Friday, June 5, 2015

Proposed Exchange Act Amendment Will Affect Proprietary Trading Firms

When are broker-dealers exempt from FINRA membership?

The U.S. Securities and Exchange Commission (SEC) is proposing an amendment to Rule 15b9-1 of the Exchange Act that would affect proprietary trading broker-dealers who currently are not required to become members of the Financial Industry Regulatory Authority (FINRA).

Presently, there is an exemption from FINRA regulation for broker-dealers that (1) are members of a national securities exchange; (2) carry no customer accounts; and (3) have annual gross income of less than $1,000 from securities transactions effected otherwise than on a national securities exchange of which it is a member (income derived from transactions for the dealer's own account with or through another registered broker-dealer does not count toward the $1,000). This last provision, called the de minimis allowance by the SEC, would be eliminated by the proposed rule. The SEC finds that the way the allowance is being used has strayed too far from its original intent. In particular, the SEC noted that active, cross-market proprietary trading firms rely on the exemption in ways not envisioned when the rule was adopted or amended.

Under the proposed rule, a broker-dealer could qualify for the exception from FINRA regulation  if they effect no off-exchange securities transaction except (1) where the dealer trades on a physical exchange floor but engages in off-exchange transactions for the dealer's own account with or through another registered broker-dealer solely for the purpose of hedging the risks of the dealer's floor-based activities; or (2) where the broker-dealer's only off-exchange transactions result from orders that are routed by the exchange of which the broker-dealer is a member in order to prevent trade-throughs as required by SEC Regulation NMS Rule 611. The requirements of being a member of a national securities exchange and carrying no customer accounts remain the same.

If the proposed amendment is adopted, proprietary trading firms that are not currently FINRA members will have to join. This will increase costs at those firms and present new compliance obligations. Still, the SEC has concluded that an amendment is needed to better reflect today's equities market activity.

Lehman & Eilen LLP has more than 20 years of experience serving as legal counsel to the securities industry. Our attorneys provide broker-dealers with comprehensive representation on regulatory and compliance matters. Contact us today at (516) 222-0888 to learn how our knowledge can be put to work for you.

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