On March 25, 2015, the Securities and Exchange Commission ("SEC" or "Commission") proposed amendments to rule 15b9-1 of the Securities Exchange Act of 1934, as amended ("Exchange Act").1 Rule 15b9-1 currently exempts certain brokers or dealers from membership in a registered national securities association.2
Section 15(b)(8) of the Exchange Act requires broker-dealers to become members of a registered national securities association ("Securities Association")3 unless it effects transactions solely on an exchange of which it is a member. Exchange Act rule 15b9-1 provides an additional exemption from the requirement to be a member of a national securities association if a broker-dealer (i) is a member of a national securities exchange, (ii) carries no customer accounts, and (iii) has annual gross income of no more than $1,000 that is derived from securities transactions effected otherwise than on a national securities exchange of which it is a member. Income derived from proprietary transactions with or through another registered broker-dealer, including transactions effected on an alternative trading system ("ATS"), is excluded from the gross-income limitation. Accordingly, many large proprietary trading firms are currently exempt from the requirement to be a member of FINRA.
The SEC is proposing to eliminate the de minimis allowance under rule 15b9-1(c) in its entirety. Under the proposal, broker-dealers that derive any income from securities transactions effected otherwise than on a national securities exchange of which it is a member will, unless another exemption is available, no longer be exempt from the requirements of Section 15(b)(8) of the Exchange Act and, accordingly, will be required to register with FINRA.
In place of the de minimis allowance, the SEC proposes two new exemptions from the requirements of Section 15(b)(8): (i) the "floor member hedging exemption" and (ii) the "Regulation NMS routing exemption."
The floor member hedging exemption will exempt from securities association membership requirements, exchange-member broker-dealers that operate on the floor of an exchange, to the extent they effect transactions off-exchange solely for the purpose of hedging the risks of their floor-based activities. Such broker-dealers will need to have in place written policies and procedures that ensure such off-exchange transactions are designed to mitigate the risk associated with their floor activities.
The Regulation NMS routing exemption will exempt broker-dealers from securities association membership requirements where their orders are routed by a national securities exchange of which the broker-dealer is a member to another market in order to prevent trade-throughs in accordance with Exchange Act rule 611.
As discussed in the Proposing Release, certain transactions currently effected by broker-dealers exempt from securities association membership will become subject to the FINRA TAF fee. Additionally, the Proposing Release notes that FINRA may have to reassess its Section 3 Fees4 as broker-dealers exempt from FINRA membership are estimated to effect a substantial percentage of all off-exchange volume.5 The Commission requests comments regarding other potential implications of the proposed amendments.
The Commission is currently requesting comments on the proposed amendments. All comments must be received on or before 60 days after the proposal is published in the Federal Register. The Commission estimates that, in the event a final rule is adopted, firms will be required to comply with the rule within 360 days of the final rule’s publication in the federal register. The Commission believes this will provide firms with sufficient time to obtain FINRA membership.