Proposed Rule

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Bylaw 1301(e) imposes annual dues on Forex Dealer Members based on their gross annual revenue from their retail off-exchange forex business. Forex Dealer Members with revenue of $100,000 or less pay normal FCM dues, those with revenue over $100,000 pay normal FCM dues plus $7,500, and those with revenue over $1,500,000 pay an additional $5,000. Forex Dealer Members do not, however, pay assessment fees on their forex transactions. In adopting this revenue structure, NFA intended to recover its regulatory costs so that fees from on-exchange transactions would not subsidize regulation of off-exchange transactions. Increasing a Forex Dealer Member's annual dues was a substitute for assessment fees.

In May 2003, when NFA's Board initially set the Forex Member dues, NFA had fifteen active Forex Dealer Members with approximately $130 million in liabilities to customers. By the beginning of September 2005, NFA was the designated self-regulatory organization for 31 active Forex Dealer Members with liabilities to customers of approximately $795 million. During that period the number of active Forex Dealer Members doubled, their individual liabilities to customers tripled, and aggregate liabilities to customers increased by 600%. Further, more extensive regulatory requirements tailored to the retail, off-exchange forex business of these firms required NFA to expend additional resources on them.

The current dues are not meeting their objective of recovering NFA's costs for regulating off-exchange retail forex transactions. Based on cost data covering the last two years, NFA has recovered approximately one-third of its direct regulatory costs. Therefore, NFA needs to increase its forex revenue by approximately 200% to recover the cost of regulating Forex Dealer Members without subsidizing it from assessment fees for on-exchange transactions.

Raising the Forex Dealer Member dues has a number of advantages over other approaches. 1 First, it has the highest firm-by-firm correlation between revenue and regulatory costs.2 Additionally, it is consistent with NFA's current approach, it is the simplest approach for NFA and Forex Dealer Members to implement, and it is easy to verify because it is based on the firm's audited financial statement.3

Accordingly, NFA is raising dues by approximately 200%, although the actual increase would be more at some levels and less at others, and is raising the revenue ceilings for the various tiers and adding a fourth tier. As with the current dues, the newly adopted dues would impose a surcharge on the regular FCM dues, which are $5,625 if NFA is the firm's designated self-regulatory organization (DSRO) and $1,500 if an exchange is the firm's DSRO.

The following table shows how the proposal would affect Forex Dealer Members for which NFA is the DSRO. If an exchange is the DSRO, both the current and the proposed dues would be $4,125 less.

Amount of Annual Gross Revenue From Off-Exchange Retail Forex Transactions (NFA as DSRO) Current Dues Proposed Dues
$500,000 or less (currently $100,000) $5,625 $20,000
Over $500,000 but not more than $2 million (currently $1.5 million) $13,125 $30,000
Over $2 million but not more than $5 million (currently unlimited) $18,125 $50,000
Over $5 million (new tier) $18,125 $100,000

NFA requested comments from Forex Dealer Members and received comments from five firms. All of the commenters stated that they understand NFA's need to recoup its regulatory costs, but all expressed some concerns about the proposed solution.

One commenter stated that basing dues on gross income is unfair but did not elaborate. Two commenters agreed that increasing dues is a better solution than imposing an assessment fee but disagreed with NFA's specific dues proposal. One of these commenters suggested that NFA increase dues gradually while looking for ways to decrease costs. The other commenter stated that the proposal harms competition by requiring small start-up firms to pay a significant percentage of their revenue to NFA as dues while larger, more established firms pay proportionally less. This firm recommended a revenue-based dues schedule with set amounts at the lower levels (greater than the current dues but less than those proposed by staff) and 11/2% of gross revenue for firms with gross revenue over $2.5 million.4

Two commenters suggested imposing a transaction fee on customers rather than raising dues.5 One of these commentators believes there is an apparent conflict of interest when a regulator's income depends on the profitability of those it regulates.6 The other commenter stated that the proposed dues schedule puts smaller firms at a competitive disadvantage to larger firms. Additionally, this commenter stated that the dues put U.S. firms at a competitive disadvantage to their foreign competitors. As an alternative, or in addition to a transaction fee, the commenter suggested charging firms for NFA's firm-specific costs so that compliance-minded firms would pay less than firms that consume more of NFA's resources.

The Board approved increasing Forex Dealer Member dues in the amounts shown above. While no potential solution is perfect, NFA believes that this approach comes closest to maximizing advantages and minimizing disadvantages.

NFA respectfully requests that the Commission review and approve the proposed amendments to Bylaw 1301 regarding Forex Dealer member dues.

1 NFA considered several other approaches, including charging per-transaction assessment fees, charging assessment fees based on notional value, implementing a fee for each retail customer account, and imposing a revenue tax.

2 Most of the firms in the first tier would pay slightly less than their average cost of regulation and some of the firms in the top tier would pay more. Even at these levels, however, one of the firms in the top tier would pay less than its average cost.

3 NFA collects dues in advance (for the upcoming year). Under the current dues schedule, new Forex Dealer Members - who are always in the lowest tier - pay the same dues as other FCMs. Under the new dues schedule, the increased dues will apply as soon as the firm becomes a Forex Dealer Member. This is the same procedure that currently applies when an introducing broker becomes an FCM.

4 Under the commenter's proposal, the larger Members would subsidize the smaller Members.

5 Nothing in NFA's rules prohibits a Forex Dealer Member from passing its NFA dues on to customers in the form of a transaction fee.

6 The same firm raised this issue when the original dues structure was proposed. As noted then, income-based fees are a standard and long-standing practice among securities self-regulatory organizations and do not create a conflict of interest.

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