaction be considered as participating in that
market with respect to such a transaction, rather than only use one
side of the trade in calculating the fee (e.g., charging only the
broker on the sell side). For similar reasons, FINRA also believes that
the proposal does not disproportionately affect lead underwriters or
brokers' brokers; to the extent such firms have high trading volumes
reported to the MSRB under applicable reporting rules, FINRA believes
that this accurately reflects those firms' participation in the
municipal securities markets, whether those firms act as underwriters,
brokers' brokers, or simply as buyers or sellers of municipal
securities.\42\
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\41\ See, e.g., FINRA Rules 7620A, 7710.
\42\ FINRA notes that basing the GASB Accounting Support Fee on
underwriting, rather than transactions, would increase the burden on
lead underwriters and would disproportionately affect those market
participants engaged in underwriting activities rather than in
trading in the secondary market. Moreover, basing the fee on
underwriting would wholly exempt secondary market participants from
paying the fee and would be assessed only on future municipal issues
and would ``grandfather'' in previous issues. FINRA does not believe
this is a more equitable way to assess the fee than a transaction-
based approach.
---------------------------------------------------------------------------
FINRA also declines to distinguish between issues based on whether
the obligor has followed FASB standards, GASB standards, or neither.
This information is not required to be reported to the MSRB, is not
available on an automated basis, and it would be impractical for FINRA
to attempt to maintain a comprehensive and accurate listing of those
issues where the obligor has followed GASB standards.
Several commenters expressed views concerning the application of
the GASB Accounting Support Fee to small firms and the exemption
proposed in Regulatory Notice 11-28 for firms with a quarterly
assessment of less than $25. Two commenters suggested that FINRA
increase the quarterly threshold from $25 to $1,000,\43\ and one
commenter suggested that ``smaller firms'' be exempt from the fee.\44\
In contrast, one FINRA member suggested that any firm with a stake in
GASB accounting standards should be charged a small assessment, even if
the firm had no assessable transactions in a given quarter.\45\
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\43\ See 3PM, NAIBD.
\44\ See BDA. The commenter did not define ``smaller firms'' and
stated that it was not in a position to recommend a figure for the
exemption because it did not have trading data available to it.
\45\ See NPB.
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FINRA proposed a quarterly minimum threshold of $25 in order to
exempt from the GASB Accounting
[[Page 1124]]
Support Fee those firms that do a de minimis amount of trading activity
in municipal securities in a given quarter. There are approximately
1,100 FINRA members eligible to conduct business in municipal
securities, and FINRA estimates that a de minimis threshold of $25 per
quarter would eliminate approximately 600 firms--approximately 55
percent of firms--per quarter from paying the fee. FINRA estimates that
raising the level to $1,000 per quarter would exempt approximately 90
percent of the firms reporting transactions to the MSRB from the fee
each quarter.
As discussed above, FINRA is required to collect a specific amount
of money each year to adequately fund the annual budget of the GASB.
Because of this unique requirement, unlike other fees assessed by
FINRA, any amount that one member is exempt from paying must be
assessed on other members so that FINRA can meet its statutory
obligation and collect the total amount needed to adequately fund the
GASB's annual budget. Consequently, FINRA believes that a de minimis
threshold of $25 per quarter achieves a fair and reasonable balance
between exempting those members that do a small amount of trading in
municipal securities and ensuring that other members are not
shouldering a disproportionate amount of the GASB Accounting Support
Fee and being allocated amounts significantly above their proportion of
reported trading activity. For the same reasons FINRA is not increasing
the quarterly exemption amount, FINRA also declines to adopt an across-
the-board ``small firm exemption.''
In Regulatory Notice 11-28, FINRA noted that ``some firms may seek
to pass the GASB Accounting Support Fee on to customers engaged in
municipal securities transactions.'' This was an acknowledgement that,
in many instances, members pass through FINRA fees and assessments to
their customers. Some commenters expressed concern that members could
pass the fee on to issuers of municipal securities and asked FINRA to
clarify or mandate that members could not pass the fee along to
issuers.\46\ Other commenters suggested that FINRA make it easier for
members to pass the fee along to customers, including issuers.\47\ One
commenter suggested that the GASB Accounting Support Fee should be
structured as an underwriting assessment because ``[p]rinciples of
fundamental fairness would dictate dealers be allowed to pass through
any GASB support fee to municipal bond issuers instead of or in
addition to investors.'' \48\
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\46\ See Bay City, GFOA, NASACT.
\47\ See BDA, SIFMA.
\48\ SIFMA.
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As discussed above, FINRA continues to believe that an equitable
way to structure the fee is through a quarterly assessment based on
trading volume with an exception for members whose assessment in a
particular quarter would be less than $25. FINRA has long recognized
that members pass fees through to the customers whose transactions
generate those fees, and FINRA rules generally do not address the
commercial allocation of fees between members and their customers,
provided such fees are fair, reasonable, and accurately disclosed.
Although FINRA is not encouraging members to pass all or part of the
GASB Accounting Support Fee to their customers, that decision is
ultimately one for each member, subject to the conditions and
requirements noted. FINRA also declines to give a blanket exemption for
issuers of municipal securities whose transactions may result in an
increase to a member's allocation of the GASB Accounting Support Fee.
FINRA notes, however, that transactions from a municipal securities
issuer to an underwriter are not reported to the MSRB and thus would
not generally be counted toward a member's quarterly assessment.\49\
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\49\ To the extent commenters are concerned that FINRA members
acting as underwriters for municipal securities may increase their
underwriting fees to recoup part of the assessment, FINRA generally
considers fee negotiations between an issuer and an underwriter to
be within each party's business decision-making process.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2011-073 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2011-073. 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 Web site (https://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 Web site 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 such filing also will be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2011-073 and should be
submitted on or before January 30, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-84 Filed 1-6-12; 8:45 am]
BILLING CODE 8011-01-P
