FinReg + Policy Watch
July 29, 2022

SEC Proposes Amendments to Exchange Act Rule 15b9-1—Is FINRA Taking Over the Lease at 100 F Street NE?

Back in April 2022, we wrote about the SEC killing the Dealer/Trader distinction.  We also noted then that it would come as no surprise to see the SEC re-propose amendments to Exchange Act Rule 15b9-1.  Just a few months later, the SEC has done just that.

Rule 15b9-1 currently exempts from membership of a “national securities association” (of which FINRA is the only one) brokers-dealers that are members of a national securities exchange (like NYSE or Nasdaq), carry no customer accounts, and meet other requirements. The exemption was created decades ago to accommodate exchange specialists and floor-traders.  In 2015, the SEC sought to narrow the exemption by “eliminat[ing] the current proprietary trading exemption and replac[ing] it with a more focused one that would accommodate off-exchange transactions by a floor-based dealer that are solely for the purpose of hedging the risks of its floor-based activities.”  But that proposal didn’t go anywhere.

We’ve barely scratched the surface of the re-proposal, but it looks quite similar to the 2015 version.  The SEC’s fact sheet says that the re-proposal would amend Rule 15b9-1 by replacing the proprietary trading exemption with more narrow exemptions from Exchange Act Section 15(b)(8). Under the re-proposal, an SEC-registered BD would be required to join FINRA if it effects securities transactions other than on an exchange of which it is a member unless:

  • It is a member of a national securities exchange;
  • It carries no customer accounts; and
  • Such transactions (i) result solely from orders that are routed by a national securities exchange of which the broker or dealer is a member to comply with Rule 611 of Regulation NMS or the Options Order Protection and Locked/Crossed Market Plan; or (ii) are solely for the purpose of executing the stock leg of a stock-option order.

Not surprisingly, the proposal further entrenches FINRA as, in many ways, the front-line regulator of BDs.  One must wonder why the SEC continues to cede that role (and responsibility) time and time again.  And as the only national securities association, FINRA essentially has a monopoly in this respect.  Remarks from Commissioners Peirce and Uyeda echo these sentiments (plus, as usual, several other insightful observations).

Expect more from us after we’ve given the proposal a good read.  It’s sub-200 pages, so the rulemaking deities have shown us mercy on a summer Friday!

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