SEC Proposes Amendments to Require Off-Exchange Broker-Dealers to Become Members of National Securities Association (Fed. Reg.) (with Lofchie Comment)

The SEC's proposal to amend Exchange Act Rule 15b9-1 to require broker-dealers trading in off-exchange venues to become members of a national securities association (i.e., FINRA) was published in the Federal Register.

The proposed amendments would replace the current gross income allowance in the rule with a narrower exemption from national securities association membership for brokers or dealers that carry no customer accounts and effect transactions on a national securities exchange.

The amendments would create an exemption for (i) a dealer that effects off-exchange transactions solely for the purpose of hedging the risks of its floor-based activity, or (ii) a broker or dealer that effects off-exchange transactions resulting from orders that are routed by a national securities exchange of which it is a member to prevent trade-throughs as required by the provisions of Rule 611 of Regulation NMS.

Comments on the proposal are due by June 1, 2015.

Lofchie Comment: On one level, the proposal is reasonably straightforward: virtually every SEC-registered broker-dealer (with perhaps the exception of some small floor-based options market makers) must become a member of FINRA (referred to in most of the document by the generic phrase "an Association," although there is only one entity that fits the term and it is FINRA). This raises a few other questions about regulatory direction. First, is this a step towards materially reducing the regulatory power that the various securities exchanges have over broker-dealers, given that FINRA will become the principal regulator of virtually every broker-dealer? Second, does the SEC intend to propose that Congress amend the Exchange Act to require that high-frequency traders register as broker-dealers? Third, at what point does FINRA become effectively a governmental entity and not a "self-regulatory organization"?

See: 80 FR 18035.Related news: SEC Proposes Rule Amendments to Require Off-Exchange Broker-Dealers to Become Members of FINRA (with Delta Strategy Group Summary and Lofchie Comment) (March 25, 2015).