Barton Blogs

SEC Proposes Rule Requiring Off-Exchange Broker-Dealers to Become FINRA Members

The Financial Industry Regulatory Authority (“FINRA”) is continuing its backdoor attempts to regulate anything and everything related directly or indirectly to securities. Its latest attempt is via its surrogate, the Securities and Exchange Commission (“SEC”), to have SEC Rule 15b9-1 (the “Rule”) under the Securities Exchange Act of 1934 amended to require any SEC registered broker-dealer that engages in “off-exchange” trading – such as the heavily scrutinized high frequency trading firms – to register with FINRA and become subject to its jurisdiction and, of course, pay registration fees and financial penalties to FINRA.

Under the proposed amendment to the Rule, to be exempt from the onerous burden of registering with FINRA, an “off-exchange” broker-dealer must meet the following requirements:

  1. Is a member of a national securities exchange (e.g., the New York Stock Exchange or the Chicago Board Options Exchange);
  2. Carries no customer accounts; and
  3. Effects transactions in securities solely on a national securities exchange of which it is a member, except that:
      – A dealer that conducts business on the floor of a national securities exchange may effect transactions off the exchange, for the dealer’s own account with or through another registered broker or dealer, that are solely for the purpose of hedging the risks of its floor-based activities, by reducing or otherwise mitigating the risks thereof (the Floor Member Hedging Exception); and

      – A broker or dealer may effect transactions off the exchange resulting from orders that are routed by a national securities exchange of which it is a member to prevent trade-throughs on that national securities exchange consistent with Rule 611 of Regulation NMS (the Regulation NMS Routing Exception).

Upon publication of the final rules in the Federal Register, the amendment would become effective 360 days thereafter. If this amendment is approved nearly all proprietary trading firms will be subject to FINRA registration; it is unclear how market integrity and customer protection, FINRA’s watchwords, will be improved by this en masse registration requirement, especially considering that high frequency trading firms do not have customers. If anything, this registration requirement could actually cause FINRA to become overburdened and not protect the very people that it is mandates to protect: customers.

If you have any questions about the SEC’s proposed Rule 15b9-1 and how it could affect your business, please contact Kevin S. Koplin.