SEC Adopts Changes to Narrow Broker-Dealer Exemptions to FINRA Membership

Over-the-counter securities transactions are subject to oversight by FINRA

On August 23, 2023, the Securities and Exchange Commission (SEC) adopted amendments that narrow the exemption from Section 15(b)(8) of the Securities Exchange Act of 1934 (the “Act”) regarding when broker-dealers are required to register with the Financial Industry Regulatory Authority (FINRA). Now, nearly all proprietary trading firms that are currently registered as broker-dealers with the SEC are required to become FINRA members.

Adopted amendment for broker-dealers

The adopted amendment substantially narrows the exemption from Section 15(b)(8) of the Securities Exchange Act. This narrower exemption only allows non-membership with FINRA if the broker-dealer carries no customer accounts and effects securities transactions other than on a national securities exchange where it is a member only if those transactions result from routing for order protection purposes by a national securities exchange where the broker-dealer is a member or constitute the execution of the stock leg or a stock-option order.

The purpose of the amendment is to require broker-dealers that engage in over-the-counter securities transactions to be subject to oversight by FINRA. FINRA is currently the only national securities association and the primary regulator of the over-the-counter market for securities. This amendment will lead to more consistent oversight and help to protect investors and maintain fair markets.

Background on Rule 15(b)(8) and Rule 15b9-1

Section 15(b)(8) of the Act generally requires that broker-dealers who effect transactions in securities must be members of a national securities exchange. The purpose of this requirement is to ensure that FINRA has direct oversight over these broker-dealers.

Rule 15b9-1 was established in 1965 and expanded in 1976. The rule allowed an exemption from Rule 15(b)(8) to certain exchange floor members and other regional, specialized broker-dealers, to not have to register with the National Association of Stock Dealers (NASD), the predecessor to FINRA. This exemption applied to broker-dealers who met certain criteria and were registered with the single exchange where they operated.

Specifically, Rule 15b9-1 allowed an SEC registered broker-dealer to avoid becoming a FINRA member if it:

• was a member of a single exchange;
• carried no customer accounts; and
• had annual revenue from securities transactions effected not on a national securities exchange of which it is a member of no more than $1,000.

Income derived through or with another registered broker-dealer did not count towards the $1,000 threshold. Therefore, these certain SEC-registered dealers could engage in unlimited proprietary trading of securities on any national securities exchange of which they were not a member or in the over-the-counter market without triggering FINRA’s membership requirement.

Prior to the amendments adopted in August 2023, according to the SEC, there were broker-dealers with monthly trading volume valued in the tens of billions of dollars that was not subject to direct FINRA oversight.

The Keiter Financial Services Industry team closely monitors broker-dealer related regulations to keep you updated and informed. If you have any questions, please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000.

Source

SEC Adopts Amendments to Exemption From National Securities Association Membership | SEC.gov