SEC wants off-exchange broker-dealers to become members of FINRA or other securities association

On March 25, the Securities and Exchange Commission proposed rule amendments to require that broker-dealers trading in off-exchange venues become members of a national securities association. Continue reading

On March 25, the Securities and Exchange Commission proposed rule amendments to require that broker-dealers trading in off-exchange venues become members of a national securities association. According to SEC Chair Mary Jo White, “today’s proposed rules would close a regulatory gap by extending oversight to a significant portion of off-exchange trading.”

The proposed amendments to Rule 15b9-1 under the Exchange Act would eliminate the proprietary trading exemption and replace it with a narrower one that will permit a floor-based dealer to engage in off-exchange transactions only if such transactions hedge the broker-dealer’s floor-based trading. The proprietary trading exemption originally was designed to accommodate exchange specialists and other floor members that might need to conduct limited hedging or other off-exchange activities ancillary to their floor-based business. Over time, the markets have undergone a substantial transformation, including the emergence of active cross-market proprietary trading firms, many of which engage in so-called high-frequency trading strategies. Although the business of these firms may not be focused on an exchange floor, and they may be responsible for a substantial percentage of the trading volume in the off-exchange market, many are not members of a national securities association because they have been able to rely on the broad proprietary trading exemption in Rule 15b9-1.

The proposed amendments would amend the exemption to target the broker-dealers for which it was originally designed – those with a business focused on an exchange floor and over which that exchange is positioned to oversee the entirety of their trading activity. They also would update the exemption that permits off-exchange transactions necessary to comply with regulatory requirements restricting trade-throughs, under Rule 611 of Regulation NMS.

The SEC will take public comment on the proposed rule amendment for 60 days following publication in the Federal Register.

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