SEC Approves Amendments to Rule 1120 to Eliminate Exemptions from the Continuing Education Regulatory Element Requirements

GUIDANCE

Guidance on the Trading Activity Fee

 

Executive Summary

On October 1, 2004, the Securities and Exchange Commission (SEC or Commission) approved an NASD rule filing amending the Trading Activity Fee (TAF) to reduce the TAF rate for covered equity securities, reduce the maximum per trade charge on covered equity securities, and assess the TAF on corporate debt securities that, under the Trade Reporting and Compliance Engine (TRACE) rules, are defined as "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to Municipal Securities Rulemaking Board (MSRB) reporting requirements.¹ NASD will implement these changes as follows: (1) the TAF rate reduction and the reduction on the maximum per trade charge on covered equity securities will be effective November 1, 2004; and (2) the TAF will be assessed on "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to MSRB reporting requirements effective April 1, 2005. NASD is delaying the effective date for debt securities until April 1 to allow member firms sufficient time to make programming changes to reflect the addition of two new categories of covered securities.

In this Notice, NASD is providing additional guidance with respect to certain equity security transactions and is seeking information from member firms concerning interpretive issues with respect to the operational aspects of applying the TAF to debt securities. NASD requests that members' interpretive questions be submitted in writing to NASD by no later than January 1, 2005 so that NASD can provide the necessary guidance to ensure members are able to program their systems for debt securities by the April 1, 2005 effective date.

Included with the Notice is Attachment A, the text of the amendments to Schedule A to the NASD By-Laws and Attachment B, the revised form indicating the new equity rates.

Questions/Further Information

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

Background and Discussion

On December 29, 2003, NASD filed with the Commission a proposed rule change to adjust the TAF rate for covered equity securities, reduce the maximum per trade charge on covered equity securities, and assess the TAF on corporate debt securities that, under the TRACE rules, are defined as "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and on municipal securities subject to MSRB reporting requirements. The proposed rule change was published for notice and comment in the Federal Register on January 28, 2004.² On May 19, 2004, NASD filed with the Commission Amendment No. 1 and, at the same time, responded to comments submitted on the proposal. On September 30, 2004, NASD responded to further comments. The SEC approved the proposed rule change on October 1, 2004.

NASD is proceeding with its commitment to ensure that its new member regulatory structure, as approved by the SEC,³ remains revenue neutral to NASD and better aligns NASD's regulatory fees with its functions, efforts, and costs. As stated in the NASD By- Laws, NASD will analyze rates, volumes, and regulatory responsibilities periodically to sustain adequate funding levels for its member regulatory programs.⁴ Further, as part of a three-year phase-in plan included in the originally proposed pricing structure, NASD intends to reduce the revenue from the collection of the TAF by approximately 50 percent over the three-year period, offset by an increase in the Personnel Assessment. Thus, with this rule change, NASD is reducing the TAF rate on covered equity securities from the current rate of $0.10 per 1,000 shares to $0.075 per 1,000 shares.⁵ In addition, the maximum charge per trade under the TAF is being reduced from the current cap of $10 per trade (based on 100,000 shares) to $3.75 per trade (based on 50,000 shares).

Further, in response to previous comments from a number of members and other selfregulatory organizations about the scope of the TAF, NASD committed to analyzing whether debt transactions should be included under the TAF. NASD has reviewed reported volumes for TRACE-eligible securities and municipal securities in conjunction with NASD's current regulatory costs associated with the oversight of these securities. Based upon this review, NASD is assessing the TAF on TRACE-eligible securities and municipal securities at a rate of $0.00075 per bond, with a maximum assessment of $0.75 per trade (based on 1,000 bonds).

