SEC Adopts Amendments to Exemption that will enhance FINRA oversight. Gary Gensler stated "monthly trading volume valued in the hundreds of billions of dollars" has led to a "regulatory gap" these amendments aim to close this gap.
Press Release:
The Securities and Exchange Commission today adopted rule amendments that narrow the exemption from Section 15(b)(8) of the Securities Exchange Act of 1934, which requires any broker or dealer registered with the Commission to become a member of a national securities association unless the broker or dealer effects transactions in securities solely on an exchange of which it is a member. The Financial Industry Regulatory Authority Inc. (FINRA) currently is the only registered national securities association.
"Some of today’s broker-dealers continue to rely on an exemption from national securities association registration that’s older than the cell phone era," said SEC Chair Gary Gensler. "This has led to a regulatory gap whereby a number of firms that have cross-market, monthly trading volume valued in the hundreds of billions of dollars are exempt from national securities association oversight. These amendments update and narrow the circumstances in which broker-dealers do not need to register with a national securities association. National securities association membership will help enhance robust and consistent oversight, particularly with regard to cross-market and off-exchange oversight."
Exchange Act Rule 15b9-1 provides an exemption from Section 15(b)(8) under which certain Commission-registered dealers may engage in unlimited proprietary trading of securities on any national securities exchange of which they are not a member or in off-exchange market without triggering Section 15(b)(8)’s national securities association membership requirement.
The rule amendments set forth narrower exemptions from Section 15(b)(8)’s national securities association membership requirement. The narrower exemptions apply when a broker or dealer that does not carry customer accounts and is a member of at least one exchange effects off-member-exchange securities transactions that: (1) result solely from orders that are routed by a national securities exchange of which it is a member to comply with order protection regulatory requirements, or (2) are solely for the purpose of executing the stock leg of a stock-option order.
The final rule will become effective 60 days after the date of publication of the adopting release in the Federal Register. The compliance date will be 365 days from the date of publication of the adopting release in the Federal Register.
Commissioner Jaime Lizárraga:
Today’s amendments requiring national securities association membership for certain broker-dealers that engage in off-exchange trading is part of the Commission’s ongoing efforts to improve oversight of our securities markets, including the Treasury markets. These amendments bring transparency to off-exchange activity and level the playing field for firms that provide liquidity on and off-exchanges.
The Commission’s actions today address, at least in part, one of the driving forces of the liquidity crisis in Treasury markets that occurred at the start of the COVID-19 pandemic.
In March 2020, many Treasury bond holders rushed to convert their Treasuries into cash. This “dash-for-cash” triggered a significant drop in Treasury prices and threatened global financial stability.
Although various factors may have contributed to this liquidity crunch, including balance sheet constraints at primary dealers, today’s adoption addresses increased trading of treasuries by proprietary trading firms.
Under current rules, proprietary trading firms that are solely members of an exchange are subject to less rigorous oversight and operate in a less transparent manner than firms that are current FINRA members and that are required to report their Treasury trades.
Today’s amendments remedy this lack of transparency by leveling the playing field between current FINRA members that report their Treasury trades and non-FINRA members that aren’t required to.
The amendments may also result in a more equitable cost structure for current FINRA members that provide liquidity as compared to non-FINRA members.
Overall, these reforms promote markets that are fairer, more efficient and transparent, and also more resilient and stable, with lower spreads that benefit retail investors.
I support the adoption of these amendments to Rule 15b9-1. The Commission’s actions today are the product of a thoughtful approach by the Commission staff. I commend them for their continued pursuit of strong and effective oversight of our capital markets. Through that commitment, they provide a valuable service to the public and to our country.
Today’s amendments requiring national securities association
TLDRS:
- The rule changes specify tighter exemptions and the REQUIREMENT of brokers or dealers to join a national securities association (should mean greater oversight, but it is FINRA...).
- Under current rules, proprietary trading firms that are solely members of an exchange are subject to less rigorous oversight and operate in a less transparent manner than firms that are current FINRA members and that are required to report their Treasury trades.
- These limited exemptions apply if a broker or dealer, without customer accounts and belonging to at least one exchange, conducts securities trades that:
- Stem solely from order routes by its member national securities exchange to meet regulatory order protection requirements.
- Are exclusively for completing the stock component of a stock-option order.
- Is effective 60 days after being published in the Federal Register
