SEC Proposes to Expand Requirement of FINRA Membership
The SEC re-proposed amendments that would narrow the scope of an exemption from FINRA membership currently relied upon by broker-dealers that trade only on exchanges. (In the proposed amendment, FINRA is referred to by the statutory term "national securities association.")
Proposed Rule
The re-proposal would amend SEA Rule 15b9-1 ("Exemption for certain exchange members") to shrink the exemption from the requirement of FINRA membership. Specifically, the SEC is proposing to eliminate the de minimis allowance and the proprietary trading exclusion, and would allow an exemption from the requirement of FINRA membership only for an SEC-registered broker or dealer that meets the following conditions:
- is an exchange member;
- carries no customer accounts; and
- effects securities transactions only on a national securities exchange of which it is a member, with the exception of transactions that:
- result from orders that are routed by an exchange of which it is a member, or
- are for the purpose of executing the stock leg of a stock-option order.
Additionally, the SEC is proposing to modify the hedging exemption so that it is limited to a dealer's physical floor-based trading on a national securities exchange.
The SEC will be soliciting comment on the re-proposal until 30 days after publication in the Federal Register or September 27, 2022, whichever is later.
Commissioner Statements
SEC Chair Gary Gensler supported the proposed amendments, saying adopting the amendments would "modernize and improve market oversight for regulators." Mr. Gensler added that expanding FINRA oversight would strengthen investor protections and help maintain fair and orderly markets.
SEC Commissioners Hester M. Peirce and Mark T. Uyeda dissented, expressing concern that the amendments expand FINRA's authority. Additionally, the Commissioners cautioned that the proposed amendments will contribute to an acceleration in the already declining number of exchange-only broker-dealers. They added that the timeframe for compliance is too short for the magnitude of the effect of the amendments.