Implementation Date

NASD implemented the TAF rate reduction and the reduction on the maximum per trade charge on covered equity securities on November 1, 2004. In addition, NASD will begin assessing the TAF on "TRACE-eligible securities" that fall within the definition of a "reportable TRACE transaction" (as defined in Rule 6210) and all municipal securities subject to MSRB reporting beginning on April 1, 2005. NASD is designating an effective date six months after SEC approval to allow member firms sufficient time to make programming changes to reflect the addition of two new categories of covered securities.

Guidance Regarding Certain Equity Transactions

NASD assesses the TAF on its members through clearing and self-clearing firms. As NASD stated in Notice to Members 02-75, the TAF is not assessed on transactions for non-member broker-dealers that clear through an NASD member unless that NASD member clearing firm is acting as executing broker in the transaction. NASD further stated in Notice to Members 03-30 that NASD would consider a clearing firm to be acting as an executing broker if its correspondents utilized the clearing firm's order delivery system to send and execute orders under the clearing firm's MPID. NASD has received numerous questions concerning the application of this interpretation, particularly when the non-member broker-dealer does not use the clearing firm's system to route the order to another market center for execution. To further clarify, NASD considers the NASD member clearing firm to be the executing broker in any transaction where its non-member broker-dealer correspondent is only able to effect the trade by virtue of its clearing firm's membership with the applicable market center. For example, trades reported to ACT generally must be submitted to ACT by an NASD member. Therefore, the non-member correspondent would not be able to effect trades required to be reported to ACT without the use of the clearing firm's MPID that is granted to the clearing firm based on its NASD membership. Further, because the TAF is assessed on all covered securities transactions wherever executed, this interpretation also applies to similarly structured transactions effected on a national securities exchange.

Solicitation of Interpretive Questions Relating to Assessing the TAF on Debt

NASD encourages all interested parties to submit interpretive questions relating to the operational aspects of assessing the TAF on debt securities. Members have stated that there are certain operational issues that must be addressed with respect to assessing the TAF on debt securities prior to programming. While the TAF will be applied to debt in generally the same manner as covered equity securities, NASD recognizes that there may be certain issues unique to debt. To ensure all potential questions regarding differences in the application of the TAF between debt and equity securities are adequately addressed, NASD is seeking to receive a comprehensive list of all such issues from industry participants. Questions must be received by NASD by January 1, 2005. Members and other interested parties can submit their questions using the following methods:

 

• Mailing the questions in hard copy to the address below; or
• E-mailing the questions to [email protected].

To help NASD process and review the questions more efficiently, persons submitting questions should use only one method. Questions sent by hard copy should be mailed to:

Barbara Z. Sweeney
Office of the Corporate Secretary
NASD
1735 K Street, NW
Washington, DC 20006-1500

NASD staff will compile a list of those questions it believes will assist industry participants in complying with the amendments and publish these questions and answers in a subsequent Notice to Members.

 

¹ Securities Exchange Act Rel. No. 50485 (Oct. 1, 2004), 69 FR 60445 (Oct. 8, 2004) (File No. SR-NASD-2003-201) (Order of Approval).

² Securities Exchange Act Rel. No. 49114 (Jan. 22, 2004), 69 FR 4194 (Jan. 28, 2004) (Notice of Filing of Proposed Rule Change).

³ Securities Exchange Act Rel. No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 2003) (approving SRNASD- 2002-148) and Securities Exchange Act Rel. No. 47106 (Dec. 30, 2002), 68 FR 819 (Jan. 7, 2003) (approving SR-NASD-2002-99).

⁴ Specifically, NASD stated in the text of the TAF rule that it will "periodically review these revenues in conjunction with these costs to determine the applicable rate." NASD By-Laws, Schedule A, Section 1(a).

⁵ NASD also will seek to reduce the TAF rate in 2005, if appropriate, after analyzing all relevant factors.

⁶ See question 6 in Notice to Members 02-75.

⁷ See question 3 in Notice to Members 03-30.

ATTACHMENT A

Text of Rule Change

New language is underlined; deleted language is in brackets.

Schedule A to NASD By-Laws

Section 1-- Member Regulatory Fees