By Courtney K. Corallo, CPA, Business Assurance & Advisory Services Senior Manager
Over-the-counter securities transactions may be subject to oversight by FINRA
On July 29, 2022, the Securities and Exchange Commission (SEC) voted unanimously to re-propose amendments to Rule 15b9-1 regarding when broker-dealers are required to register with the Financial Industry Regulatory Authority (FINRA). If adopted, nearly all proprietary trading firms that are currently registered as broker-dealers with the SEC would be required to become FINRA members.
Background on Rule 15b9-1
Rule 15b9-1 was established in 1965 and expanded in 1976. The rule allows an exception 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 applies to broker-dealers who meet certain criteria and are registered with the single exchange where they operated.
Specifically, Rule 15b9-1 allows an SEC registered broker-dealer to avoid becoming a FINRA member if it:
- is a member of a single exchange;
- carries no customer accounts; and
- has 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 does not count towards the $1,000 threshold. Therefore, these certain SEC-registered dealers may engage in unlimited proprietary trading of securities on any national securities exchange of which they are not a member or in the over-the-counter market without triggering FINRA’s membership requirement. According to the SEC, there are currently broker-dealers with monthly trading volume valued in the tens of billions of dollars that is not subject to direct FINRA oversight.
Proposed Amendment for Broker-Dealers
The proposed amendments would substantially narrow the exemption from Section 15(b)(8) of the Securities Exchange Act. This narrower exemption would only allow 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 this proposal 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 proposed amendment would lead to more consistent oversight and help to protect investors and maintain fair markets.
SEC Public Comment Deadline
The proposal was published on SEC.gov August 9, 2022. The public comment deadline is the later of September 27, 2022 (60 days after publication with the SEC) or 30 days after publication in the Federal Register, whichever is longer.
Sources
About the Author
Courtney K. Corallo, CPA, Business Assurance & Advisory Services Senior Manager
Courtney is a member of Keiter’s Business Assurance and Advisory Services team. Courtney provides audit and review services for not-for-profit organizations and financial services companies. She is a member of the Not-for-Profit team and Financial Services Industry team.
More Insights from Courtney K. CoralloThe information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
