TheCorporateCounsel.net

Last week the SEC re-proposed rule amendments originally proposed in 2015 to narrow an exemption from the requirement to be a FINRA member that is applicable to certain proprietary trading firms.

Exchange Act Rule 15b9-1 provides an exemption under which certain SEC-registered dealers can engage in unlimited proprietary trading of securities on any national securities exchange of which they are not a member or in the over-the-counter market without triggering the requirement to be a FINRA member. The SEC adopted this exemption over forty years ago to facilitate limited proprietary trading by regional specialists and floor brokers conducted off their home exchange. The trading world has changed quite a bit in the ensuing four decades, moving from floor-based to mostly electronic. During that time, SEC-registered dealers have emerged which engage in significant, proprietary trading of off-member-exchange securities, including in the U.S. Treasury securities market, and these dealers are not FINRA members in reliance on Rule 15b9-1.

Under the re-proposal, an SEC-registered broker or dealer 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.

– Dave Lynn