United States: Expanding Oversight Of Active, Proprietary Trading Firms: SEC Proposes Amendments To Rule 15b9-1

Overview

On March 25, 2015, the Securities and Exchange Commission ("SEC" or "Commission") proposed an amendment to Rule 15b9-1 (the "Proposal") under the Securities Exchange Act of 1934 ("Exchange Act") that, if adopted, would close an historical exception to the general requirement that registered broker-dealers must become members of a registered national securities association ("Association"), effectively, the Financial Industry Regulatory Authority ("FINRA").1 In doing so, the SEC intends to require SEC-registered broker-dealers that are members of one or more securities exchanges to also become members of FINRA, subject to FINRA rules and oversight. According to the SEC, FINRA membership would help accomplish a key regulatory goal: enhancing the oversight of off-exchange and cross-market trading activity.2 
 
Current Rule 15b9-1 Framework
 
Currently, Section 15(b)(8) of the Exchange Act requires a broker dealer to register with an Association unless it effects transactions solely on a national securities exchange ("exchange") of which it is a member.3 Rule 15b9-1 further exempts from Association membership a broker-dealer that: (1) is a member of a national securities exchange, (2) does not carry customer accounts, and (3) derives an annual gross income of $1,000 or less from securities transactions that are not effected on the national securities exchange of which it is a member (the "de minimis allowance").4 The de minimis allowance excludes income derived from a broker-dealer's proprietary trading transactions with or through another broker-dealer.5 Rule 15b9-1 was initially adopted to address the supplementary activities of exchange specialists and other floor members engaged in limited off-exchange trading.6
 
Proposed Changes
 
The rapidly evolving nature of the equities markets has led to the creation of active cross-market proprietary trading firms that trade electronically across exchange and off-exchange platforms. According to the SEC, because Rule 15b9-1 does not explicitly limit the exclusion from the de minimis allowance to dealer activities ancillary to a floor-based business, many of these proprietary trading firms have been able to engage in unlimited proprietary trading in the off-exchange market without becoming members of FINRA. In the Proposal, the SEC states that it seeks to realign Rule 15b9-1's original limited purposes with the state of current market activity and Section 15(b)(8).7 The Proposal would amend current Rule 15b9-1 in three significant ways:

  1. Elimination of the De Minimis Allowance: The Proposal would eliminate the de minimis allowance (including the exclusion for proprietary trading).8 As a result, and subject to the exceptions below for certain hedging and exchange order routing activity, a proprietary trading broker-dealer would have to register with an Association if it engaged in any trading activity off exchanges of which it is a member.  
  2. Floor Member Hedging Exemption: The Proposal would also create a more targeted exemption from FINRA membership for exchange members that trade on the exchange floor (i.e., specialists or floor brokers) and limit their off-exchange transactions solely to transactions for the purpose of hedging the risks of their floor-based activities.10 Dealers relying on this exemption would be required to adopt written policies and procedures to ensure that their off-exchange transactions are legitimate hedges to mitigate the risk associated with floor activities.11 Various factors, including a broker-dealer's business model and financial position, will determine whether a transaction appropriately mitigates risk under this hedging exemption.12 
  3. Regulation NMS Routing Exemption: Finally, the Proposal would create an exemption from Association
    membership for proprietary trading exchange members whose sole off-exchange transactions result from orders routed by an exchange of which it is a member to prevent trade-throughs on that exchange.13 The orders must be routed from an exchange of which the broker-dealer is a member to another trading center.14 The Commission believes that such activity by an exchange routing broker-dealer would allow the exchange to maintain oversight of the broker-dealer's market activity.15  

As described, broker-dealers who no longer qualify for the Rule 15b9-1 exemption would have to comply with Section 15(b)(8) by limiting their trading to exchanges of which they are members or registering with FINRA.
 
Potential Implications
 
If adopted, the Proposal would require proprietary trading firms that are not currently members of FINRA to: (1) limit their trading to exchanges of which they are members, (2) join FINRA, (3) join together with other proprietary trading firms to form an Association (an interesting but likely not practical alternative), or (4) cease conducting business as a broker-dealer.
 
To the extent proprietary trading firms choose to join FINRA, they will be subject to FINRA rules. Obtaining FINRA membership requires an extensive application and takes about six months; we would hope that the SEC and FINRA would consider a streamlined application process for proprietary trading firms that seek to become members, given that such firms are already SEC registered, are already subject to the SEC net capital rule and do not have customers. Proprietary trading firms that become FINRA members will also be subject to FINRA fees and incur various implementation costs. According to the Proposal, for instance, firms would spend approximately $3.3 million in implementation costs, which include FINRA application costs and costs to implement OATS reporting.
 
Although the SEC expects that the benefits of the proposed rule will outweigh its costs, it is a little unclear how the proposal ultimately will impact the OTC market. In 2014, non-FINRA member broker-dealers accounted for 35.31% of the 104.5 billion orders reported in the OTC markets. On a volume-weighted basis, such firms accounted for 48% of the 230 billion orders sent directly to an ATS. Depending on how proprietary trading firms react to the rule if it is adopted, liquidity may be affected. Some firms may decide to stop their off-exchange trading in lieu of joining FINRA. Other firms that join FINRA may opt to reduce their off-exchange activity to curb the increased costs of trading associated with FINRA membership. The Commission is soliciting comments on various aspects of the changes described above. Comments are due on June 1, 2015.
 
Conclusion
 
The Proposal reflects the Commission's latest effort to address the evolving structure of the equities markets and the increased volume of proprietary trading, including through the use of high-frequency trading strategies. If adopted, the Proposal would likely result in an expansion of FINRA's jurisdiction. To the extent that a broker-dealer may be required to become a FINRA member, it should be prepared for the costs associated with FINRA membership and compliance with FINRA rules. Thus, broker-dealers currently engaged in off-exchange activity should consider the impact of the Proposal on their activities and whether they could rely on any of the proposed exemptions.


1 Exemption for Certain Exchange Members, Exchange Act Release No. 74581 (Mar. 25, 2015), 80 Fed. Reg. 18035 (Apr. 2, 2015) (to be codified at 17 C.F.R. § 240.15b9-1) ("Proposal"). 15 U.S.C. § 78o(3). FINRA is registered as a national securities association under Section 15A(a) of the Exchange Act. The National Futures Association ("NFA") is registered as a limited purpose national securities association under Section 15A(k) of the Exchange Act, only for the purpose of regulating the activities of NFA members that are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act. See Proposal at 18039 n.34.
 
2 Off-exchange trading means off-exchange trading of exchange-listed securities, and would include trading on an ATS or directly with a broker-dealer acting as agent or principal, and is also referred to as over-the-counter ("OTC") trading. See Proposal at 18037 n.3.
 
3 15 U.S.C. § 78o(b)(8).
 
4 17 C.F.R. § 240.15b9-1.
 
5Id.
 
6 Proposal at 18038.
 
7 Proposal at 18036-18041.
 
8 The Proposal also would eliminate an exception from the de minimis requirement for transactions through the former Intermarket Trading System, which no longer exists.
 
9 Proposal at 18046.
 
10Id. at 18046-18047.
 
11Id.
 
12Id.
 
13Id. at 18049.
 
14Id.
 
15Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions