61850 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

1See Securities Exchange Act Release No. 95388 

(July 29, 2022), 87 FR 49930 (Aug. 12, 2022) (‘‘2022 

Re-Proposing Release’’ or ‘‘2022 Re-Proposal’’). The 

2022 Re-Proposal re-proposed amendments that the 

Commission proposed on Mar. 25, 2015. See 

Securities Exchange Act Release No. 74581 (Mar. 

25, 2015), 80 FR 18036 (Apr. 2, 2015) (‘‘2015 

Proposing Release’’ or ‘‘2015 Proposal’’). 

2Section 15(b)(8) of the Act prohibits any 

registered broker or dealer from effecting 

transactions in securities unless it is a member of 

an Association or effects transactions in securities 

solely on an exchange of which it is a member. 

Section 15(b)(8) applies to any security other than 

commercial paper, bankers’ acceptances, or 

commercial bills. 15 U.S.C. 78o(b)(8). References 

herein to ‘‘exchange’’ or ‘‘national securities 

exchange’’ are to a national securities exchange that 

is registered with the Commission pursuant to 

section 6 of the Act. See 17 CFR 240.600(b)(45) 

(defining ‘‘national securities exchange’’). ‘‘Offexchange’’ as used herein means any securities 

transaction that is covered by section 15(b)(8) of the 

Act that is not effected, directly or indirectly, on a 

national securities exchange. Off-exchange trading 

includes securities transactions that occur through 

alternative trading systems (‘‘ATSs’’) or with 

another broker or dealer that is not a registered 

ATS, and is also referred to as over-the-counter 

(‘‘OTC’’) trading. 

3See infra notes 33–34 and accompanying text 

(discussing the adoption of 17 CFR 240.15b8–1 

(‘‘Rule 15b8–1’’), which was later renumbered to 

Rule 15b9–1). 

4See Securities Exchange Act Release No. 60405 

(July 30, 2009), 74 FR 39362 (Aug. 6, 2009) 

(‘‘Options Linkage Plan’’). 

5See amended Rule 15b9–1, under ‘‘Text of 

Amendments,’’ infra. Consistent with section 

15(b)(8) of the Act, and unchanged by the adopted 

amendments, a broker or dealer is not required to 

become a member of an Association if the broker 

or dealer effects securities transactions only on an 

exchange of which it is a member. See section 

15(b)(8) of the Act, 15 U.S.C. 78o(b)(8). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–98202; File No. S7–05–15] 

RIN 3235–AN17 

Exemption for Certain Exchange 

Members 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

adopting amendments to a rule under 

the Securities Exchange Act of 1934 

(‘‘Act’’ or ‘‘Exchange Act’’) that exempts 

certain Commission-registered brokers 

or dealers from membership in a 

registered national securities association 

(‘‘Association’’). The amendments 

replace rule provisions that provide an 

exemption for proprietary trading with 

narrower exemptions from Association 

membership for any registered broker or 

dealer that is a member of a national 

securities exchange, carries no customer 

accounts, and effects transactions in 

securities otherwise than on a national 

securities exchange of which it is a 

member. The amendments create 

exemptions for such a registered broker 

or dealer that effects securities 

transactions otherwise than on an 

exchange of which it is a member that 

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 are solely for the 

purpose of executing the stock leg of a 

stock-option order. 

DATES: 

Effective date: November 6, 2023. 

Compliance date: The compliance 

date is September 6, 2024. 

FOR FURTHER INFORMATION CONTACT: 

Michael Bradley, Assistant Director, 

David Michehl, Special Counsel, 

Nicholas Shwayri, Special Counsel, 

Vince Vuong, Special Counsel, or Alba 

Baze, Attorney-Advisor, at (202) 551– 

5500, Office of Market Supervision, 

Division of Trading and Markets, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

II. Background 

A. Regulatory Framework 

B. Updated Background Statistics 

III. Discussion of Amendments to Rule 15b9– 

1 

A. Elimination of the De Minimis 

Allowance and Proprietary Trading 

Exclusion 

B. Narrowed Criteria for Exemption From 

Association Membership 

1. Routing Exemption 

2. Stock-Option Order Exemption 

IV. Effective Date and Implementation 

V. Economic Analysis 

A. Baseline 

1. Regulatory Structure and Activity Levels 

of Non-FINRA Member Firms 

2. Current Market Oversight 

3. Current Competition To Provide 

Liquidity 

B. Effects on Efficiency, Competition, and 

Capital Formation 

1. Firm Response and Effects on Market 

Activity and Efficiency 

2. Effect on Competition To Provide 

Liquidity 

3. Competitive Effects on Off-Exchange 

Market Regulation 

C. Consideration of Costs and Benefits 

1. Benefits 

2. Costs 

D. Alternatives 

1. Include a Floor Member Hedging 

Exemption 

2. Exchange Membership Alternative 

3. Retaining the De Minimis Allowance 

4. Eliminate the Rule 15b9–1 Exemption 

5. Mandate TRACE U.S. Treasury 

Securities Reporting Without Requiring 

Association Membership 

VI. Paperwork Reduction Act 

A. Summary of Collection of Information 

B. Proposed Use of Information 

C. Respondents 

D. Total Initial and Annual Reporting and 

Recordkeeping Burdens 

E. Collection of Information Is Mandatory 

F. Confidentiality of Responses to 

Collection of Information 

G. Retention Period for Recordkeeping 

Requirements 

VII. Regulatory Flexibility Act Certification 

VIII. Other Matters 

I. Introduction 

On July 29, 2022, the Commission reproposed amendments to 17 CFR 

240.15b9–1 (‘‘Rule 15b9–1’’).1 The 

Commission is adopting those 

amendments as re-proposed. 

Rule 15b9–1 sets forth an exemption 

from section 15(b)(8) of the Act 

pursuant to which a Commissionregistered dealer can engage in 

unlimited proprietary trading of 

securities on any exchange of which it 

is not a member or in the off-exchange 

market (collectively referred to herein as 

‘‘off-member-exchange’’) without 

joining an Association, so long as the 

dealer is a member of a national 

securities exchange, carries no customer 

accounts, and its proprietary trading is 

conducted with or through another 

registered broker-dealer.2 The 

Commission adopted this exemption 

several decades ago so that an exchange 

member’s limited off-member-exchange 

proprietary trading activity ancillary to 

its exchange activity—which, at that 

time, typically was a floor business 

conducted on a single national 

securities exchange—would not 

necessitate Association membership in 

addition to exchange membership.3

The adopted amendments update 

Rule 15b9–1 by rescinding the 

proprietary trading exemption from the 

rule such that, subject to two narrow 

exemptions, Commission-registered 

broker-dealers that effect off-memberexchange securities transactions must 

comply with section 15(b)(8) of the Act 

by joining an Association. The amended 

rule’s two exemptions apply when a 

broker or dealer that does not carry 

customer accounts and is a member of 

at least one exchange effects offmember-exchange securities 

transactions that: (1) result solely from 

orders that are routed by an exchange of 

which the broker or dealer is a member 

in order to comply with 17 CFR 242.611 

(Rule 611 of Regulation NMS) or the 

Options Order Protection and Locked/ 

Crossed Market Plan; 4 or (2) are solely 

for the purpose of executing the stock 

leg of a stock-option order.5

In the decades since the adoption of 

the proprietary trading exemption, the 

securities markets have undergone a 

substantial transformation that has been 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61851 

6See Securities Exchange Act Release No. 61358 

(Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010) (Concept 

Release on Equity Market Structure) (‘‘Equity 

Market Structure Concept Release’’), at 3594 

(‘‘Changes in market structure also reflect the 

markets’ response to regulatory actions such as 

Regulation NMS, adopted in 2005, the Order 

Handling Rules, adopted in 1996, as well as 

enforcement actions, such as those addressing anticompetitive behavior by market makers in 

NASDAQ stocks.’’). 

7See 2015 Proposing Release, supra note 1, 80 FR 

18038; 2022 Re-Proposal, supra note 1, 87 FR 

49935. See also Equity Market Structure Concept 

Release, supra note 6. 

8Proprietary trading firms that engage in socalled high-frequency trading strategies tend to 

effect transactions across the full range of exchange 

and off-exchange markets, including ATSs. They 

also typically use complex electronic trading 

strategies and sophisticated technology to generate 

a large volume of orders and transactions 

throughout the national market system. See 2015 

Proposal, supra note 1, 80 FR 18038; 2022 ReProposal, supra note 1, 87 FR 49935–36. Many, but 

not all, proprietary trading firms are often 

characterized by: (1) the use of extraordinarily highspeed and sophisticated computer programs for 

generating, routing, and executing orders; (2) the 

use of co-location services and individual data 

feeds offered by exchanges and others to minimize 

network and other types of latencies; (3) the use of 

very short time-frames for establishing and 

liquidating positions; (4) the submission of 

numerous orders that are cancelled shortly after 

submission; and (5) ending the trading day in as 

close to a flat position as possible (that is, not 

carrying significant, unhedged positions overnight). 

See Equity Market Structure Concept Release, supra 

note 6, 75 FR 3606; see also Staff of the Division 

of Trading and Markets, ‘‘Equity Market Structure 

Literature Review, Part II: High Frequency 

Trading,’’ at 4–5 (Mar. 18, 2014) (available at http:// 

www.sec.gov/marketstructure/research/hft_lit_

review_march_2014.pdf). Staff reports, Investor 

Bulletins, and other staff documents (including 

those cited herein) represent the views of 

Commission staff and are not a rule, regulation, or 

statement of the Commission. The Commission has 

neither approved nor disapproved the content of 

these staff documents and, like all staff statements, 

they have no legal force or effect, do not alter or 

amend applicable law, and create no new or 

additional obligations for any person. 

9See 2022 Re-Proposal, supra note 1, 87 FR 

49936–37. See also section III, infra. The National 

Futures Association (‘‘NFA’’), as specified in 

section 15A(k) of the Act, also is registered as a 

national securities association, but only for the 

limited 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 Act. 

10See FINRA Rule 0140. 

11To be consistent with current Rule 15b9–1’s 

proprietary trading exemption, off-memberexchange securities trading must occur with or 

through another registered broker-dealer, such as, in 

the case of trading on an exchange where the firm 

is not a member, through a broker-dealer that is a 

member of the exchange. See 17 CFR 240.15b9– 

1(b)(1). 

12Comments received in response to the 2022 ReProposing Release are available at https://

www.sec.gov/comments/s7-05-15/s70515.htm. The 

2022 Re-Proposal re-proposed amendments to Rule 

15b9–1 that the Commission proposed in 2015, 

with certain modifications informed by comments 

received on the 2015 Proposal, which comments the 

Commission addressed in the 2022 Re-Proposal. See 

2015 Proposal, supra note 1. Comments received in 

response to the 2015 Proposing Release are 

available at https://www.sec.gov/comments/s7-05- 

15/s70515.shtml. 

13See 17 CFR 240.17d–2. With respect to a broker 

or dealer that is a member of more than one SRO 

(‘‘common member’’), section 17(d)(1) of the Act 

authorizes the Commission, by rule or order, to 

relieve an SRO of the responsibility to receive 

regulatory reports, to examine for and enforce 

compliance with the applicable statutes, rules, and 

regulations, or to perform other specified regulatory 

functions. See section 17(d)(1) of the Act, 15 U.S.C. 

78q(d)(1). To implement section 17(d)(1), the 

Commission adopted 17 CFR 240.17d–1 (‘‘Rule 

17d–1’’) and Rule 17d–2 under the Act. See 17 CFR 

240.17d–1 and 240.17d–2. Rule 17d–1 authorizes 

the Commission to name a single SRO as the 

designated examining authority (‘‘DEA’’) to 

examine common members for compliance with the 

financial responsibility requirements imposed by 

the Act, or by Commission or SRO rules. See 

Securities Exchange Act Release No. 12352 (Apr. 

20, 1976), 41 FR 18808 (May 7, 1976). To address 

regulatory duplication in areas other than financial 

responsibility, including sales practices and trading 

practices, the Commission adopted Rule 17d–2 

under the Act. See Securities Exchange Act Release 

No. 12935 (Oct. 28, 1976), 41 FR 49091 (Nov. 8, 

1976). Rule 17d–2 permits SROs to propose joint 

plans among two or more SROs for the allocation 

of regulatory responsibility with respect to their 

common members. 17 CFR 240.17d–2. The 

regulatory responsibility allocated among SROs 

only extends to matters for which the SROs would 

share authority, which means that only common 

rules among SROs can be allocated under Rule 17d– 

2. Commission approval of a plan filed pursuant to 

Rule 17d–2 relieves an SRO of those regulatory 

responsibilities allocated by the plan to another 

SRO. 

14 In contrast to Rule 17d–2 plans, RSAs are 

privately negotiated agreements between two SROs 

Continued 

driven primarily by rapid and ongoing 

evolution of technologies for generating, 

routing, and executing orders, and the 

impact of regulatory changes.6 Today, 

little trading in the U.S. securities 

markets is floor-based and broker-dealer 

firms no longer trade primarily on a 

single exchange. Rather, securities 

trading today is highly automated, 

substantially more complex, and 

dispersed among many trading centers 

including 24 registered exchanges and a 

myriad off-exchange venues such as 

ATSs and OTC market makers.7

Proprietary trading broker-dealer firms 

have emerged that engage in significant, 

computer-based or algorithmic, 

securities trading activity for their own 

account across the full range of these 

exchange and off-exchange venues, 

often at lightning speeds.8

Rule 15b9–1 has remained static, 

however, as these types of firms have 

emerged and off-member-exchange 

securities trading has proliferated. As 

detailed in the 2022 Re-Proposal and 

section II.B below, several of these firms 

effect significant off-member-exchange 

securities transaction volume yet, in 

reliance on Rule 15b9–1, they are not 

members of the Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’), 

the only Association currently.9 Brokerdealers that are not FINRA members are 

not subject to FINRA’s rules or FINRA’s 

direct, membership-based jurisdiction.10

As a result, when broker-dealer firms 

that are members of one or more 

exchanges but not FINRA members 

effect proprietary off-member-exchange 

securities transactions,11 these firms are 

not subject to FINRA’s rules or its 

membership-based jurisdiction over 

such activity and are not all subject to 

the same set of exchange rules and 

interpretations of those rules, which can 

vary between exchanges. 

Because such exempt firms are not 

subject to FINRA’s direct, membershipbased jurisdiction when they engage in 

off-member-exchange securities trading 

activity, there is less stability and 

consistency in the oversight that is 

applied to such activity than there 

would be if such firms were Association 

members. To address this concern, the 

amendments to Rule 15b9–1 help 

ensure, as mandated by section 15(b)(8) 

of the Act, that an Association 

(currently, FINRA) generally has direct, 

membership-based oversight over 

broker-dealers that effect off-memberexchange securities transactions and the 

jurisdiction to directly enforce their 

compliance with Federal securities 

laws, Commission rules, and 

Association rules. Requiring brokerdealers that engage in off-memberexchange securities transactions to 

become Association members will 

provide FINRA with, among other 

things, the ability to apply with a greater 

degree of autonomy its expertise in 

supervising the firms’ off-memberexchange securities trading activity and 

investigating potential misconduct in 

that market segment. With respect to 

FINRA members, FINRA can determine 

whether to pursue examinations and 

investigations, and the parameters 

thereof, in a way that it cannot with 

respect to non-FINRA members. 

Some commenters expressed broad 

support for the 2022 Re-Proposal, while 

other commenters expressed opposition 

primarily based on the argument that 

direct, membership-based FINRA 

oversight of proprietary trading brokerdealers is unnecessary in light of 

existing regulatory mechanisms and that 

the costs of FINRA membership would 

be unduly burdensome.12 As discussed 

in the 2022 Re-Proposal and section III 

below, direct, membership-based 

jurisdiction by an Association over 

broker-dealers that are not FINRA 

members cannot be achieved through 

existing self-regulatory organization 

(‘‘SRO’’) oversight mechanisms such as 

joint SRO plans pursuant to 17 CFR 

240.17d–2 (‘‘Rule 17d–2’’) 13 or 

regulatory service agreements 

(‘‘RSA(s)’’),14 or through reliance on the 


ddrumheller on DSK120RN23PROD with RULES2
61852 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

that can expire or be terminated. Under an RSA, 

one SRO agrees to perform regulatory services on 

behalf of another SRO in exchange for 

compensation. Unlike Rule 17d–2 plans, the SRO 

paying for regulatory services under an RSA retains 

ultimate legal responsibility for and control over the 

regulatory functions allocated to the SRO providing 

the services. There are RSAs between exchange 

SROs and FINRA, but under these RSAs, for firms 

that are members of different exchanges but not 

FINRA members, FINRA applies to such firm’s offmember-exchange trading activity the rules of their 

different member exchanges using the exchanges’ 

interpretations of their rules. See Staff of the 

Division of Trading and Markets, ‘‘Staff Paper on 

Cross-Market Regulatory Coordination,’’ (Dec. 15, 

2020) (available at https://www.sec.gov/tm/staffpaper-cross-market-regulatory-coordination) 

(‘‘Cross-Market Regulatory Coordination Staff 

Paper’’). In addition to regulatory coordination that 

occurs through Rule 17d–2 plans and RSAs, SROs 

also coordinate regulatory efforts through forums 

provided by the Intermarket Surveillance Group 

(‘‘ISG’’). See id.; see also 2022 Re-Proposal, section 

II.A. 

15See 17 CFR 242.613; Securities Exchange Act 

Release No. 79318 (Nov. 15, 2016), 81 FR 84696 

(Nov. 23, 2016) (‘‘CAT NMS Plan Approval Order’’); 

notes 90, 107, and 108, infra, and accompanying 

text. See also 2022 Re-Proposal, 87 FR 49934, 

49939. For proprietary trading broker-dealer firms 

that become FINRA members due to the 

amendments to Rule 15b9–1, regulatory 

coordination mechanisms such as Rule 17d–1 DEA 

designations and Rule 17d–2 plans would be 

available to mitigate the potential for duplicative 

exchange SRO and FINRA oversight. 

16See supra note 14. 

17See FINRA Rule 6700 Series; see also Securities 

Exchange Act Release No. 79116 (Oct. 18, 2016), 81 

FR 73167 (Oct. 24, 2016) (File No. SR–FINRA– 

2016–027). In addition, FINRA requires its members 

to report all OTC Equity Security and Restricted 

Equity Security transactions (other than 

transactions executed on or through an exchange) 

to FINRA’s OTC Reporting Facility (‘‘ORF’’). See 

FINRA Rules 6410 and 6610; see also FINRA Rules 

6420(f) (defining ‘‘OTC Equity Security’’); 6420(k) 

(defining ‘‘Restricted Equity Security’’); 6420(n) 

(defining ‘‘OTC Reporting Facility’’). FINRA also 

requires its members to report off-exchange NMS 

stock trades to two Trade Reporting Facilities 

(‘‘TRFs’’) that FINRA operates, one jointly with 

Nasdaq and the other jointly with the NYSE. See 

FINRA Rule 6110 and the FINRA Rule 6000 Series 

generally; see also 17 CFR 242.600(b) (defining 

‘‘NMS stock’’). Further, FINRA operates the 

Alternative Display Facility (‘‘ADF’’) for NMS 

stocks, which is a FINRA facility for posting quotes 

and reporting trades governed by FINRA’s trade 

reporting rules. See Securities Exchange Act 

Release No. 46249 (July 24, 2002), 67 FR 49821 

(July 31, 2002) (order approving the ADF); see also 

Securities Exchange Act Release No. 71467 (Feb. 3, 

2014), 79 FR 7485 (Feb. 7, 2014) (order approving 

a proposed rule change to update the rules 

governing the ADF). 

18See FINRA Rule 6730—Transaction Reporting, 

Supplementary Material .07—ATS Identification of 

Non-FINRA Member Counterparties for 

Transactions in U.S. Treasury Securities. 

19See section 15(a)(1) of the Act, 15 U.S.C. 

78o(a)(1). For a more detailed background regarding 

the relevant regulatory environment, including the 

complementary SRO oversight performed by 

exchanges and FINRA, see 2022 Re-Proposal, supra 

note 1, section II, 87 FR 49932–39; see also 2015 

Proposal, supra note 1, section I, 80 FR 18036–45. 

20See Securities Exchange Act Release No. 50700 

(Nov. 18, 2004), 69 FR 71256 (Dec. 8, 2004) 

(‘‘Concept Release Concerning Self-Regulation’’). 

21See section 3(a)(26) of the Act, 15 U.S.C. 

78c(a)(26). 

22See Concept Release Concerning SelfRegulation, supra note 20 (citing section 15(b)(8) of 

the Act, 15 U.S.C. 78o(b)(8)). Congress historically 

has favored self-regulation for a variety of reasons, 

including that effectively regulating the innerworkings of the securities industry at the Federal 

level was viewed as cost prohibitive and inefficient; 

the complexity of securities practices made it 

desirable for SRO regulatory staff to be intimately 

involved with SRO rulemaking and enforcement; 

and the SROs could set standards such as just and 

equitable principles of trade and detailed 

proscriptive business conduct standards. Id. (citing, 

generally, S. Rep. No. 1455, 73d Cong., 2d Sess. 

(1934); H.R. Doc. No. 1383, 73d Cong., 2d Sess. 

(1934); S. Rep. No. 1455, 73d Cong., 2d Sess. 

(1934)); see also id., 69 FR 71257–58. 

23Broker-dealers registered with the Commission 

are subject to the Commission’s jurisdiction and 

oversight and must comply with Commission rules 

applicable to registered broker-dealers. See, e.g., 

section 15 of the Act, 15 U.S.C. 78o; 17 CFR 

240.15a–6 through 240.15b11–1; 17 CFR 240.17a– 

1 through 240.17a–25. Matters related to SRO 

actions or their broker-dealer members also may be 

referred to the Commission or subject to 

Commission review. See, e.g., sections 19(d), 15 

U.S.C. 78(s)(d), and 19(e), 15 U.S.C. 78s(e), of the 

Act. But the Exchange Act also requires that SROs 

enforce their members’ compliance with the 

Exchange Act, the rules and regulations thereunder, 

and the SRO’s own rules. See, e.g., sections 6(b)(1), 

15 U.S.C. 78f(b)(1); 19(g)(1), 15 U.S.C. 78s(g)(1); and 

15A(b)(2), 15 U.S.C. 78o–3(b)(2), of the Act; see also 

section 11A(a)(3)(B) of the Act, 15 U.S.C. 78k– 

1(a)(3)(B) (authorizing the Commission to require 

SROs to act jointly in planning, developing, 

operating, or regulating the national market system). 

24See, e.g., sections 10(b), 15 U.S.C. 78j(b); 15(c), 

15 U.S.C. 78o(c); and 15(g), 15 U.S.C. 78o(g), of the 

Act; section 17(a) of the Securities Act of 1933, 15 

U.S.C. 77q(a); 17 CFR 240.10b–5; FINRA Rules 2020 

(Use of Manipulative, Deceptive, or Other 

Fraudulent Devices), 4530 (Reporting 

Requirements), 5210 (Publication of Transactions 

and Quotations); NYSE Rules 2020 (Use of 

Manipulative, Deceptive or Other Fraudulent 

Devices) and 5220 (Disruptive Quoting and Trading 

Activity Prohibited); Nasdaq General 9, section 1 

(General Standards) and Nasdaq General 9, section 

53 (Disruptive Quoting and Trading Activity 

Prohibited); Cboe Rule 8.6 (Manipulation). 

25See section 19(g) of the Act, 15 U.S.C. 78s(g). 

Consolidated Audit Trail (‘‘CAT’’).15

Those regulatory measures are useful in 

many respects but, nevertheless, firms 

that are not FINRA members remain 

outside FINRA’s direct, membershipbased jurisdiction, and FINRA therefore 

cannot apply its expertise in supervising 

these firms’ off-member-exchange 

securities trading activity and 

investigating potential misconduct with 

the same degree of autonomy that it can 

for FINRA members.16

Moreover, other regulatory 

developments have heightened the need 

for Rule 15b9–1 to be updated. In 

particular, FINRA has established a 

transaction reporting regime under 

which broker-dealers that are FINRA 

members must report U.S. Treasury 

securities transactions into the Trade 

Reporting and Compliance Engine 

(‘‘TRACE’’).17 Some Commissionregistered dealer firms that are not 

FINRA members are significantly 

involved in trading U.S. Treasury 

securities proprietarily but are not 

required to report these transactions 

since they are not FINRA members 

(although if the transaction involves a 

FINRA member, then the FINRA 

member must report the transaction to 

TRACE).18 In addition, U.S. Treasury 

securities trading occurs entirely offexchange, thus these non-FINRA 

members conduct their U.S. Treasury 

securities trading activities outside of 

the direct SRO oversight of any 

exchange and, since they are not FINRA 

members, outside of FINRA’s direct 

jurisdiction despite the fact that FINRA 

is the SRO responsible for the offexchange market. 

The rise in electronic proprietary 

trading and the increasingly fragmented 

market where trading takes place across 

many active markets have put pressure 

on the status quo and persuaded the 

Commission of the need for there to be 

more consistent regulation of such 

trading. Accordingly, after considering 

the comments received in response to 

the 2022 Re-Proposal, the Commission 

is adopting amended Rule 15b9–1 as reproposed. The Commission continues to 

believe that oversight of off memberexchange securities trading must be 

enhanced in light of how securities 

trading occurs today, by narrowing the 

extent to which broker-dealer firms can 

effect off-member-exchange securities 

transactions—in significant volumes in 

many cases—while exempt from FINRA 

membership. 

II. Background 

A. Regulatory Framework 

Broker-dealers generally must register 

with the Commission and become 

members of a SRO.19 Self-regulation is 

a longstanding, key component of U.S. 

securities industry regulation.20 The 

Exchange Act defines SRO to include 

each national securities exchange or 

Association.21 An SRO sets standards, 

conducts examinations, and enforces 

rules regarding its members.22 In 

addition to Commission oversight, the 

Exchange Act requires this layer of SRO 

oversight, pursuant to which SROs act 

as front-line regulators of their brokerdealer members.23 In particular, there 

are Federal securities laws, Commission 

rules, and SRO rules that prohibit 

various forms of improper activity by 

broker-dealers.24

As SROs, exchanges and Associations 

are required to examine for and enforce 

compliance by their members and 

associated persons with the Exchange 

Act, the rules and regulations 

thereunder, and the SROs’ own rules.25


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61853 

26See sections 15(b)(8), 15 U.S.C. 78o(b)(8); 15A, 

15 U.S.C. 78o–3; 17(d), 15 U.S.C. 78q(d); and 19(g), 

15 U.S.C. 78s(g), of the Act. Under the selfregulatory structure, the SRO where a broker-dealer 

is registered conducts regulatory oversight and 

assumes responsibility for that oversight. For 

example, section 19(g)(1) of the Act, among other 

things, requires every SRO to examine for and 

enforce compliance by its members and associated 

persons with the Act, the rules and regulations 

thereunder, and the SRO’s own rules, unless the 

SRO is relieved of this responsibility pursuant to 

section 17(d) or section 19(g)(2) of the Act. See 

sections 17(d), 15 U.S.C. 78q(d); and 19(g)(2), 15 

U.S.C. 78s(g)(2), of the Act. Section 17(d)(1) of the 

Act enables the Commission to allocate authority 

among SROs when a person is a member of more 

than one SRO. Section 17(d)(1) of the Act, 15 U.S.C. 

78q(d)(1). Section 15A of the Act provides for the 

creation of national securities associations of 

broker-dealers, with powers to adopt and enforce 

rules to regulate the off-exchange market. Section 

15A of the Act, 15 U.S.C. 78o–3. And as described 

above, section 15(b)(8) of the Act further 

implements this construct of effective regulatory 

oversight by requiring Association membership of 

a broker-dealer unless it effects transactions solely 

on an exchange of which it is a member. Section 

15(b)(8) of the Act, 15 U.S.C. 78o(b)(8). 

27See section 15(b) of the Act, 15 U.S.C. 78o(b). 

28Section 15(b)(9) of the Act, 15 U.S.C. 78o(b)(9). 

29Section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8). 

30Section 15(b)(9) of the Act, 15 U.S.C. 78o(b)(9). 

31 17 CFR 240.15b9–1(a). 

32 17 CFR 240.15b9–1(b)(1). Rule 15b9–1 also 

states that the de minimis allowance does not apply 

to income derived from transactions through the 

Intermarket Trading System (‘‘ITS’’), and defines 

the term ‘‘Intermarket Trading System’’ for 

purposes of the rule. 17 CFR 240.15b9–1(b)(2) and 

(c). As discussed below, the Commission proposed 

to eliminate from amended Rule 15b9–1 references 

to the ITS because they are obsolete, and the 

Commission is adopting those eliminations by 

deleting current paragraphs (b)(2) and (c) from the 

amended rule. See infra note 192 and 

accompanying text. 

33The rule was renumbered to Rule 15b9–1 in 

1983. See SECO Programs; Direct Regulation of 

Certain Broker-Dealers; Elimination, Securities 

Exchange Act Release No. 20409 (Nov. 22, 1983), 

48 FR 53688 (Nov. 29, 1983) (‘‘SECO Programs 

Release’’). See also Qualifications and Fees Relating 

to Brokers or Dealers Who Are Not Members of 

National Security [sic] Association, Securities 

Exchange Act Release No. 7697 (Sept. 7, 1965), 30 

FR 11673 (Sept. 11, 1965) (‘‘Qualifications and Fees 

Release’’). The Commission stated in the 

Qualifications and Fees Release: ‘‘Among the 

broker-dealers that are not members of a registered 

national securities association are several 

specialists and other floor members of national 

securities exchanges, some of whom introduce 

accounts to other members. The over-the-counter 

business of these broker-dealers may be limited to 

receipt of a portion of the commissions paid on 

occasional over-the-counter transactions in these 

introduced accounts, and to certain other 

transactions incidental to their activities as 

specialists. In most cases, the income derived from 

these activities is nominal.’’ Id. at 11675. 

34See Extension of Temporary Rules 23a–1(T) 

and 23a–2(T); Adoption of Amendments to SECO 

Rules, Securities Exchange Act Release No. 12160 

(Mar. 3, 1976), 41 FR 10599 (Mar. 12, 1976) 

(‘‘Adoption of Amendments to SECO Rules’’). In 

adopting the proprietary trading exclusion, the 

Commission indicated that an exchange floor 

broker, through another broker or dealer, could 

effect transactions for its own account on an 

exchange of which it was not a member. Id. at 

10600. The Commission stated that such 

transactions ultimately would be effected by a 

member of that exchange. In 1983, the Commission 

further amended Rule 15b9–1 to accommodate 

transactions effected through the then-new ITS, and 

eliminated references to, and requirements under, 

the SECO Program, which was the Commission’s 

program of direct regulation of certain brokerdealers at that time. See SECO Programs Release, 

supra note 33. 

35See 2022 Re-Proposal, supra note 1, section II, 

87 FR 49932–39. 

36While some updated figures set forth below in 

this section differ from figures set forth in the 2022 

Re-Proposal, the Commission believes that its 

conclusions are supported by the updated figures as 

well as the 2022 Re-Proposal’s figures. 

37Sources: SEC FOCUS Reports (Form X–17A–5); 

FINRA’s Central Registration Depository (‘‘CRD’’). 

38Source: CRD. 

39 Id. 35 out of the 64 identified firms in April 

2023 were members of a Nasdaq group exchange, 

34 firms were members of Nasdaq PHLX LLC 

(‘‘PHLX’’) specifically, and five firms were members 

of only PHLX. The Commission believes these 

figures are consistent with one commenter’s 

statement in October 2022 that 39 non-FINRA firms 

were Nasdaq members, 13 of which designated 

PHLX as their DEA, as minor differences in the 

Commission’s and the commenter’s figures could be 

explained by changes in firms’ Nasdaq membership 

or Commission registration status during the 

passage of time between October 2022 and April 

2023. See letter from Erik Wittman, Deputy Head 

Continued 

Because of this, SROs that operate an 

exchange generally possess expertise in 

supervising members who specialize in 

trading the products and utilizing the 

order types that may be unique or 

specialized within the exchange. This 

expertise complements the expertise of 

an Association in supervising its 

members’ cross-exchange and offexchange securities trading activity. 

Indeed, the Exchange Act’s statutory 

framework places SRO oversight 

responsibility with an Association for 

off-member-exchange securities 

trading.26

Specifically, section 15(b) of the Act 

provides that Commission registration is 

generally not effective until the brokerdealer becomes a member of an 

Association or a national securities 

exchange if the broker-dealer effects 

transactions solely on that exchange.27

Additionally, section 15(b)(8) of the Act 

prohibits any registered broker or dealer 

from effecting transactions in securities 

unless it is a member of an Association 

or effects transactions in securities 

solely on an exchange of which it is a 

member. Section 15(b)(9) of the Act 

provides the Commission with authority 

to exempt any broker or dealer from 

section 15(b)(8), if that exemption is 

consistent with the public interest and 

the protection of investors.28 Rule 15b9– 

1 sets forth an exemption from section 

15(b)(8) of the Act 29 pursuant to 

authority conferred to the Commission 

by section 15(b)(9) of the Act.30

Rule 15b9–1 provides that any broker 

or dealer required by section 15(b)(8) of 

the Act to become a member of an 

Association shall be exempt from such 

requirement if it is (1) a member of a 

national securities exchange, (2) carries 

no customer accounts, and (3) has 

annual gross income derived from 

purchases and sales of securities 

otherwise than on a national securities 

exchange of which it is a member in an 

amount no greater than $1,000 (this 

$1,000 gross income allowance is 

referred to herein as the ‘‘de minimis 

allowance’’).31 Under Rule 15b9–1, the 

de minimis allowance does not apply to 

income derived from transactions for a 

registered dealer’s own account with or 

through another registered broker or 

dealer (referred to herein as the 

‘‘proprietary trading exclusion’’).32 The 

Commission adopted the original 

version of Rule 15b9–1 (then Rule 15b8– 

1 but generally referred to herein as 

Rule 15b9–1) in 1965,33 which included 

the de minimis allowance but not the 

proprietary trading exclusion; the 

Commission adopted the proprietary 

trading exclusion in 1976.34 Relying on 

the de minimis allowance and 

proprietary trading exclusion, a 

registered dealer can remain exempt 

from Association membership while 

engaging in unlimited off-memberexchange proprietary trading of 

securities, so long as the dealer is a 

member of a national securities 

exchange, carries no customer accounts, 

and its proprietary trading is conducted 

with or through another registered 

broker-dealer. 

B. Updated Background Statistics 

The 2022 Re-Proposal set forth 

statistics regarding off-memberexchange securities trading activity by 

firms that were Commission-registered 

broker-dealers and exchange members 

but not FINRA members during the time 

periods reviewed by the Commission in 

the 2022 Re-Proposal.35 Those statistics 

are updated below for corresponding 

year-over-year time periods.36

The Commission estimates that, as of 

the end of September 2022, there were 

73 firms that were Commissionregistered broker-dealers and exchange 

members but not FINRA members, and 

that there were 64 such firms as of April 

2023.37 Many of these firms were 

members of just one exchange while 

others were members of multiple 

exchanges.38 Specifically, as of April 

2023, 22 of the 64 identified firms were 

single exchange members; 9 of the firms 

were members of two exchanges; 15 of 

the firms were members of more than 

two but 10 or fewer exchanges; and the 

remainder were members of more than 

10 exchanges.39


ddrumheller on DSK120RN23PROD with RULES2
61854 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

of Enforcement, The Nasdaq Stock Market LLC (Oct. 

6, 2022) (‘‘Nasdaq Letter’’) at 4. 40Source: CAT. 41 Id. A firm ‘‘initiating’’ an order is the firm that 

reports the origination of the order as a New Order 

Event (MENO) to the CAT. The other 20 firms did 

not initiate orders in listed equities in Sept. 2022. 42 Id. Dollar volumes set forth in this section 

represent the sum of bought and sold volume 

during the specified time period. 43 Id. The Commission estimates that there was 

approximately $8.6 trillion in total off-exchange 

transaction volume in listed equities reported by 

buying and selling firms in Sept. 2022. 44 Id. The Commission also estimates that, in 

2022, 48 of the 73 firms identified as registered 

broker-dealers and exchange members but not 

FINRA members initiated options order executions 

accounting for approximately 16–27% of daily 

options contract volume traded. The Commission 

further estimates that 35 of these 48 firms initiated 

executions on an exchange where they are not a 

member, and that this transaction volume 

represented approximately 3% of these 35 firms’ 

total options contract transaction volume reported 

in 2022, and approximately 1% of all options 

contract transaction volume reported in 2022. Id. 

These figures, like the other figures set forth herein, 

have been updated from what was set forth in the 

2022 Re-Proposal. 

45 Id. The other 19 firms did not initiate orders 

in listed equities in Apr. 2023. 

46 Id. 

47 Id. The Commission estimates that there was 

approximately $7.2 trillion in total off-exchange 

transaction volume in listed equities reported by 

buying and selling firms in Apr. 2023. 

48 Id. See also Tables 1 and 2, section V.A.1, infra, 

for additional detail regarding these firms’ trading 

activity during the noted time periods. 

49 Id. 

50 Id. 

51 Id. 

52 Id. 

53 Id. 

54 Id. 

55See U.S. Dep’t of the Treasury et al., Joint Staff 

Report: The U.S. Treasury Market on Oct. 15, 2014 

(July 13, 2015) (‘‘Joint Staff Report’’) at 2. The 

secondary market for U.S. Treasury securities 

(sometimes referred to as the U.S. Treasury cash 

market) is generally bifurcated between the dealerto-customer market and the interdealer market. 

Trading in the U.S. Treasury securities dealer-tocustomer market is generally conducted through 

bilateral transactions. Trading often occurs either 

over the phone or on trading venues that facilitate 

the matching of buy and sell orders through 

electronic systems. In the interdealer market, the 

majority of trading in on-the-run U.S. Treasury 

securities currently occurs on ATSs using electronic 

central limit order books. For off-the-run U.S. 

Treasury securities, the majority of interdealer 

trading occurs via bilateral transactions through 

voice-assisted brokers and electronic trading 

platforms. See Securities Exchange Act Release No. 

90019 (Sept. 28, 2020), 85 FR 87106, 87108 (Dec. 

21, 2020). On-the-run U.S. Treasury securities are 

the most recently issued U.S Treasury securities of 

a particular maturity. Off-the-run U.S. Treasury 

securities include all U.S. Treasury securities that 

have been issued before the most recent issuance 

and are still outstanding. 

56See FINRA Rule 6730(a)(1) (requiring FINRA 

members to report transactions in TRACE-Eligible 

Securities, including U.S. Treasury securities). 

57See FINRA Rule 6730—Transaction Reporting, 

Supplementary Material .07—ATS Identification of 

Non-FINRA Member Counterparties for 

Transactions in U.S. Treasury Securities (among 

other things, defining the term ‘‘covered ATS’’ as 

an ATS that executed transactions in U.S. Treasury 

securities against non-FINRA member subscribers 

of $10 billion or more in monthly par value, 

computed by aggregating buy and sell transactions, 

for any two months in the preceding calendar 

quarter). U.S. Treasury securities market share is 

calculated as the sum of the identified entities’ buy 

and sell volume divided by twice the market-wide 

volume for the period. Approximately $165 trillion 

total U.S. Treasury securities transaction volume 

was reported to TRACE in 2022, of which 

approximately $64 trillion was reported as executed 

Several of these firms—both singleexchange and multiple-exchange 

members—engage in cross-market and 

off-exchange proprietary securities 

trading. These firms account for a 

significant portion of off-exchange 

securities trading volume and initiate a 

significant number of securities 

transactions on exchanges other than 

exchanges to which they belong as a 

member.40 They forgo FINRA 

membership presumably in reliance on 

Rule 15b9–1, as their effectuation of 

transactions in securities elsewhere than 

on exchanges to which they belong as a 

member would trigger section 15(b)(8)’s 

Association membership requirement 

but for the exemption provided by Rule 

15b9–1. 

For example, of the estimated 73 

broker-dealers that were exchange 

members but not FINRA members as of 

the end of September 2022, 53 initiated 

orders in listed equities in September 

2022 that were executed on or off an 

exchange.41 These firms’ September 

2022 off-exchange listed equities dollar 

volume executed was approximately 

$440 billion,42 which was 

approximately 5.1% of total offexchange volume of listed equities 

executed that month.43 Moreover, these 

firms’ September 2022 listed equities 

dollar volume executed on exchanges of 

which they are not a member was 

approximately $311 billion.44

Of the estimated 64 broker-dealers 

that were exchange members but not 

FINRA members as of April 2023, 45 

initiated orders in listed equities in 

April 2023 that were executed on or off 

an exchange.45 These firms’ April 2023 

off-exchange listed equities dollar 

volume executed was approximately 

$405 billion,46 which was 

approximately 5.6% of total offexchange volume of listed equities 

executed that month.47 Moreover, these 

firms’ April 2023 listed equities dollar 

volume executed on exchanges of which 

they are not a member was 

approximately $262 billion.48

A subset of the identified firms that 

traded during September 2022 and April 

2023 accounted for the large majority of 

the identified firms’ aggregate trading 

volume. In this regard, the Commission 

estimates that, as of September 2022, 12 

of the 53 identified firms that initiated 

orders in listed equities accounted for 

approximately 4.5% of total offexchange listed equities volume 

executed in September 2022 and 89% of 

the off-exchange listed equities 

transaction volume attributable to the 53 

identified firms that month.49 One of the 

12 firms initiated $180 billion in offexchange listed equities executions in 

September 2022, which was over 2% of 

total off-exchange listed equities 

transaction volume that month and 

approximately one-half of the offexchange volume executions 

attributable to the 53 identified firms.50

With respect to the 53 firms’ listed 

equities transaction volume on 

exchanges of which they are not a 

member, one firm accounted for 

approximately 66% of the $311 billion 

in volume attributable to the 53 

identified firms in September 2022; six 

firms (including the aforementioned 

one) accounted for over 90% of that 

volume; and 22 firms (including the 

aforementioned six firms) accounted for 

over 99% of that volume.51

The Commission also estimates that, 

as of April 2023, 12 of the 45 identified 

firms that initiated orders in listed 

equities then accounted for 

approximately 5.1% of total offexchange listed equities volume 

executed in April 2023 and 90% of the 

off-exchange listed equities transaction 

volume attributable to the 45 identified 

firms that month.52 One of the 12 firms 

initiated $222 billion in off-exchange 

listed equities executions in April 2023, 

which was 3.1% of total off-exchange 

listed equities transaction volume that 

month and approximately 55% of the 

off-exchange volume executions 

attributable to the 45 identified firms.53

With respect to the 45 firms’ listed 

equities transaction volume on 

exchanges of which they are not a 

member, one firm accounted for 

approximately 72% of the $262 billion 

in volume attributable to the 45 

identified firms in April 2023; five firms 

(including the aforementioned one) 

accounted for over 90% of that volume; 

and 21 firms (including the 

aforementioned six firms) accounted for 

approximately 99% of that volume.54

With respect to trading in U.S. 

Treasury securities, all of which occurs 

off-exchange,55 the Commission 

estimates that seven broker-dealers that 

were exchange members but not FINRA 

members accounted for over $6 trillion 

in U.S. Treasury securities volume 

executed on ‘‘covered ATSs’’ in 2022 

that was reported to TRACE,56 which 

was approximately 3.67% of total U.S 

Treasury securities volume traded in 

2022 that was reported to TRACE.57 In 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61855 

on a covered ATS. Beginning in September 2022, 

a new form of trade reports from depository 

institutions were added to TRACE. These 

transactions, which amounted to $4.5 trillion, are 

excluded. 

58See supra note 56. 

59 Id. One broker-dealer that was not a FINRA 

member and traded U.S. Treasury securities in 2022 

joined FINRA prior to April 2023, and another 

broker-dealer that was not a FINRA member and 

traded U.S. Treasury securities in 2022 did not 

appear to trade U.S. Treasury securities in April 

2023. 

60See section 15(b)(8) of the Act, 15 U.S.C. 

78o(b)(8); amended Rule 15b9–1, infra. 

61See section 15(b)(8) of the Act, 15 U.S.C. 

78o(b)(8). 

62See amended Rule 15b9–1, under ‘‘Text of 

Amendments,’’ infra. 

63See 2022 Re-Proposal, supra note 1, 87 FR 

49932. 

64See letters from: Marcia E. Asquith, Corporate 

Secretary, EVP, Board of External Relations, FINRA 

(Sept. 27, 2022) (‘‘FINRA Letter’’) at 1–2; Stephen 

W. Hall, Legal Director and Securities Specialist, 

and Scott Farmin, Legal Counsel, Better Markets, 

Inc. (Sept. 27, 2022) (‘‘Better Markets Letter’’) at 6– 

7. 

65See FINRA Letter at 1–2; Better Markets Letter 

at 6–7; letter from Henry M. Phillip (Aug. 1, 2022) 

(‘‘Phillip Letter’’). See also Nasdaq Letter at 2 

(expressing support for broker-dealers being 

required to join an Association if they effect 

securities transactions off-exchange and/or in the 

fixed income space). 

66See, e.g., FINRA Letter at 5; memorandum 

dated June 20, 2023, regarding a call between 

Commission staff and FINRA (‘‘6/20/23 Meeting 

Memorandum’’) (stating that FINRA identified nonFINRA member broker-dealer firms as potential 

respondents in 5% of the market regulation 

investigations it conducted in 2020 and 2021, 

which ranged across asset types and included both 

cross-exchange and off-exchange conduct). 

67See FINRA Letter at 6. 

68 Id. 

69 Id. 

70See Better Markets Letter at 5, 7–8; see also 

note 8, supra, for a description of high-frequency 

trading firms. This commenter also stated that highfrequency trading represents roughly 50% of the 

trading volume in U.S. equities markets and 48% 

of the total U.S. Treasury securities interdealer 

market, and that recent liquidity crises in both the 

U.S. equities and Treasury securities markets have 

shown the effects on markets dominated by, and 

heavily reliant on, high-frequency trading firms. See 

Better Markets Letter at 3. 

71See, e.g., Nasdaq Letter at 3; and letters from: 

John Kinahan, CEO, Group One Trading, LP (Sept. 

26, 2022) (‘‘Group One Letter) at 1–2; Tom 

Simpson, CEO, PEAK6 Capital Management LLC 

(Sept. 26, 2022) (‘‘PEAK6 Letter’’) at 2; Akuna 

Securities LLC, Belvedere Trading, Chicago Trading 

Company, and Volant Trading (Sept. 27, 2022) 

(‘‘ABCV Letter’’) at 3; Angelo Evangelou, Chief 

Policy Officer, and Greg Hoogasian, Chief 

Regulatory Officer, Cboe Global Markets, Inc. (Sept. 

27, 2022) (‘‘Cboe Letter’’) at 4–7; Kirsten Wegner, 

Continued 

April 2023, the Commission estimates 

that five broker-dealers that were 

exchange members but not FINRA 

members accounted for approximately 

$302 billion in U.S. Treasury securities 

volume executed on covered ATSs that 

was reported to TRACE,58 which was 

approximately 2.65% of total U.S 

Treasury securities volume traded in 

April 2023 that was reported to 

TRACE.59

III. Discussion of Amendments to Rule 

15b9–1 

Under the amendments to Rule 15b9– 

1 being adopted, a broker or dealer 

registered with the Commission 

pursuant to section 15 of the Act will be 

required by section 15(b)(8) of the Act 

to join an Association if the broker or 

dealer effects off-member-exchange 

securities transactions, unless it can rely 

upon one of the amended rule’s narrow 

exemptions.60 Conversely, and 

unchanged by these amendments, a 

broker or dealer will not be required to 

become a member of an Association if 

it effects securities transactions only on 

an exchange of which it is a member.61

Specifically, Rule 15b9–1, as 

amended, no longer provides a de 

minimis allowance or proprietary 

trading exclusion, and allows an 

exemption from Association 

membership only for a registered broker 

or dealer that is an exchange member, 

carries no customer accounts, and 

effects securities transactions solely on 

a national securities exchange of which 

it is a member except in two narrow 

circumstances: (1) a broker or dealer 

effects off-member-exchange securities 

transactions that result solely from 

orders that are routed by an exchange of 

which it is a member in order to comply 

with Rule 611 of Regulation NMS or the 

Options Order Protection and Locked/ 

Crossed Market Plan; or (2) a broker or 

dealer effects off-member-exchange 

securities transactions that are solely for 

the purpose of executing the stock leg of 

a stock-option order.62 In the 

subsections below, the Commission 

discusses each element of the amended 

rule in detail. 

A. Elimination of the De Minimis 

Allowance and Proprietary Trading 

Exclusion 

The adopted amendments to Rule 

15b9–1 eliminate the de minimis 

allowance and proprietary trading 

exclusion. Rescinding these provisions 

generally eliminates (subject to the 

exemptions in the amended rule) the 

ability for proprietary trading dealer 

firms to rely on Rule 15b9–1 to effect 

off-member-exchange securities 

transactions without joining an 

Association. The Commission proposed 

these rescissions to update Rule 15b9– 

1 so that it more appropriately 

effectuates Exchange Act principles of 

complementary exchange SRO and 

Association oversight in today’s market, 

including section 15(b)(9)’s mandate 

that any exemption from section 

15(b)(8) be consistent with the public 

interest and protection of investors.63

Some commenters on the 2022 ReProposal broadly agreed that Rule 15b9– 

1 should be updated in this way.64 They 

stated that the proposed amendments 

are appropriate and necessary to modify 

and modernize Rule 15b9–1 such that it 

is consistent with the protection of 

investors and the public interest in 

today’s market.65 They also stated that 

the current regulatory framework, which 

includes RSAs, Rule 17d–2 plans, and 

the CAT, among other things, does not 

provide the full scope of regulatory 

coverage appropriate for comprehensive 

and consistent oversight of proprietary 

trading activities because an Association 

still lacks regulatory jurisdiction over 

certain trading activity.66 FINRA stated 

that performing regulatory work with 

respect to broker-dealer firms that are 

not FINRA members pursuant to RSAs 

is less certain and stable than direct 

Association oversight of such firms 

because of the discretionary nature of 

RSAs.67 FINRA also emphasized that 

access to audit trail data does not confer 

jurisdiction to FINRA over such firms, 

and that FINRA does not have the 

independent ability to examine for, 

investigate, or enforce potential 

violations of the Federal securities laws 

or FINRA rules with respect to such 

firms when they are identified through 

surveillance or other means.68 FINRA 

stated that jurisdictional limitations 

impede comprehensive off-exchange 

and cross-market oversight in equities, 

options, and fixed income markets.69

Another commenter stated that the 

proposal would help ensure that highfrequency trading firms, which trade 

large volumes of equities and U.S. 

Treasury securities across and off 

exchanges without being required to 

join an Association, i.e., FINRA, are 

subject to consistent and robust 

oversight through FINRA as opposed to 

only being subject to complying with 

the more narrow regulatory 

requirements specific to each exchange, 

and that such firms do not take 

advantage of exclusions provided by 

Rule 15b9–1 that were intended to 

accommodate limited broker-dealer 

activities.70

Other commenters questioned the 

necessity and appropriateness of the 

application of FINRA oversight to 

proprietary trading broker-dealer firms 

that are not FINRA members. They 

stated that, in light of existing regulatory 

mechanisms that apply to such firms, 

including, in particular, proprietary 

options trading firms, FINRA 

membership for such firms would be 

unnecessary and duplicative.71 In this 


ddrumheller on DSK120RN23PROD with RULES2
61856 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

CEO, Modern Markets Initiative (Sept. 27, 2022) 

(‘‘MMI Letter’’) at 2; Thomas M. Merritt, Deputy 

General Counsel, Virtu Financial, Inc. (Sept. 30, 

2022) (‘‘Virtu Letter’’) at 2–3; Joanna Mallers, 

Secretary, FIA Principal Traders Group (Sept. 27, 

2022) (‘‘FIA PTG Letter’’), at 4. See also letter from 

Chasse R. Thomas (Sept. 26, 2022) (‘‘Thomas 

Letter’’) at 2 (stating that the proposal should not 

be adopted because FINRA’s ability to monitor 

complex financial market is inefficient and 

unreliable). Some commenters also stated that the 

FINRA membership application process requires 

information that is duplicative of information 

already provided to the Commission and other 

SROs. See PEAK6 Letter at 2; FIA PTG Letter at 4. 

The Commission does not believe that the 

submission of information in connection with the 

FINRA membership application process that is 

duplicative of information already provided to the 

Commission or exchange SROs is a reason to forgo 

the amendments to Rule 15b9–1 being adopted. To 

the extent information requested by FINRA is 

duplicative, firms may be able to leverage their 

prior submissions when applying for FINRA 

membership. Moreover, it is important that each 

SRO of which a broker-dealer is a member, 

including FINRA, have the requisite information 

required by its membership application, regardless 

of any duplication of the information, because each 

SRO has regulatory responsibilities over the brokerdealer. FINRA may require the same information 

that is provided to exchange SROs so that it may 

be able to review the information in order to 

approve the membership application and effectively 

regulate the firm. Additionally, Commissionregistered broker-dealers that are exchange 

members and that join FINRA as result of these rule 

amendments would not be situated any differently 

from the many Commission-registered brokerdealers that are exchange members and already 

FINRA members. In addition, see discussion below 

in this section as well as in section V, infra, 

regarding FINRA membership costs for brokerdealer firms that must join FINRA as a result of the 

adopted amendments. 

72See, e.g., Group One Letter at 1–2; PEAK6 

Letter at 2; ABCV Letter at 3; Cboe Letter at 4–7; 

Nasdaq Letter at 3; FIA PTG Letter at 4; MMI Letter 

at 2; Virtu Letter at 2–3. 

73See, e.g., MMI Letter at 2; FIA PTG Letter at 2; 

Cboe Letter at 2–3; STA Letter at 2–3; ABCV Letter 

at 3; PEAK6 Letter at 3; Group One Letter at 2; letter 

from Eric Chern, Co-Founder, Chicago Trading 

Company, LLC (Sept. 27. 2022) (‘‘CTC Letter’’) at 4. 

74Commenters’ critiques of the 2022 Re-Proposal 

are largely the same as those that the Commission 

received in response to the 2015 Proposal, and the 

Commission continues to disagree with them for 

many of the same reasons expressed in the 2022 ReProposal. See 2022 Re-Proposal, supra note 1, 87 FR 

49941. 

75See supra note 14. 

76See FINRA Letter at 8. FINRA has taken an 

active role in overseeing trading activity in U.S. 

Treasury securities by, for example, requiring U.S. 

Treasury securities to be reported to TRACE, and 

by publishing daily files of aggregated U.S. Treasury 

securities transactions data reported to TRACE. See 

FINRA Rules 6730 and 6750; see also Treasury 

Daily Aggregate Statistics, available at https:// 

www.finra.org/finra-data/browse-catalog/abouttreasury/daily-file. In addition, FINRA has taken 

enforcement action regarding U.S. Treasury 

securities trading activity and reporting. See, e.g., 

FINRA Department of Enforcement v. BGC 

Financial, L.P., FINRA Letter of Acceptance, 

Waiver, and Consent No. 2020068558701 (Jan. 20, 

2023), available at https://www.finra.org/sites/ 

default/files/fda_documents/

2020068558701%20BGC%20Financial%

2C%20L.P.%20CRD%2019801%20AWC%

20va%20%282023-1676852400276%29.pdf. 

77See CAT NMS Plan Approval Order, supra note 

15, 81 FR 84836–41, for a discussion of the benefits 

provided to SROs by the CAT with regard to 

surveillance, examinations, enforcement 

investigations, and tips and complaints. 78See Nasdaq Letter at 2 (citing traditional 

operational responsibilities such as real-time 

surveillance, and the establishment of an 

investigation and enforcement team in 2017 

dedicated to prosecuting member misconduct on its 

equities and options markets); Cboe Letter at 6 

(stating that SROs operate comprehensive in-house 

regulatory programs which include cross market 

surveillance, such as CAT). 

regard, they stated that exchange SROs, 

including where appointed as DEA over 

certain of their members, already 

possess and exercise authority and can 

cooperate on regulatory matters to 

ensure compliance with the securities 

laws.72 They also stated that the CAT 

provides exchanges with sufficient 

visibility into proprietary brokerdealers’ off-member-exchange securities 

trading activity, which, they contended, 

obviates the need for proprietary trading 

broker-dealers to be required to join 

FINRA.73

As explained below in this section, 

the Commission continues to believe 

that, in today’s market, the de minimis 

allowance and proprietary trading 

exclusion must be eliminated from Rule 

15b9–1 such that there is direct, 

membership-based Association SRO 

oversight of broker-dealers’ off-memberexchange securities trading activity, in 

accordance with section 15(b)(8) of the 

Act and with the section 15(b)(9) 

requirement that any exemption from 

section 15(b)(8) be consistent with the 

protection of investors and the public 

interest.74

Requiring broker-dealers that engage 

in off-member-exchange securities 

transactions to become FINRA members 

will provide FINRA with direct 

jurisdiction and the ability to apply 

with a greater degree of autonomy its 

expertise to the firms’ off-memberexchange securities trading activity and 

investigate potential misconduct in that 

market segment. With respect to FINRA 

members, FINRA can determine 

whether to pursue examinations and 

investigations, and the parameters 

thereof, in a way that it cannot with 

respect to non-FINRA members, as 

FINRA’s oversight over the latter 

depends on RSA arrangements, 

pursuant to which exchange SROs 

retain legal responsibility and final 

decision-making authority with respect 

to the covered exchange members.75 In 

contrast, for FINRA member brokerdealer firms that effect off-memberexchange securities transactions, FINRA 

possesses legal responsibility and 

decision-making authority with respect 

to exercising SRO oversight because 

FINRA can directly apply its own 

jurisdiction and rules to such firms. As 

such, FINRA can unilaterally decide 

whether and how to examine and 

investigate off-member-exchange 

activity by a FINRA member firm for 

compliance with FINRA rules, and what 

course of action to pursue if potential 

FINRA rule violations are identified. 

Moreover, due to FINRA’s experience 

and expertise in cross-market and offexchange oversight, FINRA is wellpositioned to perform direct, 

membership-based oversight over 

broker-dealer firms that effect offmember-exchange securities 

transactions, as FINRA could bring such 

broker-dealers within the applicable 

regulatory operations that FINRA 

already has in place for its direct 

oversight of FINRA members that trade 

across markets. And this FINRA 

oversight extends to U.S. Treasury 

securities trading activity, unlike RSAbased SRO oversight, which does not 

extend to such activity.76

While FINRA traditionally has been 

the SRO that primarily oversees offmember-exchange securities trading 

activity, in the context relevant here— 

proprietary trading broker-dealer firms 

with exchange-only SRO membership 

that effect off-member-exchange 

securities transactions—FINRA is 

unable to directly enforce such firms’ 

compliance with Federal securities laws 

and Commission rules applicable to 

broker-dealers, or apply its own rules to 

such firms, because they are not FINRA 

members. Without direct, membershipbased FINRA oversight, SRO oversight 

of such firms’ off-member-exchange 

securities trading activity is largely a 

function of cooperative regulatory 

arrangements among SROs, but those 

arrangements do not confer 

membership-based jurisdiction to 

FINRA to enforce compliance with the 

Exchange Act and applicable rules. 

These arrangements include those 

discussed in the 2022 Re-Proposal and 

highlighted by commenters, such as 

exchange SRO oversight through being 

appointed as DEA for certain exchange 

members pursuant to Rule 17d–1 and 

through Rule 17d–2 plans, indirect 

FINRA oversight pursuant to RSAs with 

exchange SROs, and the CAT.77 As 

discussed below in this section, while 

these arrangements serve useful 

purposes and enhance regulatory 

outcomes, the Commission continues to 

believe that, in today’s market, they are 

inadequate substitutes for direct, 

membership-based FINRA jurisdiction 

over firms that effect off-memberexchange securities transactions. 

Commenters described the general 

proficiency of direct exchange SRO 

oversight over exchange members.78 As 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61857 

79See 2022 Re-Proposal, supra note 1, 87 at 49934 

n. 46. 

80See 2022 Re-Proposal, supra note 1, 87 FR 

49934; Cross-Market Regulatory Coordination Staff 

Paper, supra note 14. See also Cboe Letter at 4 

(stating that the exchanges know their markets best, 

including the products traded, the intricacies of the 

trading mechanics, and their members’ business 

models). 

81See supra section II.B; see also 2022 ReProposal, supra note 1, 87 FR 49935–40. 

82Section 17(d) of the Act, 15 U.S.C. 78q(d). 

83Section 17(j)(1) of the Act, 15 U.S.C. 78q(j)(1). 

84 17 CFR 240.17d–1. See supra note 13; see also 

2022 Re-Proposal, supra note 1, 87 FR 49933; 

Securities Exchange Act Release No. 12352 (Apr. 

20, 1976), 41 FR 18808 (May 7, 1976). 

85See Staff Paper on Cross-Market Regulatory 

Coordination, supra note 14. 

86RSAs are mechanisms through which such 

coordination can occur, but they are subject to 

limitations including that they do not relieve the 

contracting SRO of its legal responsibilities to 

provide SRO oversight or provide FINRA with 

jurisdiction. See supra note 14 and the discussion 

infra in this section. 

87See supra note 13. See also Group One Letter 

at 3 (stating that the Commission should ensure that 

FINRA serves as the DEA for options market making 

firms that newly join FINRA as a result of the 

amendments to Rule 15b9–1 so that these firms do 

not pay DEA fees that are duplicative of their 

current DEA fees paid to an exchange). 

88See Securities Exchange Act Release No. 12935 

(Oct. 28, 1976), 41 FR 49091 (Nov. 8, 1976); see also 

note 13, supra. 

89See infra sections V.B.1 and V.C.2.d (discussing 

firms’ options for complying with the amendments, 

and that a firm may choose to join additional 

exchanges rather than FINRA when the costs of 

joining FINRA exceed the costs of joining 

additional exchanges to cover all of the exchanges 

on which the firm currently trades). 

90 Generally, FINRA is the DEA for financial 

responsibility rules for exchange members that also 

are members of FINRA. See 2022 Re-Proposal, 

supra note 1, 87 FR 49935 n. 55; see also CrossMarket Regulatory Coordination Staff Paper, supra 

note 14 (stating that ‘‘FINRA serves as the 

Designated Regulation NMS Examining Authority 

(‘DREA’) and Designated CAT Surveillance 

Authority (‘DCSA’) for common exchange members 

that are also members of FINRA, and assumes 

certain examination and enforcement 

responsibilities for those members with respect to 

specified Regulation NMS rules (i.e., 606, 607, 611, 

612 and 613(g)(2)), and for the cross-market 

surveillance, examination, investigation and 

enforcement of Rule 613 and the rules of the SROs 

regarding compliance with the CAT NMS Plan’’). 

Some exchanges serve as DEA for certain of their 

members, but these cases mostly involve firms that 

have specialized business models that focus on a 

particular exchange that is judged to be best 

situated to supervise the member firm’s activity. 

See 2022 Re-Proposal, supra note 1, 87 FR 49956 

and n. 228. 

discussed in the 2022 Re-Proposal, in 

contrast to FINRA, the regulatory focus 

of exchange SROs is generally on 

trading by their members on their 

respective exchanges.79 Exchange SROs 

generally monitor market activity 

specific to their own exchanges and 

have expertise in regulating unique 

aspects of their markets.80 The focus of 

the amendments being adopted here, 

however, is different. Here, the 

Commission is concerned with offmember-exchange securities trading 

activity, SRO oversight of which 

traditionally has been and remains 

primarily FINRA’s responsibility. As 

discussed above and in the 2022 ReProposal, several broker-dealer firms 

that are exchange members but not 

FINRA members effect off-memberexchange securities transactions.81 This 

includes firms that trade options 

proprietarily and are engaged in 

proprietary options market making. 

While some commenters stated that 

membership-based FINRA oversight 

over such firms would be unnecessary 

and would duplicate existing exchange 

SRO oversight, the Commission 

continues to believe that direct, 

membership-based FINRA oversight 

over these firms (and therefore the 

amendments being adopted here) is 

necessary because they effect securities 

transactions off-member-exchange and 

thus generally outside the expertise of 

any exchange where they are a member 

and within FINRA’s primary area of 

expertise. 

Moreover, the Exchange Act provides 

a way to help address commenter 

concerns regarding regulatory 

duplication. Specifically, with respect 

to common members, section 17(d) of 

the Act authorizes the Commission to 

relieve an SRO of the responsibility to 

receive regulatory reports; to examine 

for and enforce compliance with 

applicable statutes, rules, and 

regulations; or to perform other 

specified regulatory functions.82 Section 

17(j)(1) of the Act also requires the 

SROs’ cooperation and coordination of 

broker-dealer examination and oversight 

activities and elimination of any 

unnecessary and burdensome 

duplication in the examination 

process.83

To implement section 17(d)(1) of the 

Act, the Commission adopted two rules 

thereunder: Rule 17d–1 and Rule 17d– 

2. Rule 17d–1 authorizes the 

Commission to name a single SRO as 

the DEA to examine a common SRO 

member (i.e., a broker-dealer that is a 

member of the DEA SRO as well as 

other SROs) for compliance with the 

financial responsibility requirements 

imposed by the Act, Commission rules, 

or the rules of the SROs where the 

broker-dealer is a member.84 When an 

SRO has been named as a common 

member’s DEA, all other SROs to which 

the common member belongs are 

relieved of the responsibility to examine 

the firm for compliance with the 

applicable financial responsibility rules. 

Rule 17d–1 addresses only an SRO’s 

obligations to enforce member 

compliance with financial responsibility 

requirements. Rule 17d–1 does not 

relieve an SRO from its obligation to 

examine a common member for 

compliance with its own rules and 

provisions of the Federal securities laws 

governing matters other than financial 

responsibility, including sales practices 

and trading activities and practices. 

To further address regulatory 

duplication, the Commission also 

adopted Rule 17d–2 under the Act. Rule 

17d–2 permits SROs to propose joint 

plans for the allocation of regulatory 

responsibilities with respect to their 

common members. Commission 

approval of a plan filed pursuant to Rule 

17d–2 relieves an SRO of those 

regulatory responsibilities allocated by 

the plan to another SRO. FINRA has 

experience coordinating with exchanges 

in the oversight of broker-dealers that 

are common members of FINRA and the 

exchanges on which they trade 

securities pursuant to such plans.85

Such coordination among FINRA and 

exchange SROs pursuant to Rule 17d–2 

plans cannot occur, however, with 

respect to broker-dealer firms that are 

not FINRA members.86

Rule 17d–1 DEA arrangements and 

Rule 17d–2 plans are relevant with 

respect to commenters’ concern that 

direct, membership-based FINRA 

oversight of broker-dealer firms would 

duplicate exchange SRO oversight.87

Mitigating duplicative SRO oversight is 

the primary purpose of these regulatory 

arrangements.88 To the extent brokerdealer firms join FINRA as a result of 

the amendments to Rule 15b9–1 89 and 

are members of one or more exchanges, 

Rule 17d–1 could be utilized to mitigate 

duplicative oversight with respect to 

financial responsibility by exchange 

SROs and FINRA over these common 

members. And Rule 17d–2 plans could 

similarly be utilized by exchange SROs 

and FINRA to mitigate the potential for 

duplicative SRO oversight over their 

common members in areas other than 

financial responsibility. This is what 

occurs today with common SRO 

members, and therefore the Commission 

believes the same will likely occur for 

proprietary trading broker-dealer firms 

that are exchange members and newly 

join FINRA as a result of these 

amendments.90

FINRA has entered into RSAs with 

certain exchange SROs, which allow for 

some SRO oversight of off-memberexchange equities and options trading 

activity by proprietary trading brokerdealer firms that are exchange members 


ddrumheller on DSK120RN23PROD with RULES2
61858 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

91See FINRA Letter at 4 (stating that Rule 17d– 

2 plans and RSAs are not without their limitations). 

92See id. at 8. 

93 In the context of an RSA in which an exchange 

SRO contracts with FINRA for FINRA to provide 

regulatory services on behalf of the exchange SRO, 

FINRA’s oversight of the off-member-exchange 

trading activity of a firm that is a member of the 

exchange but not a FINRA member is for 

compliance with the exchange’s rules, not FINRA’s 

rules, since FINRA’s rules apply only to its 

members. 

94See FINRA Letter at 5 (stating that RSAs are 

privately negotiated contracts, vary in their scope 

of regulatory coverage, and can be terminated by the 

parties thereto; that FINRA examines for 

compliance with the rules of certain individual 

exchanges under RSAs and, therefore, firms that are 

not FINRA members may be subject to different 

exchange rules and interpretations with respect to 

the same activity; and that RSAs do not provide 

FINRA with membership-based jurisdiction to 

directly enforce such firms’ compliance with the 

Federal securities laws or subject such firms to 

FINRA’s rules for their OTC trading, even where 

such trading may not be comprehensively 

addressed by exchange rules or RSAs). As a result 

of amended Rule 15b9–1, any broker-dealer that 

effects off-member-exchange securities transactions 

will need to join an Association, pursuant to section 

15(b)(8) of the Act, unless the broker-dealer’s offmember-exchange securities transactions are 

covered by an exemption in the amended rule. 

95See infra section V (setting forth expiration 

dates for RSAs). 

96See Nasdaq Letter at 3; see also Cboe Letter at 

5 (discussing the formation of the ISG and CMRWG 

to facilitate coordination among the SROs). 

97See FINRA Information Notice—4/8/20 

available at https://www.finra.org/rules-guidance/ 

notices/information-notice-040820 (informing 

members of the existence and role of the CMRWG). 

98See Cboe Letter at 4. 

99See id. at 2–3. 

100See, e.g., CTC Letter at 3; Group One Letter at 

2. 101See Cboe Letter at 2–3. 

but not FINRA members.91 RSAs can 

serve useful purposes, but they 

generally are not publicly available and 

are not subject to Commission approval. 

Rather, they are voluntary private 

agreements between SROs that are not 

mandated by any Commission rule or 

statutory obligation, and that may expire 

or be terminated by the parties. As a 

result, to the extent oversight is 

performed on non-FINRA member 

firms’ off-member-exchange securities 

trading activity based on RSAs, such 

oversight relies upon discretionary 

arrangements between exchanges and 

FINRA insofar as equities and options 

are concerned; and such agreements to 

date have not covered U.S. Treasury 

securities trading activity.92 In addition, 

under an RSA, FINRA examines for 

compliance with the rules of the 

exchange with which it has entered into 

the RSA.93 Thus, non-FINRA members 

that are members of different exchanges 

may be subject to different exchange 

rules and interpretations when they 

effect off-member-exchange securities 

transactions to the extent these rules 

and interpretations are different. This 

approach provides the potential for a 

less stable and consistent regulatory 

regime for the covered off-memberexchange securities transactions than 

one in which Association membership 

and oversight is mandated.94 Moreover, 

there is no regulatory requirement that 

any RSA pursuant to which FINRA 

oversight currently is applied to a nonFINRA member broker-dealer’s offmember-exchange securities trading 

activity must continue to exist.95

One commenter stated that firms still 

will be subject to multiple sets of rules 

and interpretations if amended Rule 

15b9–1 is adopted as re-proposed, and 

that it will be important for FINRA to 

continue to work collaboratively as part 

of the Cross-Market Regulation Working 

Group (‘‘CMRWG’’), a subgroup of the 

ISG.96 The ISG was established in 1981 

and is an international group of 

exchanges, market centers, and market 

regulators that perform front-line market 

surveillance in their respective 

jurisdictions. The group was formed to 

facilitate the coordination and 

development of programs and 

procedures to identify possible 

fraudulent and manipulative activities 

across markets and to facilitate 

information sharing related to those 

efforts. In 2020, the CMRWG was 

established with U.S. SROs as a working 

group of the ISG’s U.S. Subgroup to 

focus on ways to reduce unnecessary 

regulatory duplication.97 The 

Commission agrees that continued 

collaboration will be important. 

One commenter stated that an 

exchange can take action against its 

member for exchange rule violations 

associated with the conduct of a nonmember broker-dealer that accessed the 

exchange through the member, or the 

exchange may refer the activity to 

another SRO.98 This commenter also 

stated that the access-providing 

exchange member is likely to be a 

FINRA member.99 Similarly, other 

commenters stated that options trading 

firms that are members of exchanges 

where they trade options do not need to 

be FINRA members because, when they 

conduct off-member-exchange trading 

activity, they do so through a FINRA 

member broker-dealer.100 In the same 

vein, one commenter stated that volume 

effected by options trading firms in the 

equities markets is often processed 

through FINRA members and, thus, 

options trading firms effectively trade 

like customers, making a requirement 

that they join FINRA no more useful 

than requiring FINRA registration for 

any non-broker-dealer customers that 

trade in the equities market through a 

FINRA registered broker-dealer.101

In response, the Commission does not 

believe that its concerns regarding nonFINRA member broker-dealers that 

effect off-member-exchange securities 

transactions are addressed when such 

broker-dealers act in the capacity of a 

customer of another broker-dealer that is 

a FINRA member. A broker-dealer 

acting in a customer capacity does not 

provide a basis for regulatory oversight 

of that broker-dealer’s off-memberexchange activities as required by 

section 15(b)(8) when the broker-dealer 

is not a FINRA member. The 

Commission believes that such activities 

should be subject to direct, 

membership-based FINRA oversight, 

which carries with it an obligation to 

comply with FINRA’s rules and 

FINRA’s direct examination authority. 

This is not accomplished when a 

broker-dealer acts as a customer of a 

FINRA member but is not itself a FINRA 

member. 

In addition, in the scenarios presented 

by commenters, neither the exchange 

where the violative conduct occurred 

nor FINRA would have direct authority 

to address the conduct of the brokerdealer that is not a member of the 

exchange (and is not a FINRA member). 

If the exchange referred the matter to 

another exchange SRO where the 

broker-dealer is a member, the two 

exchanges could have different rules or 

different interpretations of their 

respective existing rules. In other words, 

there would be separate recourse by 

separate exchanges with potentially 

different rules or rule interpretations 

against different broker-dealers for the 

same conduct on one of the exchanges. 

The Commission believes this presents 

the potential for inconsistent outcomes, 

as the exchange where the conduct 

occurred could choose to pursue 

recourse against its member but the 

referred-to exchange could, for the same 

conduct, choose not to pursue recourse 

against its member. A requirement that 

all broker-dealers that effect offmember-exchange securities 

transactions become FINRA members (if 

not exempt under amended Rule 15b9– 

1) is more consistent with the protection 

of investors and the public interest. If 

both broker-dealers were FINRA 

members in the scenarios presented by 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61859 

102See, e.g., Cboe Letter at 6 (stating that 

requiring FINRA membership for non-member 

FINRA firms would add regulatory duplication and 

administrative burden to the firms and SROs with 

whom the firm is already a member). 

103See section 17(d)(1) of the Act, 15 U.S.C. 

78q(d)(1). 

104See infra note 275 (stating that FINRA serves 

as the DEA for the majority of member firms). 

105See supra note 26 and accompanying text. 

106See, e.g., MMI Letter at 2; FIA PTG Letter at 

2; Cboe Letter at 2–3; STA Letter at 2–3; ABCV 

Letter at 3; PEAK6 Letter at 3; Group One Letter at 

2; CTC Letter at 4. 

107Exchange rules require their members to 

report to CAT. See, e.g., Cboe BYX Rules 4.5 

through 4.17; Nasdaq General 7; NYSE Rule 6800. 

108See FINRA Letter at 6. 

109 Id. See also Concept Release Concerning SelfRegulation, supra note 20, 69 FR 71266 (stating that 

‘‘[w]hile the full implementation of robust 

intermarket order audit trails would be a significant 

step forward, an order audit trail is simply a tool 

that can be used by regulators to better surveil for 

illicit trading activity’’ and that ‘‘the SRO regulatory 

function would still play a critical role in the 

regulation of intermarket trading’’). Likewise, the 

ISG is a valuable forum for the coordination of 

regulatory efforts and sharing of information and 

serves an important function, but it does not confer 

jurisdiction to FINRA over a broker-dealer that is 

not a FINRA member and effects off-memberexchange securities transactions. The ISG also does 

not create rules or impose disciplinary actions; 

rather, the information sharing between members 

allows for the proper authority, regulator, or 

exchange to pursue appropriate rule changes or 

pursue legal action on market participants based on 

evidence gathered. 

110See, e.g., FINRA Letter at 5; 6/20/23 Meeting 

Memorandum (stating that FINRA identified nonFINRA member broker-dealer firms as potential 

respondents in 5% of the market regulation 

investigations it conducted in 2020 and 2021, 

which ranged across asset types and included both 

cross-exchange and off-exchange conduct). 

111See FINRA Letter at 6. Such a case may be 

referred to the Commission or an exchange where 

the firm is a member for further investigation. 

112See 2022 Re-Proposal, supra note 1, 87 FR 

49938. 

113See Section 15(b)(8) of the Act, 15 U.S.C. 

78o(b)(8); 2015 Proposing Release, supra note 1, 80 

FR 18039 at notes 28–33 and accompanying text 

describing the regulatory history of off-exchange 

trading. See also Cross-Market Regulatory 

Coordination Staff Paper, supra note 14 (stating that 

‘‘[w]hile multiple SROs reviewing the same 

securities activities can have benefits, in that the 

resources and expertise from several organizations 

can be brought to bear on assessing these activities, 

it also can lead to duplication and inefficiencies in 

the regulatory process and increased burdens on 

member firms’’). FINRA and the exchange SROs 

have a history of coordinating and can work 

together to address concerns of firms that are 

receiving duplicative regulatory requests such as 

through the Cross Market Regulatory Working 

Group. Id. 

114As discussed above in this section, if FINRA 

has an RSA with a given exchange, FINRA is able 

to apply that exchange’s rules to off-memberexchange activity by members of that exchange, 

even if they are not FINRA members, assuming that 

the RSA assigned to FINRA the oversight of those 

rules. But RSAs are not required to continue to exist 

pursuant to any regulatory requirement, and 

exchanges with potentially different rules and 

interpretations thereof retain legal responsibility 

and decision-making authority under RSAs, which 

could lead to inconsistent outcomes. FINRA does 

not need to rely on RSAs for its oversight of FINRA 

members, and so it can apply its jurisdiction 

directly to FINRA members’ off-member-exchange 

trading activity. Further, for FINRA member firms 

that also are exchange members, Rule 17d–1 DEA 

designations and Rule 17d–2 plans could be 

utilized in areas of overlap to mitigate duplicative 

application of exchange and FINRA oversight. 

115See FINRA Letter at 6 (stating that ‘‘there are 

key regulatory limitations that remain when FINRA 

encounters potentially problematic Non-Member 

Continued 

commenters, FINRA could take a 

consistent approach in addressing both 

broker-dealers’ involvement in the 

conduct. 

Exchange SRO rules would, of course, 

continue to apply to broker-dealer firms 

that are exchange members and become 

FINRA members as a result of the 

amendments to Rule 15b9–1.102 The 

potential for inconsistent recourse by 

exchanges where such firms are a 

member could, therefore, continue to 

exist. But such firms would be common 

members of FINRA and their member 

exchanges, and SROs have a statutory 

obligation to eliminate unnecessarily 

duplicative oversight of their common 

members.103 While FINRA rules and 

exchange rules would apply to such 

firms, the Commission believes that 

Rule 17d–1 DEA designations and Rule 

17d–2 plans will likely be utilized in 

areas of overlap to mitigate duplicative 

application of exchange SRO and 

FINRA oversight, in the same fashion as 

they already are utilized for the many 

broker-dealer firms that are exchange 

members and FINRA members. As a 

result, with respect to broker-dealer 

firms that become FINRA members and 

are exchange members, the Commission 

believes that FINRA likely will be the 

only SRO with regulatory responsibility 

regarding these firms’ compliance with 

rules that FINRA and their member 

exchange(s) have in common.104

Moreover, FINRA already directly 

regulates cross-market and off-exchange 

trading activity by FINRA members for 

compliance with FINRA rules, and 

would extend that direct oversight to 

new FINRA members’ off-memberexchange activity (without needing to 

rely on RSAs to do so). Exchange SROs 

would remain primarily responsible for 

their members’ on exchange activity 

(subject to Rule 17d–1 DEA 

designations, Rule 17d–2 plans, or 

RSAs). This complementary structure 

with FINRA as the SRO primarily 

responsible for off-member-exchange 

activity by FINRA members and 

exchange SROs primarily responsible 

for member exchange activity is 

consistent with the Exchange Act’s 

statutory framework, which places SRO 

oversight responsibility with an 

Association for off-member-exchange 

securities trading.105

The Commission also does not believe 

that the CAT mitigates the need for 

proprietary trading broker-dealer firms 

that effect off-member-exchange 

securities transactions to be required to 

join FINRA, as was asserted by some 

commenters.106 The CAT is an 

important audit trail tool through which 

exchange SROs and FINRA are able to 

perform surveillance of trading activity 

in NMS and OTC securities using CAT 

data.107 In addition, FINRA has stated 

that it surveils 100% of the equities and 

options markets with CAT data.108 But 

access to CAT data does not confer 

jurisdiction to FINRA over a firm that is 

not a FINRA member and that trades 

securities off-member-exchange.109 As a 

result, when FINRA encounters 

potentially problematic conduct by 

firms that are not FINRA members,110 it 

lacks the independent ability to 

examine for and investigate potential 

violations of, or enforce compliance 

with, the Federal securities laws, 

Commission rules, or FINRA rules.111

Moreover, access to CAT data alone 

does not enable FINRA to conduct 

additional investigative methods, such 

as collecting documents, interviewing 

witnesses, and otherwise investigating 

the firm.112 Even if one or more 

exchanges of which a broker-dealer is a 

member and FINRA could coordinate 

SRO oversight of the non-FINRA 

member firm’s off-member-exchange 

securities trading activity through the 

use of CAT data and RSAs, performing 

SRO oversight pursuant to RSAs is, as 

discussed above in this section, a less 

certain and stable approach than direct 

Association oversight of such trading 

activity due to the discretionary nature 

of RSAs, and frustrates the regulatory 

scheme established by Congress in 

which an Association directly regulates 

broker-dealers that effect off-memberexchange securities transactions.113 And 

any such coordinated efforts would not 

apply to U.S. Treasury securities trading 

activity, which is not reported to the 

CAT and not covered by RSAs. In short, 

even with this coordination, FINRA 

would still not have direct membershipbased jurisdiction over the firm. This 

limitation impedes stable and consistent 

SRO oversight of off-member-exchange 

securities trading activity through 

direct, membership-based FINRA 

jurisdiction by continuing the 

dependence upon RSAs for such 

oversight,114 and impedes 

comprehensive SRO oversight of offmember-exchange securities trading 

activity since RSAs, the CAT, and 

coordinated regulatory efforts using 

these tools do not cover U.S. Treasury 

securities trading activity.115


ddrumheller on DSK120RN23PROD with RULES2
61860 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

Firm conduct’’ via audit trail data and that the 

limitations posed by RSAs ‘‘impede comprehensive 

OTC and cross-market oversight in the equities, 

options, and fixed income markets’’). 

116Some commenters agreed with the 

Commission. See, e.g., Cboe Letter at 2 (stating that 

Cboe believes it is appropriate for broker-dealers 

that are not FINRA members that effect fixed 

income transactions to register with FINRA to 

ensure FINRA insight into, and sufficient regulatory 

coverage of, those transactions). 

117See FINRA Letter at 8 (stating that individual 

fixed income securities generally are not traded on 

exchange and their markets rely exclusively on 

FINRA oversight); see also supra note 76. 

118See FINRA Letter at 10 (stating that FINRA 

surveils and examines for manipulative or other 

illegal activity in the fixed income market, 

including with respect to U.S. Treasury securities 

trading). As discussed above in this section, trading 

activity in U.S. Treasury securities is not reported 

to the CAT, so the CAT is not a tool that can be 

used by SROs to surveil that activity. A commenter 

suggested that the Commission could require that 

TRACE data and other securities trading data be 

reported to the CAT. See Phillip Letter. Such an 

undertaking would not, however, provide FINRA 

with needed, membership-based jurisdiction over 

broker-dealers that trade U.S. Treasury securities. 

119See FINRA Letter at 10; see also Better 

Markets Letter at 9. The 17% figure reflects an 

upper bound of the rate at which Commissionregistered broker-dealers that are not FINRA 

members appeared in the alerts generated by 

FINRA’s U.S. Treasury security manipulation 

pattern surveillance in 2020 and 2021. See 6/20/23 

Meeting Memorandum. The Commission 

understands that the actual rate at which 

Commission-registered broker-dealers that are not 

FINRA members appeared in these alerts is likely 

lower than 17%, as some portion of the alerts may 

have involved non-FINRA member proprietary 

trading firm entities that are not Commissionregistered broker-dealers. Id. More precise estimates 

are not possible in light of the way proprietary 

trading firms are identified under current audit trail 

rules and the way FINRA evaluates conduct by 

potentially affiliated entities. Id. 

120See FINRA Letter at 10. 

121As discussed below in this section, the 

Commission retains authority over broker-dealers, 

but the Exchange Act contemplates dual layers of 

oversight of broker-dealers through such 

Commission authority working in tandem with SRO 

authority. The focus here is on strengthening the 

SRO layer of oversight. 

122See FINRA Rule 6700 series. FINRA publishes 

aggregated transaction information and statistics on 

U.S. Treasury securities on its website. See 

FINRA.org, Treasury Aggregate Statistics, available 

at https://www.finra.org/finra-data/browse-catalog/ 

about-treasury (last visited Aug. 9, 2023); FINRA 

Rule 6750, Supplementary Material .01(b); see also 

Securities Exchange Act Release No. 95438 (Aug. 5, 

2022), 87 FR 49626 (Aug. 11, 2022) (File No. SR– 

FINRA–2022–017) (order approving FINRA 

publication of aggregated U.S. Treasury securities 

transactions more frequently than weekly, such as 

on a daily basis). Also, pursuant to effective 

national market system plans which are also 

effective transaction reporting plans (as both terms 

are defined in 17 CFR 242.600(b) (Rule 600(b) of 

Regulation NMS)), namely the Nasdaq UTP Plan 

and the CTA Plan, FINRA reports to the Securities 

Information Processors (‘‘SIPs’’) information for offexchange NMS stock transactions that are reported 

to FINRA’s TRFs, and the SIPs in turn distribute the 

information in the public consolidated market data 

feeds. See section VIII(a) of the CTA Plan; section 

VIII.B of the Nasdaq UTP Plan. 

123See FINRA Rule 6720—Participation in 

TRACE; see also 2022 Re-Proposal, supra note 1, 87 

FR 49938. Since Sept. 1, 2022, certain depository 

institutions (‘‘covered depository institutions’’) 

have been required to report to TRACE transactions 

in U.S. Treasury securities, agency debt securities 

and agency mortgage-backed securities. See 

FINRA.org, Federal Reserve Depository Institution 

Reporting to TRACE, available at https://

www.finra.org/filing-reporting/trace/federal-reservedepository-institution-reporting (last visited Aug. 8, 

2023). In addition, in order to enhance the 

regulatory audit trail and ensure data is reported in 

a more timely manner, FINRA adopted amendments 

to Rule 6730 to require members to report U.S. 

Treasury securities transaction data in the smallest 

increment available to the member and as soon as 

practicable, but no later than 60 minutes following 

a transaction. See Securities Exchange Act Release 

No. 95635 (Aug. 30, 2022), 87 FR 54579 (Sept. 6, 

2022). 

124See FINRA Rule 6730—Transaction Reporting, 

Supplementary Material .07—ATS Identification of 

Non-FINRA Member Counterparties for 

Transactions in U.S. Treasury Securities. 

125 In the proposal the Commission issued in Jan. 

2022 to, among other things, amend Regulation ATS 

for ATSs that trade U.S. government securities, and 

the reopening release issued in Apr. 2023, which 

provides supplemental information and economic 

analysis on the Jan. 2022 proposal, the Commission 

estimated that there would be a number of trading 

systems that would be required to comply with 

Regulation ATS under the proposal. See Securities 

Exchange Act Release Nos. 94062 (Jan. 26, 2022), 

87 FR 15496, 15585 (Mar. 18, 2022); 97309 (Apr. 

14, 2023), 88 FR 29448, 29466 (May 5, 2023). 

126 In 2022, there were approximately 60 million 

transactions reported in U.S. Treasury securities, 

totaling $165 trillion in dollar volume. 

Approximately 35.7 million of those transactions, 

Relatedly, the Commission continues 

to believe that direct, membership-based 

FINRA jurisdiction is necessary for 

proprietary trading broker-dealer firms 

that effect transactions in U.S. Treasury 

securities, and that FINRA oversight 

would not duplicate any exchange SRO 

oversight in this area.116 U.S. Treasury 

securities are not traded on any 

exchange, and to the Commission’s 

knowledge, unlike FINRA,117 no 

exchange SRO possesses expertise on 

U.S. Treasury securities trading activity. 

Further, as discussed above in this 

section, U.S. Treasury securities trading 

activity also is not covered by RSAs 

between exchange SROs and FINRA, so 

RSAs are not a mechanism through 

which FINRA currently could apply 

exchange rules (to the extent any would 

be applicable) to U.S. Treasury 

securities trading activity by proprietary 

trading broker-dealer firms that are 

exchange members but not FINRA 

members. Thus, aside from certain 

surveillances (other than the CAT),118

no SRO oversight is performed with 

respect to the U.S. Treasury securities 

trading activity of proprietary trading 

broker-dealer firms that are not FINRA 

members. 

For example, FINRA stated that, 

subject to audit trail limitations, it has 

observed that firms that are not FINRA 

members were identified in 17 percent 

of the surveillance alerts generated by 

its U.S. Treasury security manipulation 

pattern surveillance in 2020 and 

2021.119 FINRA has no jurisdiction over 

such firms and, therefore, no authority 

to address their involvement in 

potential market misconduct that is 

identified.120 Since, to the 

Commission’s knowledge, no exchange 

SRO has expertise or performs oversight 

in this area, broker-dealer firms that are 

not FINRA members may participate in 

the U.S. Treasury securities market 

effectively without SRO oversight 

applied to their activity in that market 

(other than, as discussed below, what 

can be discerned by regulators when 

non-FINRA member broker-dealer U.S. 

Treasury securities transactions are 

reported to TRACE by FINRA 

members).121 This rulemaking would 

facilitate oversight consistent with the 

protection of investors and the public 

interest. 

Insofar as U.S. Treasury securities 

transaction reporting and transparency 

in particular are concerned, FINRA’s 

TRACE system is the regulatory vehicle 

that facilitates mandatory reporting of 

OTC transactions in U.S. Treasury 

securities, among other eligible fixed 

income securities.122 But as discussed 

in the 2022 Re-Proposal, proprietary 

trading broker-dealer firms that are not 

FINRA members are not required to 

report their U.S. Treasury securities 

transactions to FINRA’s TRACE system 

because TRACE reporting obligations for 

U.S. Treasury securities transactions 

apply only to broker-dealers that are 

FINRA members.123 Thus, exchange 

SRO membership alone is not enough to 

subject proprietary trading broker-dealer 

firms that effect U.S. Treasury securities 

transactions to FINRA’s reporting 

requirement for such transactions. 

When a non-FINRA member brokerdealer trades U.S. Treasury securities 

through a ‘‘covered ATS,’’ the covered 

ATS is obligated in its TRACE report to 

identify the non-FINRA member brokerdealer via its Market Participant ID 

(‘‘MPID’’),124 thus providing visibility to 

regulators as to what transactions on 

covered ATSs are attributable to nonFINRA members.125 But regulators have 

no such visibility when non-FINRA 

member broker-dealers trade U.S. 

Treasury securities otherwise than on a 

covered ATS. If non-FINRA member 

broker-dealers trade on a non-covered 

ATS or bilaterally with a counterparty 

that is a FINRA member or covered 

depository institution, the ATS or 

FINRA member or covered depository 

institution reports the trade, but the 

non-FINRA member is not specifically 

identified via a MPID and instead is 

identified only as a ‘‘customer.’’ 126 If 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61861 

representing approximately $64 trillion in dollar 

volume, were executed on ATSs. The balance of 

approximately 24.3 million reported transactions, 

or $100 trillion in dollar volume, that was not 

traded on an ATS was reported by FINRA members 

with a counterparty that, if not a FINRA member, 

was identified as a ‘‘customer’’ in the reported data. 

The Commission estimates that approximately 12.7 

million transactions and $60 trillion in dollar 

volume not executed on an ATS had a counterparty 

identified as a ‘‘customer’’ in the reported data. 

This represents 52% of the 24.3 million 

transactions and 60% of the $100 trillion in dollar 

volume not executed on an ATS, or 21% of the 60 

million total transactions and 36% of the $165 

trillion total dollar volume. Further, the 

Commission estimates that, of the 35.7 million 

transactions and $64 trillion in dollar volume 

executed on an ATS, approximately 98.2% of that 

transaction volume and 99% of that dollar volume 

was executed on a covered ATS; approximately 

1.8% of the 35.7 million transactions and 1% of the 

$64 trillion dollar volume, representing 

approximately 0.6 million transactions and $536 

billion, respectively, was executed on a noncovered ATS; and approximately 4.8% of the 0.6 

million transactions and 22% of the $536 billion in 

dollar volume executed on a non-covered ATS, 

representing approximately 15,000 transactions and 

$59 billion, respectively, was reported with a 

counterparty identified as a ‘‘customer.’’ Customer 

volume and transaction counts are calculated as 

half the sum of ATS-to-customer buys and ATS-tocustomer sells. 127 In addition, in the context of an NMS stock 

transaction effected between a FINRA member and 

a non-FINRA member otherwise than on an 

exchange, only the FINRA member is obligated to 

report the transaction to the FINRA TRF and the 

non-FINRA member generally is not identified on 

the trade report as the contra party to the trade. See 

Trade Reporting Frequently Asked Questions, 

Reporting Relationships and Responsibilities, 

section 202: Reporting Trades with a Non-FINRA 

Member, available at https://www.finra.org/filingreporting/market-transparency-reporting/tradereporting-faq#202 (last visited Aug. 9, 2023). The 

non-FINRA member is, however, identified in CAT 

in this context. 

128For example, in a Nov. 2021 report, an interagency working group comprised of staff of the U.S. 

Department of the Treasury, Commission, 

Commodity Futures Trading Commission, Federal 

Reserve Bank of New York, and Board of Governors 

of the Federal Reserve System stated that ‘‘[i]n 

March 2020, large flows from investors were 

captured by TRACE data but were not identifiable 

beyond the FINRA-member dealer intermediary that 

facilitated the trade. Understanding the source of 

these flows required the official sector to contact 

dealers, wait for other datasets that are significant 

lagged, and rely on separate sources of 

information.’’ See U.S. Dep’t of the Treasury et al., 

Recent Disruptions and Potential Reforms in the 

U.S. Treasury Market: A Staff Progress Report (Nov. 

8, 2021) (‘‘2021 Interagency Report’’) available at 

https://home.treasury.gov/system/files/136/IAWGTreasury-Report.pdf. 

129See id. 130See supra section V.C.2 for estimated costs of 

TRACE reporting. 131See FINRA Letter at 9 (stating that FINRA has 

no visibility into the identity of non-FINRA firms 

for U.S. Treasury securities transactions that occur 

otherwise than on a covered ATS or on any other 

non-ATS platform); Better Markets Letter at 9 

(stating that a significant proportion of U.S. 

Treasury securities transaction activity is performed 

on a bilateral basis without data reporting 

requirements, and that this lack of visibility 

undermines regulators’ ability to monitor risks, 

understand how those risks evolve into potentially 

systemic risks, and react to them in real-time, and 

inhibits robust price discovery) (citing 2021 

Interagency Report, supra note 128); Cboe Letter at 

9. 

132See FIA/PTG Letter at 3 (acknowledging 

concerns regarding the identification of non-FINRA 

member counterparties but noting they are not 

aware of the situation applying to proprietary 

broker-dealer transactions in a ‘‘meaningful’’ way); 

MMI Letter at 2 (arguing CAT and TRACE data 

‘‘effectively captures’’ all proprietary broker-dealer 

transactions). It is difficult to assess the accuracy of 

the commenter statement that there is no reporting 

gap with respect to U.S. Treasury securities 

transactions by proprietary trading broker-dealer 

firms that are not FINRA members because, as 

discussed above in this section, if non-FINRA 

member broker-dealers trade U.S. Treasury 

securities otherwise than on an ATS and with a 

counterparty that is not a FINRA member and not 

a covered depository institution, there is no TRACE 

reporting obligation and the trade is not reported. 

And even when a non-FINRA member brokerdealer’s transactions in U.S. Treasury securities are 

reported by a counterparty that does have a TRACE 

reporting obligation, such as a FINRA member or 

covered depository institution, the non-FINRA 

member is identified only as ‘‘customer’’ in the 

reported data unless the transaction occurred on a 

covered ATS. 

133See FIA/PTG Letter at 3. 

134See, e.g., PEAK6 Letter at 6; Group One Letter 

at 2; CTC Letter at 3; Cboe Letter at 7; Virtu Letter 

at 7. 

non-FINRA member broker-dealers 

trade U.S. Treasury securities otherwise 

than on an ATS and with a counterparty 

that is not a FINRA member and not a 

covered depository institution, there is 

no TRACE reporting obligation and the 

trade is not reported.127

The Commission continues to believe 

that regulators’ lack of visibility into 

U.S. Treasury securities transactions 

effected by proprietary trading brokerdealer firms that are not FINRA 

members, in the circumstances 

described above in which such firms are 

not identified by MPID in TRACE data, 

detracts from the comprehensiveness of 

U.S. Treasury securities TRACE data 

and regulators’ ability to utilize that 

data to reconstruct market events, and 

detect and deter improper trading 

activity in the U.S. Treasury securities 

market.128 The Commission does not 

know if all U.S. Treasury securities 

transactions by non-FINRA member 

broker-dealer firms are reported to 

TRACE, and for those that are reported, 

any non-FINRA member broker-dealer 

firm that is a counterparty remains 

anonymous if the transaction did not 

occur on a covered ATS. As a result, the 

Commission cannot quantify total 

secondary market trading by brokerdealers in U.S. Treasury securities, and 

regulators cannot readily identify from 

TRACE when a non-FINRA member 

broker-dealer is the source of reported 

U.S. Treasury securities order flows 

executed otherwise than on a covered 

ATS and cannot link any such order 

flows to any particular non-FINRA 

member broker-dealer.129 Moreover, 

broker-dealers that are not FINRA 

members have a potential competitive 

advantage over those that are FINRA 

members, as FINRA members incur the 

costs of reporting transactions in U.S. 

Treasury securities transactions but 

non-FINRA members do not.130

Some commenters broadly agreed 

with the Commission’s concern, 

expressed in the 2022 Re-Proposal, 

regarding transparency and reporting of 

U.S. Treasury securities transactions by 

proprietary trading broker-dealer firms 

that are not FINRA members.131 Other 

commenters stated that there is no 

reporting gap that must be addressed 

with respect to U.S. Treasury securities 

transactions by proprietary trading 

broker-dealer firms that are not FINRA 

members because, according to the 

commenters, existing TRACE reporting 

requirements meaningfully capture 

effectively all proprietary broker-dealer 

U.S. Treasury securities transactions.132

One of these commenters also stated 

that potential concerns around the 

identification of non-FINRA member 

counterparties to U.S. Treasury 

securities transactions on non-covered 

ATSs are not implicated by proprietary 

broker-dealer transactions in any 

meaningful way, or could be remedied 

by requiring that such transactions be 

reported with account ownership 

identifiers, which, according to the 

commenter, would not necessitate 

FINRA membership.133 Similarly, other 

commenters suggested, as an alternative 

to what the Commission has proposed, 

an approach under which proprietary 

trading broker-dealer firms could 

remain exempt from section 15(b)(8)’s 

Association membership requirement so 

long as they report their U.S. Treasury 

securities transactions to FINRA’s 

TRACE system.134

The reporting requirements suggested 

by commenters could help address the 

potential anonymity of proprietary 

trading broker-dealer firms in TRACE 

data. But as discussed above in this 

section, a lack of transparency to 

regulators when non-FINRA member 

broker-dealers trade U.S. Treasury 

securities—and the resulting difficulty it 

poses for regulators when trying to 

identify the source of U.S. Treasury 

securities order flows, detect and deter 

improper trading activity, and 

reconstruct market events—is not the 

full scope of what the Commission 

believes must be addressed. There also 

is the necessity, described above in this 

section, for FINRA to have the authority 

to allow it to independently examine 

for, investigate, or address potential offmember-exchange misconduct by 

proprietary trading broker-dealer firms 

in the securities markets, including the 


ddrumheller on DSK120RN23PROD with RULES2
61862 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

135See supra note 22 (stating that Congress 

historically has favored self-regulation for a variety 

of reasons, including that effectively regulating the 

inner-workings of the securities industry at the 

Federal level was viewed as cost prohibitive and 

inefficient; the complexity of securities practices 

made it desirable for SRO regulatory staff to be 

intimately involved with SRO rulemaking and 

enforcement; and the SROs could set standards 

such as just and equitable principles of trade and 

detailed proscriptive business conduct standards). 

136See FINRA Letter at 5, 10; see also 6/20/23 

Meeting Memorandum (specifying that non-FINRA 

member broker-dealer firms made up the 5% of the 

market regulation investigations that FINRA 

conducted in 2020 and 2021, and that the 17% 

figure reflects an upper bound of the rate at which 

Commission-registered broker-dealers that are not 

FINRA members appeared in the alerts generated by 

FINRA’s U.S. Treasury security manipulation 

pattern surveillance in 2020 and 2021). 

137See FINRA Rule 6730—Transaction Reporting, 

Supplementary Material .07—ATS Identification of 

Non-FINRA Member Counterparties for 

Transactions in U.S. Treasury Securities. FINRA 

membership also would require that such firms be 

identified in off-exchange NMS stock transaction 

reports to FINRA’s TRFs, and thus promote broader 

public market transparency in NMS stocks. See 

FINRA Rule 6000 Series—Quotation, Order, and 

Transaction Reporting Facilities and FINRA Rule 

7000 Series—Clearing, Transaction and Order Data 

Requirements, and Facility Charges; see also supra 

note 17; 2022 Re-Proposal, supra note 1, 87 FR 

49942. 

138See, e.g., FINRA Letter at 11; ABCV Letter at 

2; PEAK6 Letter at 2; Group One Letter at 1–2; letter 

from James Toes, President & CEO, and Kate 

McAllister, Chair of the Board, Securities Traders 

Association (Oct. 5, 2022) (‘‘STA Letter’’) at 3–4. 

139See FINRA Letter at 11 (stating that certain 

proprietary trading dealer firms that are not FINRA 

members have a significant market footprint and the 

scope of their activities introduces a moderate to 

high degree of risk to the market and market 

counterparties). 

140See id. 

141 Id. 

142See id. at 7–8. 

143See, e.g., ABCV Letter at 2; PEAK6 Letter at 

2; Group One Letter at 1–2; STA Letter at 3–4. 

144See section II.B, supra. 

145See FINRA Letter at 11 (stating that FINRA 

jurisdiction over proprietary trading dealer firms 

and the ability to identify their activity in all of 

FINRA’s audit trails would further enable FINRA to 

assess individual entities’ impacts on the market 

and market counterparties, and that the 2022 ReProposal would enable FINRA to directly and more 

comprehensively oversee such firms and their 

trading activity, which, in turn, would enhance 

market integrity and foster the maintenance of fair, 

orderly, and efficient markets); Better Markets 

Letter at 5 (stating that the amendments to Rule 

15b9–1 would ‘‘help ensure that dealers such as 

high-frequency trading firms, which conduct an 

enormous volume of trading, are subject to 

consistent and robust oversight through FINRA, not 

only the more narrow regulatory requirements that 

are specific to each exchange’’). 

146Many broker-dealer firms that derive all or 

most of their revenue from proprietary trading 

already are FINRA members. See Securities 

markets for U.S. Treasury securities, 

equities and options. Such FINRA 

authority is necessary notwithstanding 

the Commission’s authority over brokerdealers in order to strengthen the SRO 

layer of oversight of off-memberexchange securities trading, consistent 

with the dual Commission and SRO 

oversight of broker-dealers required by 

the Exchange Act.135 As a membershipbased organization, FINRA’s 

jurisdiction, and thus its authority, is 

limited to its members and their 

associated persons. As such, authority 

to independently examine, investigate, 

or enforce potential violations against 

non-FINRA member broker-dealers is 

not conferred to FINRA through 

reporting requirements without FINRA 

membership. For example, FINRA 

stated that it identified non-FINRA 

member broker-dealer firms as potential 

respondents in five percent of the 

market regulation investigations it 

conducted in 2020 and 2021, which 

ranged across asset types and included 

both cross-exchange and off-exchange 

conduct), and FINRA identified nonFINRA member firms in 17 percent of 

the surveillance alerts generated by its 

U.S. Treasury security manipulation 

pattern surveillance in 2020 and 

2021.136 If those non-FINRA member 

firms could remain exempt from section 

15(b)(8)’s Association membership 

requirement as long as they report their 

U.S. Treasury securities transactions to 

TRACE, FINRA would continue to lack 

the independent ability to examine and 

investigate those firms to generate 

evidence, such as by collecting 

documents and interviewing witnesses. 

In contrast, the rescission of the de 

minimis allowance and proprietary 

trading exclusion helps solve both for 

the need for FINRA authority over offmember-exchange securities trading 

activity and for the anonymity in 

TRACE data of proprietary trading 

broker-dealer firms when they trade 

U.S. Treasury securities otherwise than 

on a covered ATS. Under the adopted 

approach, proprietary trading brokerdealer firms that effect off-memberexchange securities transactions and 

that become FINRA members will be 

subject to direct, membership-based 

FINRA jurisdiction. Further, those that 

effect U.S. Treasury securities 

transactions otherwise than on a 

covered ATS will be specifically 

identified by MPID in TRACE.137

In addition to discussing existing 

regulatory mechanisms and suggesting 

reporting-specific requirements as 

alternatives to FINRA membership, 

commenters addressed the 

Commission’s position, set forth in the 

2022 Re-Proposal, that it is appropriate 

for FINRA to exercise direct, 

membership-based oversight over firms 

that do not carry customer accounts.138

FINRA agreed with the Commission that 

direct, membership-based FINRA 

oversight over proprietary trading 

broker-dealer firms would be 

appropriate even though they typically 

do not carry customer accounts.139

FINRA stated that active trading firms 

have the potential to introduce risk into 

the markets even where they do not 

have customers, and for that reason, 

FINRA’s rules and regulatory programs 

cover a cross section of activity and 

risks beyond sale practices.140 FINRA 

stated that certain member risk controls 

overseen by FINRA are particularly 

relevant to proprietary trading dealer 

firms, such as controls for credit risk to 

counterparties, market risk, market 

integrity risk, and liquidity risk.141

FINRA also observed that while nonFINRA members may not have 

customers of their own, they 

nonetheless can have a significant role 

executing customer orders routed to 

them by other broker-dealers.142 Other 

commenters stated that FINRA 

regulation is customer-focused and not 

appropriate for proprietary trading firms 

that do not carry customer accounts.143

The Commission continues to believe 

that it is appropriate for FINRA to have 

direct, membership-based jurisdiction 

over proprietary trading broker-dealer 

firms that effect off-member-exchange 

securities transactions even though such 

firms typically do not carry customer 

accounts. As discussed above,144 several 

non-FINRA member broker-dealer firms 

that do not carry customer accounts 

effect significant volumes of offmember-exchange securities 

transactions. The Commission believes 

that such firms—and such trading 

activity—should not remain exempt 

from FINRA’s direct, membership-based 

oversight on the basis that such firms do 

not carry customer accounts. FINRA’s 

ability to create a consistent regulatory 

framework for all broker-dealers that 

effect off-member-exchange securities 

transactions is undermined by the 

subset of such broker-dealers that do not 

carry customer accounts and are not 

FINRA members in reliance on Rule 

15b9–1.145 The rescission of the de 

minimis allowance and proprietary 

trading exclusion will help address this 

by eliminating the legal basis upon 

which such firms generally are able to 

effect off-member-exchange securities 

transactions without joining FINRA. 

In particular, as discussed in the 2022 

Re-Proposal, FINRA is well-positioned 

to exercise direct oversight over such 

firms. FINRA has established a 

regulatory regime for broker-dealers that 

effect off-member-exchange securities 

transactions that applies to FINRA 

members regardless of whether they 

handle customer orders or carry 

customer accounts.146 For example, 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61863 

Exchange Act Release No. 97798 (June 26, 2023), 88 

FR 42404, 42406 (June 30, 2023) (‘‘TAF 

Amendment’’) (stating that FINRA estimates that 

approximately 66 member firms derive all or most 

of their revenue from proprietary trading). As 

FINRA members, these broker-dealers are subject to 

FINRA’s rules and FINRA’s direct jurisdiction even 

though they effect securities transactions for their 

own account and not on behalf of customers. 

147See FINRA Rule 5000 Series—Securities 

Offerings and Trading Standards and Practices. For 

instance, FINRA prohibits members from 

coordinating prices and intimidating other 

members. See FINRA Rule 5240(a) (stating, among 

other things, that ‘‘[n]o member or person 

associated with a member shall: (1) coordinate the 

prices (including quotations), trades or trade reports 

of such member with any other member or person 

associated with a member, or any other person; (2) 

direct or request another member to alter a price 

(including a quotation); or (3) engage, directly or 

indirectly, in any conduct that threatens, harasses, 

coerces, intimidates or otherwise attempts 

improperly to influence another member, a person 

associated with a member, or any other person’’). 

148See FINRA Rule 2000 Series—Duties and 

Conflicts. 

149See FINRA Rule 4000 Series—Financial and 

Operational Rules. For example, FINRA Rule 

4370(a) provides, among other things, that ‘‘[e]ach 

member must create and maintain a written 

business continuity plan identifying procedures 

relating to an emergency or significant business 

disruption. Such procedures must be reasonably 

designed to enable the member to meet its existing 

obligations to customers. In addition, such 

procedures must address the member’s existing 

relationships with other broker-dealers and counterparties. The business continuity plan must be made 

available promptly upon request to FINRA staff.’’ 

150See FINRA Rule 3000 Series—Supervision and 

Responsibilities Relating to Associated Persons. 

This rule series generally requires FINRA member 

firms, among other things, to establish, maintain, 

and enforce written procedures to supervise the 

types of business in which the firm engages and the 

activities of its associated persons that are 

reasonably designed to achieve compliance with 

applicable securities laws and regulations, and with 

applicable FINRA rules. See, e.g., FINRA Rules 

3110 (Supervision), 3120 (Supervisory Control 

System), and 3170 (Tape Recording of Registered 

Persons by Certain Firms). See also FINRA By-Laws 

Article III—Qualifications of Members and 

Associated Persons. Any person associated with a 

member firm who is engaged in the securities 

business of the firm—including partners, officers, 

directors, branch managers, department 

supervisors, and salespersons—must register with 

FINRA. 

151See, e.g., the FINRA rules set forth in notes 

17–18, 56–57, 122–124, 137 and 147–150, and 

accompanying text, supra. In addition, FINRA has 

regulatory programs and staff dedicated to fixed 

income regulation. See FINRA.org, Key Topics— 

Fixed Income, available at https://www.finra.org/ 

rules-guidance/key-topics/fixed-income#overview. 

152See FINRA Rule 6000 Series (Quotation, 

Order, and Transaction Reporting Facilities). 

153See FINRA Risk Monitoring Program, FINRA, 

available at https://www.finra.org/contact-finra/ 

risk-monitoring-program; FINRA Examination and 

Risk Monitoring Programs, FINRA, available at 

https://www.finra.org/rules-guidance/key-topics/ 

finra-examination-risk-monitoringprograms#overview. 

154See FINRA Examination and Risk Monitoring 

Programs, FINRA, available at https://

www.finra.org/rules-guidance/key-topics/finraexamination-risk-monitoring-programs#overview. 

155 Id. 

156See FINRA Rule 1017; Form CMA, FINRA, 

available at https://www.finra.org/registrationexams-ce/broker-dealers/registration-forms/formcma. 

157See Filing a Change in Membership 

Application, The ‘‘What to Expect’’ Webcast Series 

(2010), FINRA, available at https://www.finra.org/ 

sites/default/files/Education/p018711.pdf. 

158FINRA could refer such a matter to the 

Commission or to an exchange where the firm is a 

member or, as discussed above in this section, 

potentially address the matter through an RSA if 

covered by the terms of the RSA. See also supra 

note 14. But FINRA may lack certain investigative 

tools, discussed above in this section, with respect 

to non-FINRA member broker-dealers that it 

possesses with respect to FINRA members, which 

could help FINRA further investigate potentially 

violative behavior before making a referral to the 

Continued 

FINRA, not unlike exchanges, has 

developed a detailed set of rules in core 

areas such as trading practices,147

business conduct,148 financial condition 

and operations,149 and supervision,150

many of which apply to FINRA 

members regardless of whether they 

handle customer orders or carry 

customer accounts.151 As another 

example, FINRA’s transaction reporting 

regime is not limited to broker-dealers 

with customers and applies to FINRA 

members regardless of whether they 

handle customer orders or carry 

customer accounts.152 Continuing to 

permit an exemption from FINRA 

membership on the basis that brokerdealers that, for example, trade U.S. 

Treasury securities proprietarily do not 

have customers would not help improve 

the comprehensiveness of U.S. Treasury 

securities transaction TRACE data or 

address the potential competitive 

advantage of non-FINRA member 

broker-dealers that, unlike FINRA 

member broker-dealers, may trade U.S. 

Treasury securities without incurring 

the costs of reporting those trades to 

TRACE. 

The Commission also continues to 

believe that it is important to the 

protection of investors and the public 

interest that FINRA has direct, 

membership-based jurisdiction over 

proprietary trading broker-dealer firms 

that effect off-member-exchange 

securities transactions regardless of 

whether they carry customer accounts. 

An Association’s regulatory 

responsibility, like exchange SROs’, 

includes an obligation to enforce 

compliance with the Federal securities 

laws and rules thereunder and the 

SRO’s rules. As an Association, the 

Exchange Act’s statutory framework 

places SRO oversight responsibility 

with FINRA for off-member-exchange 

securities trading, and FINRA is wellpositioned to carry out this 

responsibility with respect to its 

members. 

For example, FINRA gains familiarity 

with a member’s operational risk by 

assigning dedicated staff members to 

each firm (e.g., a Risk Monitoring 

Analyst to act as the primary point of 

contact and a Risk Monitoring Director) 

and having staff with subject matter 

expertise relevant to a member’s 

business model conduct examinations 

and carry out monitoring duties.153

Firms are classified into five primary 

business models and then further sorted 

into various subgroups overseen by 

exam and risk monitoring staff.154 Risk 

monitoring teams seek to understand 

the unique aspects of each firm 

monitored, and use that expertise to 

inform exam staff in the preparation of 

exams. Employing a risk-based 

approach, FINRA examines firms on a 

one, two or four-year frequency and 

makes use of specialist teams (e.g., antimoney laundering, cybersecurity or 

fixed income). Further, FINRA gains 

familiarity with a member’s operational 

risk through customer complaints and 

regulatory tips or calls, which may 

trigger a ‘‘cause’’ exam (in contrast to 

the routine exams described above) 

focusing on the issues raised in the 

complaints.155 Finally, FINRA staff is 

informed of changes in operational risk 

associated with a material change in 

business operations or change of control 

through FINRA Rule 1017.156 The 

Continuing Member Application 

triggered under FINRA Rule 1017, 

among other things, reviews if the 

member’s contractual and business 

relationships support the proposed 

change, if communications and 

operational systems are appropriate, 

financial and internal controls, and the 

adequacy of the member’s supervisory 

system to prevent and detect 

violations.157

The inability of FINRA to directly 

enforce regulatory compliance by 

proprietary trading broker-dealer firms 

that are not FINRA members—whether 

or not they handle customer orders or 

carry customer accounts—may create a 

risk to the fair and orderly operation of 

the market because FINRA may not be 

as familiar with the firm’s operational 

risks or other risks posed by the firm’s 

off-member-exchange securities trading 

activity as FINRA would be with a 

FINRA member firm, and FINRA may 

not be as well positioned potentially to 

mitigate those risks. In addition, if 

FINRA were to detect that a non-FINRA 

member is effecting off-memberexchange securities transactions that are 

not in compliance with the Exchange 

Act or applicable rules, FINRA would 

not have direct, membership-based 

jurisdiction to directly address the 

behavior.158


ddrumheller on DSK120RN23PROD with RULES2
61864 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

Commission or an exchange, or help prevent FINRA 

from failing to make referrals when they are 

warranted. See also section V, infra. Further, the 

Commission believes that regulatory efforts based 

on discretionary RSA arrangements among 

exchange SROs and FINRA, while beneficial in 

many contexts, are a less stable and consistent 

mechanism for SRO oversight than the FINRA 

membership required by the Exchange Act in the 

context presented here, and are less comprehensive 

than membership-based FINRA oversight because 

they do not cover U.S. Treasury securities trading 

activity. 

159See FINRA Schedule A to the By-Laws of the 

Corporation (‘‘FINRA Schedule A’’), at section 1, 

available at https://www.finra.org/rules-guidance/ 

rulebooks/corporate-organization/section-1- 

member-regulatory-fees. 160FINRA uses the TAF to recover the costs to 

FINRA of the supervision and regulation of 

members, including performing examinations, 

financial monitoring, and policy, rulemaking, 

interpretive, and enforcement activities. See FINRA 

Schedule A, at section 1(a). The TAF is generally 

assessed on FINRA member firms for all equity 

sales transactions that are not performed in the 

capacity of a registered exchange specialist or 

market maker. See id. at section 1(b). FINRA 

charges its members other fees as well, such as an 

annual Gross Income Assessment (‘‘GIA’’). See id. 

at section 1. 

161See FINRA Regulatory Notice 15–13, Trading 

Activity Fee (May 2015), available at http://

www.finra.org/sites/default/files/notice_doc_file_

ref/Notice_Regulatory_15-13.pdf. FINRA re-opened 

the comment period on its 2015 Regulatory Notice 

after the 2022 Re-Proposal. See FINRA Regulatory 

Notice 22–30, Trading Activity Fee (Dec. 15, 2022) 

available at https://www.finra.org/sites/default/ 

files/2022-12/Regulatory-Notice-22-30.pdf. 

162See TAF Amendment. The TAF Amendment’s 

implementation date, which FINRA will announce 

in a Regulatory Notice, will be no earlier than the 

date of the Commission’s adoption of amended Rule 

15b9–1 and no later than the effective date of 

amended Rule 15b9–1. Id. 

163See, e.g., MMI Letter at 3; PEAK6 Letter at 4– 

5; FIA PTG Letter at 4; Group One Letter at 2–3; 

ABCV Letter at 2–3; CTC Letter at 4; Cboe Letter at 

7. One commenter estimated that some proprietary 

broker-dealers would incur TAF fees greater than 

$1,000,000 per year under the current TAF 

structure. See FIA PTG Letter at 4. Another 

commenter opined on the substance of FINRA’s 

contemplated TAF amendment. See PEAK6 Letter 

at 4. Some commenters also stated that FINRA must 

amend the TAF before the Rule 15b9–1 

amendments are adopted so firms can assess the 

fee-related costs of FINRA membership on 

proprietary trading firms. See PEAK6 Letter at 4; 

FIA PTG Letter at 4. 

164See, e.g., Cboe Letter at 3; see also ABCV 

Letter at 2 (stating that any trading by options 

market makers in the underlying cash equities 

markets is related to legitimate hedging of their 

options positions). 

165See Cboe Letter at 2–3; ABCV Letter at 3–4; 

CTC Letter at 5; PEAK6 Letter at 4; Nasdaq Letter 

at 2. Commenters also stated that options trading 

firms’ equities volume often is processed through a 

FINRA member, and stated that a hedging 

exemption would be particularly appropriate if the 

routing away from a member exchange is through 

a broker-dealer that is a FINRA member. See Cboe 

Letter at 2–3; ABCV Letter at 2–4; CTC Letter at 5; 

PEAK6 Letter at 4. As discussed supra in this 

section, the Commission does not agree. See supra 

notes 98–101 and accompanying text. 

166See STA Letter at 3–4; Cboe Letter at 2–3, 7; 

ABCV Letter at 2–4; CTC Letter at 5; PEAK6 Letter 

at 4–6. 

167See FINRA Letter at 12 n. 40 (also stating that 

FINRA does not anticipate that new member 

proprietary trading dealer firms would incur the 

one-time clearing surcharge that applies to new 

applicants engaged in clearing and carrying 

activity). 

168See id. at 14. See also note 170 and 

accompanying text, infra. 

169See section II.B, supra. 

170See 2022 Re-Proposal, supra note 1, sections 

III.B.2 and III.C, 87 FR 49947–50. Section 15(b)(9) 

of the Act provides the Commission with the 

authority, by rule or order, and as it deems 

consistent with the public interest and the 

protection of investors, to conditionally or 

unconditionally exempt from the requirements of 

section 15(b)(8) any broker or dealer or class of 

brokers or dealers. Accordingly, if a broker or dealer 

or class of brokers or dealers believes that it should 

be exempted from the requirements of section 

15(b)(8) in a manner that is not provided by 

amended Rule 15b9–1, it may seek an exemption 

from the Commission, by order, pursuant to section 

15(b)(9). For example, the Commission may 

consider granting such an exemption, where 

appropriate, if a dealer or class of dealers chooses 

to limit its exchange trading activity to the physical 

floor of an exchange of which it is a member, but 

must effect limited securities transactions 

elsewhere for its own account in order to facilitate 

its exchange-floor business. 

As is discussed in the 2022 ReProposal and in more detail in the 

Economic Analysis, infra section V, 

firms that become FINRA members as a 

result of the adopted rule amendments 

will be required to apply for 

membership with FINRA and become 

subject to the fees charged by FINRA to 

all of its member firms. FINRA charges 

each member firm certain regulatory 

fees designed to recover the costs to 

FINRA of the supervision and regulation 

of members, including performing 

examinations, financial monitoring, and 

policy, rulemaking, interpretive, and 

enforcement activities.159 These 

regulatory fees include a Trading 

Activity Fee (‘‘TAF’’).160 FINRA issued 

a Regulatory Notice in 2015 in which it 

proposed to amend the TAF such that 

it would not apply to transactions by a 

proprietary trading firm effected on 

exchanges of which the firm is a 

member.161 In June 2023, after the 2022 

Re-Proposal, FINRA filed a proposed 

rule change with the Commission, 

pursuant to section 19 of the Act, to 

amend the TAF such that it does not 

apply to transactions by a proprietary 

trading firm effected on exchanges of 

which the firm is a member.162 FINRA 

designated this proposed rule change as 

‘‘establishing or changing a due, fee or 

other charge’’ under section 

19(b)(3)(A)(ii) of the Act and 17 CFR 

240.19b–4(f)(2) (‘‘Rule 19b–4(f)(2)’’) 

thereunder, which renders the rule 

effective upon filing with the 

Commission. 

Comments on the 2022 Re-Proposal, 

submitted prior to the TAF Amendment, 

stated that the costs of applying for 

FINRA membership, as well as ongoing 

costs of FINRA membership such as the 

TAF, are high and burdensome and 

could affect liquidity provision.163 In 

particular, commenters stated that 

proprietary options trading firms should 

remain exempt from section 15(b)(8)’s 

Association membership requirement 

because they do not trade U.S. Treasury 

securities and the equities transaction 

volume that they effect is hedging 

activity.164 Commenters urged the 

Commission to adopt an exemption for 

proprietary options trading brokerdealer firms, such that their off-memberexchange securities trading activity 

would not trigger section 15(b)(8)’s 

Association membership requirement if 

such activity is to hedge or in 

furtherance of their options trading 

activity on their member exchange(s).165

If proprietary options trading firms do 

not remain exempt, commenters stated, 

there could be a negative impact on 

options market liquidity and smaller 

options trading firms could cease 

trading, which could lead to 

consolidation and decreased 

competition.166 FINRA stated that most 

proprietary trading dealer firms that 

newly join FINRA would not incur 

membership application fees exceeding 

$12,500.167 FINRA also stated (prior to 

filing the TAF Amendment with the 

Commission) that it is committed to 

amending the TAF to lessen its impact 

on such firms.168

The Commission believes that a 

hedging exemption for broker-dealers 

that are proprietary options trading 

firms, like that sought by commenters, 

could continue to result in a significant 

volume of off-member-exchange trading 

activity not being subject to direct, 

membership-based FINRA oversight. 

Proprietary options trading firms make 

up the majority of the 12 firms that the 

Commission identified above as 

accounting for 5.1% of all off-exchange 

listed equities volume in April 2023 and 

the majority of the 21 firms that the 

Commission identified as accounting for 

approximately 99% of the $262 billion 

in listed equities transaction volume 

executed on exchanges where they are 

not a member.169 As a result, significant 

off-member-exchange trading activity 

could continue not to be subject to 

direct FINRA oversight under 

commenters’ suggested exemption. The 

Commission continues to believe that 

this would not be consistent with the 

protection of investors or the public 

interest, or with the historical rationale 

for Rule 15b9–1 of accommodating 

limited off-member-exchange trading 

activities.170


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61865 

171See infra section V.C.2 (stating that the 

Commission believes that the median application 

fee for the 12 largest (by volume traded) non-FINRA 

member broker-dealer firms would be $12,500). 

172See STA Letter at 3–4; ABCV Letter at 2–3; 

Cboe Letter at 7; Nasdaq Letter at 3–4. 

173See infra section V.C.2 (stating that the 12 

largest non-FINRA member broker-dealer firms (as 

measured by off-exchange equities volume traded in 

April 2023) had average and median annual total 

revenues of approximately $1.2 billion and $491 

million, respectively, in 2022; would incur an 

estimated median GIA of $327,870; and would 

incur an estimated median and average TAF of 

approximately $119,256 and $304,994, 

respectively). 

174See infra section V.C.2. 

175The Commission believes that the potential 

FINRA membership costs that could be incurred by 

firms not among the 12 largest non-FINRA member 

broker-dealers is the best data point available to the 

Commission to assess commenters’ assertion. As 

discussed in section V.B.2, infra, the Commission 

cannot, however, rule out the possibility that the 

addition of FINRA costs will serve as a catalyst for 

one or more small non-FINRA member options 

market makers to exit the market, although FINRA’s 

exemption of TAF fees should reduce the likelihood 

that firms will choose to exit in response to the 

adopted rule amendments. In addition, as discussed 

in section VII, infra, the Commission estimates that 

not more than three of the 64 non-FINRA member 

broker-dealer firms that the Commission identified 

as of April 2023 have total capital of less than 

$500,000 and are not affiliates of any person (other 

than a natural person) that is not a small business 

or small organization and would, as a result, be 

considered small entities under Regulatory 

Flexibility Act (‘‘RFA’’) standards. These three 

small firms—by RFA standards—could be 

significantly impacted by the adopted rule 

amendments because they could be required to 

become a member of FINRA under section 15(b)(8) 

of the Act, if they effect off-member-exchange 

securities transactions and do not qualify for one of 

the adopted exemptions. These three firms are not 

among the 12 largest non-FINRA member brokerdealer firms identified by the Commission, and so, 

as discussed in the paragraph above and in section 

V.C.2 infra, their initial and ongoing FINRA 

membership costs, should they join FINRA, likely 

would be low. This suggests that, while they could 

be significantly impacted by the adopted rule 

amendments in that they may no longer be exempt 

from FINRA membership, their trading businesses 

nevertheless might not be materially impeded by 

the costs of FINRA membership. 

176See STA Letter at 3–4; ABCV Letter at 2–3. See 

also infra section V.B.2. The decrease is largely the 

result of such firms ceasing their broker-dealer 

operations and withdrawing their registration as 

broker-dealers with the Commission. 

177See FINRA.org, 2022 Industry Snapshot, at 13, 

available at https://www.finra.org/sites/default/ 

files/2022-03/2022-industry-snapshot.pdf (last 

visited Aug. 8, 2023) (reflecting the following 

number of FINRA-registered firms in 2017–2021: 

3,726 in 2017; 3,607 in 2018; 3,517 in 2019; 3,435 

in 2020; and 3,394 in 2021); compare 2015 

Proposal, supra note 1, 80 FR 18042, with section 

II.B supra (reflecting a decrease in the 

Commission’s estimate of the number of brokerdealers registered with the Commission that are 

exchange members but not FINRA members from 

125 in the 2015 Proposal to 64 as of Apr. 2023). 

This trend began well before the amendments being 

adopted in this release, and may or may not 

continue regardless of the adopted rule 

amendments. In other words, if options trading 

firms ceased operating in the future, the 

Commission does not believe the cause necessarily 

would be the amendments to Rule 15b9–1 as other 

factors have caused this trend before these 

amendments and likely would continue to be 

relevant. 

178See section V.B, infra (among other things, 

citing an academic study showing that options bidask spreads have remained flat since 2015, and 

citing NYSE Data Insights 2021 Options Year in 

Review, available at https://www.nyse.com/datainsights/2021-options-year-in-review, which reflects 

that options quoted spreads have remained flat or 

slightly declined in recent years as overall option 

trading volumes have continued to hit record 

highs). 

179See id. 

180See 2022 Re-Proposal, supra note 1, 87 FR 

49960; section V.B.1, infra. 

181See, e.g., Virtu Letter at 2. 

The effect of not including a hedging 

exemption in Rule 15b9–1 will be that 

proprietary options trading brokerdealer firms (among other types of 

proprietary trading broker-dealer firms) 

will no longer be exempt from section 

15(b)(8)’s Association membership 

requirement if they effect off-memberexchange securities transactions (unless 

they are covered by one of the 

exemptions in the amended rule). 

Therefore, these firms will be required 

by section 15(b)(8) of the Act to join 

FINRA in order to continue any offmember-exchange securities trading 

activity. The Commission is mindful of 

the FINRA membership costs, including 

application and TAF fees, that would be 

incurred by proprietary trading brokerdealer firms, including options trading 

firms, that join FINRA as a result of the 

rescission of the de minimis allowance 

and proprietary trading exclusion, and 

the Commission is mindful of the 

potential impact of those costs on 

options market liquidity. 

The Commission believes it is 

unlikely, however, that such firms 

would be unable to continue operating 

their trading businesses or providing 

liquidity in their normal course due to 

the costs of FINRA membership. Insofar 

as the costs of joining FINRA are 

concerned, the Commission believes 

that a $12,500 FINRA membership 

application fee would be manageable for 

proprietary trading options firms that 

newly join FINRA, and is small enough 

such that it should not materially 

impact their ability to provide 

liquidity.171 As for concerns regarding 

the TAF, an ongoing FINRA cost, 

FINRA, after considering the potential 

impact of the TAF on proprietary 

trading firms that join FINRA, has 

amended its rules to provide an 

exemption from the TAF for all 

proprietary trading firms for 

transactions executed on an exchange of 

which the proprietary trading firm is a 

member. 

In addition, commenters stated that 

small options trading firms could be 

adversely affected by the rule 

amendments to the point of providing 

less liquidity or ceasing to trade.172

While commenters did not indicate how 

they are defining ‘‘small’’ options firms, 

the Commission believes that smaller 

firms should be able to absorb the 

ongoing costs of FINRA membership, 

such as the GIA and TAF.173 As 

discussed in the Economic Analysis 

below,174 the estimated aggregate costs 

for the 12 largest non-FINRA member 

broker-dealer firms as of April 2023 

represent the majority of the aggregate 

costs stemming from the amendments to 

Rule 15b9–1. Therefore, the 

Commission believes that smaller nonFINRA member broker-dealer firms as 

well as new entrants will experience 

much lower initial and ongoing costs 

and that these FINRA membership costs 

would not materially impede their 

ability to continue their trading 

businesses, which may include 

providing liquidity in the options 

market, if they join FINRA.175

Further, since the 2015 Proposal, as 

commenters observed, there has been a 

decrease in the number of Commissionregistered broker-dealers that are 

exchange members but not FINRA 

members.176 There also has been 

significant consolidation among brokerdealers generally over the past 

decade.177 Meanwhile, despite this 

decline in the number of firms, options 

market liquidity has remained robust, as 

reflected by data suggesting that options 

quoted spreads have remained flat or 

slightly declined in recent years as 

overall option trading volumes have 

continued to hit record highs.178

Therefore, as discussed in the Economic 

Analysis below,179 the Commission 

does not believe that the adopted rule 

amendments will undermine options 

market liquidity provision. In addition, 

as discussed in the Economic Analysis 

below,180 the Commission believes that 

amended Rule 15b9–1 is not likely to 

have an economically meaningful effect 

on direct capital formation, and that 

changes in the allocation of regulatory 

fees and direct FINRA supervision 

within the off-member-exchange market 

may result in improved efficiency of 

capital allocation by the financial 

industry, as current FINRA members 

might commit additional capital to 

liquidity provision when the trading 

environment has more uniform 

regulatory requirements. 

Finally, commenters stated that the 

Commission already possesses and can 

exercise authority over Commissionregistered broker-dealers that are not 

FINRA members.181 While this is 


ddrumheller on DSK120RN23PROD with RULES2
61866 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

182See section I, supra; 2022 Re-Proposal, supra 

note 1, 87 FR 49931–32 (stating that the 

Commission may bring enforcement actions, 

including pursuant to referrals made by SROs, to 

enforce compliance with the Exchange Act and 

applicable rules). 

183See section I, supra; 2022 Re-Proposal, supra 

note 1, 87 FR 49932. 

184One commenter stated that, ‘‘by adopting a 

Commission rule requiring certain broker-dealers to 

register with FINRA, FINRA will become, at least 

as to those broker-dealers, a ‘part of the 

Government’ under the standard set forth by the 

U.S. Supreme Court in Free Enterprise Fund v. 

Public Company Accounting Board, 561 U.S. 477 

(2010).’’ Letter from W. Hardy Callcott (Sept. 3, 

2022). FINRA disputed this. See FINRA Letter at 

15–20. The Commission disagrees that the 

amendments to Rule 15b9–1 would make FINRA 

‘‘part of the Government’’ under Free Enterprise. In 

that case, the Supreme Court reasoned that, 

‘‘[u]nlike the self-regulatory organizations,’’ the 

Public Company Accounting Oversight Board was 

‘‘a Government-created, Government appointed 

entity.’’ 561 U.S. at 485. These distinctions between 

FINRA and the PCAOB remain unchanged by the 

amendments to Rule 15b9–1. See also, e.g., 

Desiderio v. Nat’l Ass’n of Sec. Dealers, Inc., 191 

F.3d 198, 206 (2d Cir. 1999) (NASD ‘‘is a private 

actor, not a state actor,’’ because it is a ‘‘private 

corporation that receives no federal or state 

funding,’’ ‘‘[i]ts creation was not mandated by 

statute, nor does the government appoint its 

members or serve on any NASD board or 

committee.’’). 185See Securities Exchange Act Release No. 

94524 (Mar. 28, 2022), 87 FR 23054 (Apr. 18, 2022). 186See, e.g., MMI Letter at 3; STA Letter at 2; 

Virtu Letter at 4. 187See 2022 Re-Proposal, supra note 1, 87 FR 

49944–49. Relatedly, the Commission proposed that 

existing paragraph (a) of Rule 15b9–1 would remain 

the same except it would no longer be numbered 

as paragraph (a); existing paragraph (a)(1) would be 

renumbered as paragraph (a); and existing 

paragraph (a)(2) would be renumbered as paragraph 

(b). See 2022 Re-Proposal, supra note 1, 87 FR 

49945 n. 156. 

188See 2022 Re-Proposal, supra note 1, 87 FR 

49945. 

189See amended Rule 15b9–1(c), under ‘‘Text of 

Amendments,’’ infra. The Commission also is 

adopting the proposed renumbering of paragraphs 

(a) and (b) in the amended rule. See supra note 187. 

190 17 CFR 242.611. 

191See 2022 Re-Proposal, supra note 1, 87 FR 

49945. See also Options Linkage Plan, supra note 

22. 

192The ITS was an NMS plan, the full title of 

which was ‘‘Plan for the Purpose of Creating and 

Operating an Intermarket Communications Linkage 

Pursuant to Section 11A(c)(3)(B) of the Exchange 

Act of 1934’’ (‘‘ITS Plan’’). The ITS Plan was 

provisionally approved by the Commission in 1978 

and finally approved by the Commission in 1983. 

See Securities Exchange Act Release Nos. 14661 

(Apr. 14, 1978), 43 FR 17419 (Apr. 24, 1978) 

(‘‘Initial ITS Plan Approval Order’’); 19456 (Jan. 27, 

1983), 48 FR 4938 (Feb. 3, 1983) (‘‘Final ITS Plan 

Approval Order’’). All national securities exchanges 

that traded exchange-listed stocks and the National 

Association of Securities Dealers (‘‘NASD’’) were 

participants in the ITS Plan. 

193See 2022 Re-Proposal, supra note 1, 87 FR 

49945; see also Notice of Filing and Immediate 

Effectiveness of the Twenty Fourth Amendment to 

the ITS Plan Relating to the Elimination of the ITS 

Plan, Securities Exchange Act Release No. 55397 

(Mar. 5, 2007), 72 FR 11066 (Mar. 12, 2007). 

true,182 as discussed above and in the 

2022 Re-Proposal,183 the Exchange Act 

requires dual SRO and Commission 

oversight of registered broker-dealers, 

with SROs acting as robust, front-line 

regulators of their broker-dealer 

members. While the Commission retains 

examination authority over the SROs 

and can bring enforcement actions, 

including pursuant to SRO referrals, 

that Commission layer of regulatory 

oversight is meant to work in tandem 

with, not in place of, a robust front-line 

layer of SRO oversight. The Commission 

continues to believe that the front-line 

layer of SRO oversight must be 

strengthened with respect to proprietary 

trading broker-dealer firms that effect 

off-member-exchange securities 

transactions notwithstanding the 

Commission’s plenary jurisdiction over 

Commission-registered broker-dealers. 

Section 15(b)(8)’s complementary SRO 

oversight structure generally has 

enabled exchange SROs to specialize in 

oversight of securities trading activity 

that occurs on the exchange, and FINRA 

to specialize in oversight of off-memberexchange securities trading activity. The 

Commission continues to believe that 

rescinding Rule 15b9–1’s de minimis 

allowance and proprietary trading 

exclusion would better enable robust 

and consistent FINRA oversight in the 

area of its expertise through direct, 

membership-based jurisdiction of 

broker-dealers that effect off-memberexchange securities transactions 

proprietarily. This, in turn, could 

strengthen the front-line layer of SRO 

regulatory oversight that is applied to 

off-member-exchange proprietary 

securities trading in today’s market.184

On March 28, 2022, the Commission 

proposed new rules to further define 

certain language as used in the 

definition of ‘‘dealer’’ and ‘‘government 

securities dealer’’ under sections 3(a)(5) 

and 3(a)(44) of the Exchange Act, 

respectively.185 Some commenters 

stated that the amendments to Rule 

15b9–1 may affect proprietary trading 

firms that are not Commissionregistered dealers, but could be required 

to register as such if the definition of 

‘‘dealer’’ is amended.186 To the extent 

the Commission amends the definition 

of ‘‘dealer’’ in the future, the adopted 

amendments to Rule 15b9–1 would 

become part of the baseline from which 

the effects of any such new rule on the 

definition of ‘‘dealer’’ are measured. 

B. Narrowed Criteria for Exemption 

From Association Membership 

The Commission proposed to add to 

Rule 15b9–1 a new paragraph (c) that 

would set forth two narrow 

circumstances in which a broker or 

dealer would continue to be exempt 

from section 15(b)(8)’s Association 

membership requirement if it effects 

transactions in securities otherwise than 

on an exchange of which it is a 

member.187 Specifically, following the 

existing paragraphs of Rule 15b9–1 that 

require that a broker or dealer be a 

member of a national securities 

exchange and carry no customer 

accounts (both of which paragraphs 

would be retained), the Commission 

proposed to add language that states: 

‘‘and, (c) Effects transactions in 

securities solely on a national securities 

exchange of which it is a member, 

except that with respect to this 

paragraph (c) . . .’’ 188 The two 

proposed exemptions followed in new 

paragraphs (c)(1) and (2). 

As discussed in turn below, the 

Commission is adopting as proposed 

new paragraphs (c)(1) and (2) (as well as 

the above-quoted language).189

Paragraphs (c)(1) and (2) of the amended 

rule are intended to provide more 

focused exemptions from Association 

membership for types of off-memberexchange activity that are similar to the 

off-member-exchange activities that 

Rule 15b9–1 was originally intended to 

cover, and that are consistent with the 

protection of investors and the public 

interest in accordance with section 

15(b)(9) of the Act. 

1. Routing Exemption 

The Commission proposed to add a 

new paragraph (c)(1) to Rule 15b9–1 

that sets forth an exemption from 

Association membership if a broker or 

dealer that meets the criteria of 

paragraphs (a) and (b) of the rule effects 

transactions in securities otherwise than 

on a national securities exchange of 

which it is a member that result solely 

from orders that are routed by a national 

securities exchange of which it is a 

member to comply with Rule 611 of 

Regulation NMS 190 or the Options 

Order Protection and Locked/Crossed 

Market Plan.191 Relatedly, the 

Commission also proposed to eliminate 

from Rule 15b9–1 outdated references to 

the ‘‘Intermarket Trading System,’’ 192

which is a now-obsolete NMS plan that 

was discontinued in 2007 because it 

was superseded by Regulation NMS.193

The Commission is adopting these 

aspects of the 2022 Re-Proposal by 

adding new paragraph (c)(1), as reproposed, to Rule 15b9–1, and by 

removing from Rule 15b9–1 the ITS 

provisions in pre-existing paragraphs 

(b)(2) and (c). 

As discussed in the 2022 Re-Proposal, 

Rule 611 of Regulation NMS requires 

trading centers, such as national 

securities exchanges, to establish, 

maintain, and enforce written policies 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61867 

194 17 CFR 242.611. See also 17 CFR 

242.600(b)(94) (defining a ‘‘trade-through’’ under 

Regulation NMS); 17 CFR 240.600(b)(95) (defining 

‘‘trading center’’); Options Linkage Plan, supra note 

4 (defining ‘‘trade-through’’ in the options context). 

195 17 CFR 242.611. 

196See 17 CFR 242.600(b)(71) (defining 

‘‘protected quotation’’ under Regulation NMS); 17 

CFR 242.600(b)(70) (defining ‘‘protected bid’’ and 

‘‘protected offer’’ under Regulation NMS); see also 

Options Linkage Plan, supra note 4 (defining 

‘‘protected bid’’ and protected offer’’ in the options 

context). 

197See Options Linkage Plan, supra note 4. A 

locked or crossed market occurs when a trading 

center displays an order to buy at a price equal to 

or higher than an order to sell, or an order to sell 

at a price equal to or lower than an order to buy, 

that is displayed on another trading center. 

198 Id. 

199See 2022 Re-Proposal, supra note 1, 87 FR 

49945. 

200Amended Rule 15b9–1 provides an exemption 

from section 15(b)(8) of the Act’s Association 

membership requirement for routing broker-dealers 

that meet the conditions for the exemption, but it 

does not provide routing broker-dealers with an 

exemption from the rules of an exchange that are 

applicable to routing broker-dealers that operate as 

facilities of that exchange (and that the exchange 

uses to conduct routing to other trading centers). As 

discussed in the 2022 Re-Proposal, a routing brokerdealer continues to be required to comply with the 

applicable rules of any exchange for which it 

performs outbound routing services, including 

those requiring the routing broker-dealer to be 

overseen by an unaffiliated SRO such as FINRA. 

See, e.g., Cboe BZX Exchange, Inc. Rule 2.11 (Cboe 

Trading, Inc. as Outbound Router); NYSE Rule 17(c) 

(Operation of Routing Broker); Nasdaq Options 5, 

section 4 (Order Routing). 

201As stated in the 2022 Re-Proposal, the routing 

exemption is applicable where the broker’s or 

dealer’s member exchange utilizes the services of a 

designated broker-dealer (which could be affiliated 

or unaffiliated with the exchange) to perform the 

exchange’s outbound routing. See 2022 ReProposal, supra note 1, 87 FR 49946. An exchange’s 

routing fees must be consistent with the Act, 

including sections 6(b)(4) and 6(b)(5), which require 

an equitable allocation of reasonable dues, fees and 

other charges among members and issuers and other 

persons using any facility of the exchange, and 

require that the exchange’s fees not be designed to 

permit unfair discrimination between customers, 

issuers, brokers, or dealers. 

202See 2022 Re-Proposal, supra note 1, 87 FR 

49946. 

203See Cboe Letter at 3; ABCV Letter at 4. It 

appeared to the Commission that commenters 

intertwined this point with a different point, and 

for the sake of completeness, the Commission has 

addressed both. Specifically, in this section, the 

Commission interprets and addresses these 

comments as a request that the routing exemption 

cover off-member-exchange securities transactions 

to comply with intermarket order protection 

requirements that are effected via routers other than 

a member exchange router. These and other 

commenters also requested an exemption for 

proprietary options trading broker-dealer firms 

under which their off-member-exchange securities 

trading activity would not trigger section 15(b)(8)’s 

Association membership requirement if such 

activity is to hedge or in furtherance of their options 

trading activity on their member exchange(s). See 

supra note 165 and accompanying text. This request 

is addressed in section III.A, supra. 

204See 2022 Re-Proposal, supra note 1, 87 FR 

49946. 

205See Cboe Letter at 3. 

206See ABCV Letter at 4. Likewise, commenters 

suggested that it would be particularly appropriate 

to continue to exempt options trading firms from 

section 15(b)(8)’s Association membership 

requirement where their routing away from a 

member exchange is through a broker-dealer that is 

a FINRA member. See Cboe Letter at 2–3; ABCV 

Letter at 3–4; CTC Letter at 5; PEAK6 Letter at 4. 

As discussed supra in section III.A, the Commission 

does not agree. See supra notes 98–101 and 

accompanying text. 

and procedures reasonably designed to 

prevent trade-throughs in exchangelisted stocks, subject to certain 

exceptions.194 In general, Rule 611 

protects automated quotations that are 

the best bid or offer of a national 

securities exchange or an 

Association.195 To facilitate compliance 

with Rule 611, national securities 

exchanges have developed the 

capability to route orders through 

brokers or dealers (many of which are 

affiliated with the exchanges) to other 

trading centers with protected 

quotations.196 Similarly, in the options 

market, the Options Linkage Plan is an 

NMS plan that requires linkages 

between the options exchanges to 

protect the best-priced displayed quotes 

in the market and to avoid locked and 

crossed markets.197 The Options 

Linkage Plan includes written policies 

and procedures that provide for order 

protection and address locked and 

crossed markets in eligible options 

classes.198

The Commission proposed the routing 

exemption in paragraph (c)(1) to 

accommodate securities transactions 

away from a broker’s or dealer’s member 

exchange(s) that are to comply with 

these regulatory requirements.199 In 

essence, a broker or dealer may, as a 

necessary part of its business trading on 

exchanges of which it is a member and 

in light of today’s market structure, 

effect securities transactions elsewhere 

than an exchange where it is a member 

solely as a consequence of routing by its 

member exchange(s) to comply with the 

requirements of Rule 611 of Regulation 

NMS or the Options Linkage Plan.200

The Commission continues to believe 

that it would be consistent with section 

15(b)(9)’s goal of protecting investors 

and the public interest if transactions 

effected solely to comply with these 

regulatory requirements, via routing by 

the broker’s or dealer’s member 

exchange(s), do not trigger section 

15(b)(8)’s Association membership 

requirement for a broker or dealer that 

otherwise limits its securities 

transactions to an exchange of which it 

is a member (or to stock transactions 

that are covered by the stock-option 

order exemption discussed below). The 

routing exemption is intended to serve 

the limited, narrowly defined purpose 

of facilitating compliance with 

intermarket order protection 

requirements. 

The Commission also stated in the 

2022 Re-Proposal that it would be 

consistent with the protection of 

investors and the public interest to 

permit reliance on the routing 

exemption only where the routing is 

performed by a national securities 

exchange of which the broker or dealer 

is a member.201 The Commission stated 

that this limitation would help ensure 

that the broker’s or dealer’s member 

exchange has visibility into the routing 

transactions and thus is better able to 

provide effective SRO oversight of its 

member’s trading activity that is related 

to its trading on the exchange and may 

not be overseen by another SRO if the 

member is exempt from Association 

membership under amended Rule 15b9– 

1.202

Some commenters stated that the 

routing exemption should be broadened 

for proprietary options trading brokerdealer firms so that it covers routing that 

is not performed by member-exchange 

routers.203 The Commission stated in 

the 2022 Re-Proposal that this would 

not be consistent with the protection of 

investors and the public interest 

because it could permit scenarios in 

which there is insufficient SRO 

oversight of the broker-dealer’s offmember-exchange securities trading 

activity.204 Commenters suggested that 

the Commission’s concerns in this 

regard are mitigated in the context of 

options trading firms because they 

typically route to non-member 

exchanges via another broker-dealer,205

and are especially mitigated where that 

routing broker-dealer is a FINRA 

member.206

The Commission does not agree. As 

stated previously, consistent with the 

original design of Rule 15b9–1, the 

narrowed exemptions from section 

15(b)(8)’s Association membership 

requirement set forth in amended Rule 

15b9–1 are designed to apply to limited 

off-member-exchange securities trading 

activity that is ancillary to the registered 

broker’s or dealer’s trading activity on a 

national securities exchange of which it 

is a member. As stated above, Rule 

15b9–1 previously exempted securities 

transactions effected through the ITS. 

The ITS Plan required each 

participant—exchanges and the NASD— 

to provide electronic access to its 

displayed best bid and offer, and 

provided an electronic mechanism for 

routing orders, called ‘‘commitments to 

trade,’’ to access those displayed 


ddrumheller on DSK120RN23PROD with RULES2
61868 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

207See Initial ITS Plan Approval Order, supra 

note 192. 

208 Id. 

209 Id. 

210While there could be direct exchange SRO or 

FINRA oversight over the routing broker-dealer in 

this scenario, the Commission does not believe this 

is adequate, as discussed above, due to the lack of 

direct FINRA oversight over the broker-dealer 

initiating the order. See supra notes 98–101 and 

accompanying text (discussing that separate 

exchange SRO recourse against different brokerdealers for the same conduct can present the 

potential for inconsistent outcomes). 

211Alternatively, a firm wishing to route orders 

to exchanges using a non-exchange-designated 

routing broker-dealer could comply with section 

15(b)(8) by becoming a member of all exchanges to 

which it routes orders. But any such firm would 

still be required to join FINRA to the extent it 

effects off-exchange securities transactions (unless 

exempted by the stock-option order exemption). See 

section V.D, infra. 

212See 2022 Re-Proposal, supra note 1, 87 FR 

49947. 

213See id. 

214See Cboe Letter at 3 (stating that the existence 

of a stock-option exemption in the 2022 ReProposal is an acknowledgment that activity critical 

to the functioning of the options market should not 

be adversely impacted). 

215See supra note 44. 

216Source: CAT. The Commission previously 

estimated that, in 2021, seven such firms effected 

stock leg transactions and could potentially rely on 

the stock-option order exemption to the extent that 

they effect the stock leg transactions off-exchange 

or on an exchange where they are not a member. 

See 2022 Re-Proposal, supra note 1, 87 FR 49947. 

The Commission attributes the increase from 2021 

to 2022 of its estimated number of broker-dealers 

that are not FINRA members and that executed 

stock leg transactions mainly to an increase in the 

percentage of stock leg transactions that are 

captured in the CAT in a manner that enables the 

prices.207 The ITS Plan provided each 

participant market limited access to the 

other participant markets for the 

purpose of avoiding a trade-through or 

a locked or crossed market.208

Specifically, the ITS enabled a broker or 

dealer that was physically present in 

(and a member of) one market center to 

transmit its own or its customer’s 

commitment to trade in an ITS-traded 

stock to another market center, which 

could then be accepted by a broker or 

dealer at the receiving market center.209

When a broker or dealer initiated a 

commitment to trade from an exchange 

where it was a member, it did so to 

prevent orders on its member exchange 

from trading through or locking or 

crossing quotations displayed on away 

market centers, and the member 

exchange was inextricably involved in 

the routing activity covered by the 

exemption. 

In contrast, if the routing exemption 

were expanded, as suggested by 

commenters, to cover routing for 

intermarket order protection purposes 

performed by a non-exchangedesignated router on behalf of a brokerdealer trading firm, the exemption could 

cover trading activity that is not 

ancillary to the firm’s trading activity on 

any exchange where it is a member. 

Under the commenters’ approach, the 

trading firm could remain exempt from 

Association membership while utilizing 

a non-exchange-designated routing 

broker-dealer to effect securities 

transactions solely on off-memberexchange venues without any nexus to 

an exchange where the trading firm is a 

member. The Commission remains 

concerned that, in this type of scenario, 

there would not be an exchange where 

the trading firm is a member that has 

visibility into the routing transactions 

and that is able to provide effective SRO 

oversight of the trading firm’s order 

routing activity. Among other things, no 

exchange where the trading firm is a 

member would be positioned to assess 

whether the routing transactions 

complied with the terms of the 

exemption. This would be the case even 

if the routing is performed by a routing 

broker-dealer that also is a FINRA 

member.210 This would be inconsistent 

with the Commission’s intention to 

continue to permit exemptions from 

section 15(b)(8)’s Association 

membership requirement that are 

narrowly tailored to limited off-memberexchange securities trading activity that 

is ancillary to the registered broker’s or 

dealer’s trading activity on a national 

securities exchange of which it is a 

member and, in the Commission’s view, 

would be inconsistent with the 

protection of investors and the public 

interest. 

To be clear, nothing in amended Rule 

15b9–1 prohibits broker-dealer firms 

from effecting securities transactions 

away from their member exchange(s) by 

utilizing routing services provided by 

non-exchange-designated brokerdealers, so long as they comply with 

section 15(b)(8) of the Act. Any brokerdealer firm may continue to route orders 

away from its member exchange(s) for 

order protection or any other 

appropriate purposes using nonexchange-designated routing brokerdealers. But a broker-dealer firm cannot 

do so without joining FINRA, as such 

trading activity is not exempt from, and 

therefore would trigger, section 15(b)(8) 

(assuming the trading activity is not 

otherwise covered by the stock option 

order exemption discussed below), 

which would require Association 

membership for the firm.211

2. Stock-Option Order Exemption 

The Commission proposed to add a 

new paragraph (c)(2) to Rule 15b9–1 

that sets forth an exemption from 

Association membership if a broker or 

dealer that meets the criteria of 

paragraphs (a) and (b) of the rule effects 

off-member-exchange securities 

transactions, with or through another 

registered broker or dealer, that are 

solely for the purpose of executing the 

stock leg of a stock-option order.212 The 

Commission also proposed to require in 

new paragraph (c)(2) that a broker or 

dealer seeking to rely on the exemption 

establish, maintain, and enforce written 

policies and procedures reasonably 

designed to ensure and demonstrate that 

such transactions are solely for the 

purpose of executing the stock leg of a 

stock-option order, and that the broker 

or dealer preserve a copy of its policies 

and procedures in a manner consistent 

with 17 CFR 240.17a–4 (‘‘Rule 17a–4’’) 

until three years after the date the 

policies and procedures are replaced 

with updated policies and 

procedures.213 One commenter 

referenced the stock-option order 

exemption.214 The Commission is 

adopting paragraph (c)(2) as proposed. 

As the Commission stated in the 2022 

Re-Proposal, the Commission 

understands that there are firms that 

trade stock-option orders whose 

business is focused on one or more 

options exchanges of which they are a 

member, and whose trading elsewhere 

is primarily to effect the execution of 

stock orders to facilitate their stockoption order business. These firms’ 

stock trading activity is for a limited 

purpose and ancillary to their primary 

business handling stock-option orders 

on an options exchange of which they 

are member. Moreover, there is a close 

link between the stock component 

transaction of a stock-option order and 

the relevant options exchange. As such, 

the stock-option order exemption 

permits these types of firms to continue 

their stock-option order trading business 

without being required to join stock 

exchanges or an Association solely in 

order to effect the execution of the stock 

legs of stock-option orders that they 

handle. 

As stated above, the Commission 

estimates that, in 2022, 48 of the 73 

firms identified as registered brokerdealers and exchange members but not 

FINRA members initiated options order 

executions.215 The Commission 

estimates that 17 of the firms that 

initiated options order executions also 

effected the execution of stock leg 

transactions, and therefore could 

potentially rely on the proposed stockoption order exemption to the extent 

that they effect the stock leg executions 

off-exchange or on an exchange where 

they are not a member.216 Because the 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61869 

Commission to identify the firms that initiated the 

transactions. 217See, e.g., Cboe Rules 1.1 and 5.33(b)(5); MIAX 

Rule 518(a)(5); MIAX Emerald Rule 518(a)(5); 

Nasdaq Options 5, section 1(4) (defining ‘‘Complex 

Trade’’); Nasdaq PHLX Options 5, section 1(d) 

(defining ‘‘Complex Trade’’); Nasdaq ISE Options 5, 

section 1(d) (defining ‘‘Complex Trade’’); Nasdaq 

BX Chapter 5, section 27(a)(v)(1) of the 

‘‘Grandfathered Rules’’ of the Boston Stock 

Exchange, Inc.; NYSE Arca Rule 6.62–O(h)(1); 

NYSE American Rule 900.3NY(h)(1). 

218See, e.g., Cboe Rule 5.33, Interpretations and 

Policies .04 Stock Option Orders; Supplementary 

Material .07 to Nasdaq ISE Options 3, section 14; 

Commentary .01 to MIAX Rule 518. A qualified 

contingent trade is ‘‘a transaction consisting of two 

or more component orders, executed as agent or 

principal where: (1) at least one component order 

is in an NMS stock; (2) all components are effected 

with a product or price contingency that either has 

been agreed to by the respective counterparties or 

arranged for by a broker-dealer as principal or 

agent; (3) the execution of one component is 

contingent upon the execution of all other 

components at or near the same time; (4) the 

specific relationship between the component orders 

(e.g., the spread between the prices of the 

component orders) is determined at the time the 

contingent order is placed; (5) the component 

orders bear a derivative relationship to one another, 

represent different classes of shares of the same 

issuer, or involve the securities of participants in 

mergers or with intentions to merge that have been 

announced or since cancelled; and (6) the 

transaction is fully hedged (without regard to any 

prior existing position) as a result of the other 

components of the contingent trade.’’ Securities 

Exchange Act Release No. 54389 (Aug. 31, 2006), 

71 FR 52829 (Sept. 7, 2006); see also Securities 

Exchange Act Release No. 57620 (Apr. 4, 2008), 73 

FR 19271 (Apr. 9, 2008). 

219Presumably, an options exchange would 

accept only those stock-option orders that meet the 

exchange’s definition thereof. In addition, the 

Commission’s understanding is that, currently, 

consistent with options exchange definitions, a 

stock-option order contains only one stock leg. See 

supra note 217. Therefore, the stock-option order 

exemption currently covers stock-option orders 

with only one stock leg. 

220See, e.g., Cboe Rule 5.33(l) and Interpretations 

and Policies .04; Nasdaq ISE Options 3, section 7 

and Supplementary Material .01, Options 3, section 

14 and Supplementary Material .07; MIAX Rule 518 

and Commentary .01. 

221See, e.g., Cboe Rule 5.33(l); Nasdaq ISE 

Options 3, section 7 and Supplementary Material 

.01, Options 3, section 14 and Supplementary 

Material .07; MIAX Rule 518 and Commentary .01. 

222Section 19(g)(1) of the Act, 15 U.S.C. 78s(g), 

among other things, requires every SRO to examine 

for and enforce compliance by its members and 

associated persons with the Act, the rules and 

regulations thereunder, and the SRO’s own rules, 

unless the SRO is relieved of this responsibility 

Continued 

broker or dealer relying on Rule 15b9– 

1(c)(2) would not itself be a member of 

an exchange on which such stock 

transactions are executed, or a member 

of an Association, such stock leg 

transactions must be effected with or 

through another registered broker or 

dealer that is a member of the exchange 

where the transactions are executed or 

a member of an Association (or both). 

Options exchanges define the term 

‘‘stock-option order’’ in their rules.217

Further, the Commission stated in the 

2022 Re-Proposal that its understanding 

is that all options exchanges accept a 

stock-option order only if it complies 

with the Qualified Contingent Trade 

(‘‘QCT’’) Exemption (‘‘QCT Exemption’’) 

from Rule 611(a) of Regulation NMS.218

For purposes of relying on the 

exemption provided by Rule 15b9– 

1(c)(2), a broker or dealer should adhere 

to the stock-option order definition of 

the options exchange where the stockoption order is handled and of which 

the broker or dealer is a member.219

Specifically, the broker or dealer could 

rely on that definition to determine 

whether, for purposes of amended Rule 

15b9–1(c)(2), an order is in fact a stockoption order and a stock order is in fact 

the stock leg of a stock-option order. 

Moreover, the exemption applies 

regardless of whether the component 

legs of a stock-option order are executed 

electronically, on a physical exchange 

floor, or through a combination of both. 

The Commission continues to believe, 

as discussed in the 2022 Re-Proposal, 

that the stock-option order exemption’s 

reliance on the options exchange’s 

‘‘stock-option order’’ definition should 

enhance an exchange’s ability to 

monitor whether its members are 

appropriately relying on the exemption 

and thereby enhance its ability to 

provide effective SRO oversight of its 

members’ stock-option order trading 

activity. Under options exchange rules, 

an exchange member submitting a stockoption order to the exchange must 

designate to the exchange one or more 

specific broker-dealers: (i) that are not 

affiliated with the exchange; (ii) with 

which the exchange member has 

entered into a brokerage agreement; (iii) 

that the exchange has identified as 

having connectivity to electronically 

communicate the stock components of 

stock-option orders to stock trading 

venues; and (iv) to which the exchange 

will electronically communicate the 

stock component of the stock-option 

order on behalf of the member.220 The 

option exchange’s execution of the 

stock-option order is contingent on the 

exchange’s receipt from the designated 

broker-dealer of an execution report for 

the stock component transaction 

confirming that the transaction has 

occurred.221 In light of these rules, the 

Commission continues to believe that 

there is a close link between the stock 

component transaction of a stock-option 

order and the relevant options 

exchange. Accordingly, the Commission 

continues to believe that this exemption 

would serve the limited, narrowly 

defined purpose of facilitating the 

execution of stock-option orders 

consistent with options exchange rules 

and that the options exchange would be 

able to monitor and oversee the totality 

of the securities trading activity of any 

of its members that rely on the 

exemption. 

The Commission also continues to 

believe that the exchange’s oversight 

capabilities will be further enhanced, 

consistent with the public interest and 

protection of investors, by requiring 

brokers and dealers to develop written 

policies and procedures in connection 

with the stock-option exemption in 

paragraph (c)(2) of the amended rule. 

This requirement should help facilitate 

exchange SRO supervision of brokers 

and dealers relying on the stock-option 

order exemption because it would 

provide an efficient and effective way 

for the relevant options exchange to 

assess compliance with the exemption. 

Moreover, the Commission continues to 

believe that requiring brokers and 

dealers to develop written policies and 

procedures would provide sufficient 

flexibility to accommodate potentially 

varying business models of brokers and 

dealers that effect stock-option orders 

and may seek to rely on this exemption. 

Such written policies and procedures 

must be reasonably designed to ensure 

and demonstrate that the broker’s or 

dealer’s securities transactions 

elsewhere than on an exchange of which 

it is a member are solely for the purpose 

of executing the stock leg of a stockoption order. Accordingly, a broker or 

dealer seeking to rely upon the stockoption order exemption must establish, 

maintain, and enforce written policies 

and procedures reasonably designed to 

ensure and demonstrate that such 

transactions are solely for the purpose of 

executing the stock leg of a stock-option 

order. For example, the broker or dealer 

could maintain documentation that 

demonstrates its compliance with the 

stock-option order requirements of any 

options exchange of which it is a 

member and where it effects the 

execution of stock-option orders. 

Indeed, in addition to the Commission, 

the options exchange of which the 

broker or dealer is a member and where 

the stock-option order is handled would 

be able to enforce compliance with the 

stock-option order exemption. In the 

context of routine examinations of its 

members, the options exchange 

generally would review the adequacy of 

its members’ written policies and 

procedures and assess whether its 

members’ off-member-exchange 

transactions comply with those written 

policies and procedures as well as the 

terms of the exemption itself, as set 

forth in amended Rule 15b9–1.222


ddrumheller on DSK120RN23PROD with RULES2
61870 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

pursuant to section 17(d), 15 U.S.C. 78q(d), or 

section 19(g)(2), 15 U.S.C. 78s(g)(2), of the Act. 

223See, e.g., 17 CFR 240.17a–4(e)(7). 

224See 2022 Re-Proposal, supra note 1, 87 FR 

49951. 

225 Id. 

226 Id. 

227See, e.g., FIA PTG Letter at 4–5; PEAK6 Letter 

at 2. 

228See FIA PTG Letter at 4–5. 

229See FINRA Letter at 12. 

230See id. at 12–13. 

231See supra notes 229–230 and accompanying 

text. 

232See PEAK6 Letter at 2; FIA PTG Letter at 4. 

233See section III.A, supra. 

234See section I, supra. 

235 ‘‘Off-member-exchange’’ trading of securities 

refers to trading by a broker-dealer on any national 

securities exchange of which it is not a member or 

in the off-exchange market. See supra note 2 and 

accompanying text. 

236See section V.A.2, infra. 

237See sections I and III.A, supra. 

238Based on information provided by FINRA. 

239Current non-FINRA members that choose to 

join FINRA in response to the amendments will 

face direct Association oversight of their offmember exchange trading instead of oversight that 

occurs and is based on an RSA. The Exchange Act’s 

statutory framework places SRO oversight 

responsibility with an Association for off-memberexchange securities trading, and FINRA’s role with 

respect to non-FINRA member broker-dealers is 

limited to what is covered in RSAs it enters into 

with the exchanges. See supra section III for a 

discussion of issues related to RSA-administered 

oversight of off-member exchange trading. 

240Municipal bond trades are reported to the 

MSRB but not TRACE, so the Commission does not 

expect the proposed amendments to affect the data 

collected on municipal bonds. Off-exchange trading 

of both listed and unlisted equities by non-FINRA 

member broker-dealers is already reported to CAT. 

Finally, a broker or dealer seeking to 

rely on the stock-option order 

exemption is required to preserve a 

copy of its policies and procedures in a 

manner consistent with Rule 17a–4 

under the Exchange Act until three 

years after the date the policies and 

procedures are replaced with updated 

policies and procedures.223

Accordingly, a broker or dealer is 

required to keep the policies and 

procedures relating to its use of this 

exemption as part of its books and 

records while they are in effect, and for 

three years after they are updated. 

IV. Effective Date and Implementation 

The Commission proposed that the 

compliance date for amended Rule 

15b9–1 be one year after publication of 

any final rule in the Federal Register.224

In proposing this compliance date, the 

Commission considered various factors 

that impact the time that it takes to 

become a FINRA member, as well as 

that firms that choose to adjust their 

business models such that they are not 

required to join FINRA would need time 

to do so.225 The Commission 

understood that, on average, the FINRA 

membership application process takes 

approximately six months.226

Some commenters on the 2022 ReProposal characterized the FINRA 

membership application process as 

lengthy.227 One commenter stated that it 

understood FINRA’s membership 

application process to take more than a 

year, and suggested a revised 

compliance period in which firms must 

only submit their FINRA registration 

application within 360 days of adoption 

of amended Rule 15b9–1, and allow for 

540 days from adoption for FINRA 

approval of the application.228 FINRA 

stated that it typically has 180 days to 

issue a decision after the filing of a new 

membership application, but that, 

depending on the characteristics of an 

application, FINRA may issue a ‘‘fasttrack’’ decision within 100 days.229

FINRA also stated that, based on the 

types of proprietary trading dealer firms 

that would be likely to join FINRA as a 

result of the Rule 15b9–1 amendments, 

it intends to implement an expedited 

membership application process for 

these applicants pursuant to which it 

anticipates processing their applications 

within 60 days after submission.230

The Commission believes that a 

compliance date for amended Rule 

15b9–1 that is 365 days after publication 

of amended Rule 15b9–1 in the Federal 

Register would provide a sufficient 

period of time for proprietary trading 

broker-dealer firms to comply with the 

amended rule. Based on FINRA’s 

statements regarding its ability to issue 

a ‘‘fast-track’’ decision within 100 days 

and expectation that it would process 

proprietary trading dealer firm 

applications within 60 days after 

submission,231 for any FINRA 

membership application submitted by 

such a firm in a timely manner, the 

Commission expects FINRA to be able 

to process the application and render a 

decision within the compliance period. 

Additionally, some commenters stated 

that the FINRA membership application 

process requires information that is 

duplicative of information already 

provided to the Commission and other 

SROs as part of their prior Commission 

registration and exchange SRO 

application process.232 Accordingly, the 

Commission believes that when 

applying to be FINRA members, firms in 

this situation may be able to leverage 

their prior submissions to the 

Commission and exchange SROs to be 

able to have a more expedient 

application process with FINRA than 

they would otherwise if they had not 

already prepared such information for 

submission to the Commission and 

exchange SROs. More broadly, any 

existing broker-dealer firm that applies 

for FINRA membership as a result of the 

amendments to Rule 15b9–1 would 

have already completed the application 

processes for becoming a Commissionregistered broker-dealer and a member 

of at least one exchange and, the 

Commission believes, should be able to 

leverage those experiences to expedite 

their application process with FINRA. 

V. Economic Analysis 

The Commission is amending Rule 

15b9–1 to help ensure that an 

Association generally has direct, 

membership-based oversight over 

broker-dealers that effect off-memberexchange securities transactions and the 

jurisdiction to directly enforce their 

compliance with Federal securities 

laws, Commission rules, and 

Association rules. In addition, these 

amendments will provide a more 

consistent regulatory framework for 

broker-dealers,233 which in turn should 

enhance competition and result in 

potential efficiency gains for market 

participants. 

The Exchange Act’s statutory 

framework places SRO oversight 

responsibility with an Association for 

trading that occurs elsewhere than on an 

exchange to which a broker or dealer 

belongs as a member.234 However, 

currently pursuant to Rule 15b9–1, a 

broker or dealer may engage in 

unlimited off-member-exchange 235

proprietary trading without becoming a 

member of an Association, so long as its 

proprietary trading activity is conducted 

with or through another registered 

broker or dealer. Currently, off-exchange 

equity activity and exchange listed 

options trading of non-FINRA member 

broker-dealers is surveilled by FINRA 

through CAT data and supervised in 

part via the use of RSAs.236 However, 

RSAs are voluntary, privately negotiated 

agreements that can expire or be 

terminated, and accordingly, these 

agreements do not provide the 

consistent and stable oversight that 

direct Association oversight of such 

trading activity does.237 For example, of 

the current FINRA RSA contracts: one 

RSA contract expires at the end of 2023, 

seven RSA contracts expire at the end 

of 2024, and three RSA contracts expire 

at the end of 2025 unless extended or 

terminated early.238 The amendments 

will provide consistency and stability of 

oversight.239

In the case of U.S. Treasury securities 

and other fixed income securities (other 

than municipal bonds) 240 that trade offexchange, surveillance relies on TRACE 

data which is collected by FINRA from 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61871 

241Non-FINRA member depository institutions 

also report U.S. Treasury securities trades to 

TRACE. See supra note 123. 

242The Commission can observe and quantify 

some of this activity through the reporting of U.S. 

Treasury securities on covered ATSs as discussed 

in supra section III.A. See supra note 59. It is likely 

that non-member broker-dealers also trade fixedincome securities other than U.S. Treasury 

securities and these transactions are also not 

reported to TRACE. This Economic Analysis 

focuses on the effects on equities, options, and U.S. 

Treasury securities markets. To the extent that nonFINRA member broker-dealers do trade in 

additional asset classes, the Commission believes 

that the economic impacts discussed herein would 

also apply. In particular, if a non-FINRA member 

broker-dealer does trade in an asset class which 

requires reporting to FINRA, the proposal would 

improve transparency for these securities, which 

would enhance the regulatory oversight of such 

activity. See infra section V.C.2.c for information on 

the costs of TRACE reporting for non-FINRA 

member firms. 

243These trades do not include those with 

depository institutions that are mandated for 

TRACE reporting. 

244See section III.A, supra. The Commission 

believes this is a small fraction of U.S. Treasury 

securities trading. In Apr. 2023, the Commission 

estimates that non-FINRA member broker-dealers’ 

U.S. Treasury securities transactions executed on 

covered ATSs accounted for 2.65% of total U.S. 

Treasury securities transaction volume reported to 

TRACE that month. See supra note 57. The 

unreported trades involving only non-FINRA 

member firms that are not executed on covered 

ATSs might be similar but could be a lower fraction 

of the total U.S. Treasury securities volume. 

245See section III.A, supra. 

246FINRA member firms that compete with these 

firms may currently be at a cost disadvantage due 

to this fee disparity. 

247The term ‘‘non-FINRA member firm’’ refers to 

a broker-dealer that is not a FINRA member. 

248The Commission is sensitive to the economic 

effects of its rule, including the costs and benefits 

and effects on efficiency, competition, and capital 

formation. Section 3(f) of the Exchange Act requires 

the Commission, whenever it engages in rulemaking 

pursuant to the Exchange Act, to consider or 

determine whether an action is necessary or 

appropriate in the public interest, and to consider, 

in addition to the protection of investors, whether 

the action would promote efficiency, competition, 

and capital formation. See 15 U.S.C. 78c(f). In 

addition, section 23(a)(2) of the Exchange Act 

requires the Commission, when making rules under 

the Exchange Act, to consider the effect such rules 

would have on competition. See 15 U.S.C. 

78w(a)(2). Exchange Act section 23(a)(2) prohibits 

the Commission from adopting any rule that would 

impose a burden on competition not necessary or 

appropriate in furtherance of the purposes of the 

Exchange Act. 

249See infra section V.B.1 for further discussion 

of the difficulties in estimating market quality 

effects likely to result from the amendments. 

250 15 U.S.C. 78c(a)(4)(A). 

251 15 U.S.C. 78c(5)(A). 

252A firm that wishes to transact business upon 

an exchange without becoming a broker or dealer 

generally can do so by engaging a broker-dealer that 

is a member of that exchange to provide market 

access and settlement services. 

its members.241 Some dealer firms that 

are not FINRA members are 

significantly involved in trading U.S. 

Treasury securities 242 proprietarily but 

are not required to report these 

transactions because they are not FINRA 

members. Consequently, trades that do 

not occur on an ATS or with a covered 

depository institution,243 and that are 

between two non-FINRA member 

broker-dealers, are not reported to 

TRACE at all, and trades that occur 

otherwise than on a covered ATS do not 

specifically identify the non-FINRA 

member in the information reported by 

the ATS to TRACE.244 The amendments 

will provide for all fixed income trading 

by broker-dealers to be subject to 

FINRA’s rules, including its rules 

requiring reporting to TRACE. 

Section 15(b)(8)’s complementary 

SRO oversight structure generally has 

enabled exchange SROs to specialize in 

oversight of securities trading activity 

that occurs on the exchange, and FINRA 

to specialize in oversight of off-memberexchange securities trading activity. The 

amendments will rescind the de 

minimis allowance and proprietary 

trading exclusion so that the regulatory 

scheme more appropriately effectuates 

Exchange Act principles regarding 

complementary exchange SRO and 

Association oversight.245 For brokerdealers relying on the exemption that 

will be required to register with FINRA 

under the amendments, joining FINRA 

will expose these firms to additional 

costs that they previously did not 

incur.246 While reliance on the 

exemption may be cost-efficient for 

these firms, it introduces inefficiencies 

for exchange SROs, FINRA, and 

regulatory oversight more generally. 

FINRA, the sole Association, has a 

rulebook, surveillance infrastructure, 

and supervisory expertise that is 

targeted to cross-exchange and offexchange trading of both listed and 

unlisted securities. When FINRA detects 

potentially violative behavior by a nonFINRA member firm,247 it can and does 

refer such cases to other SROs or the 

SEC. However, it may lack certain 

investigative tools which could help it 

further investigate potentially violative 

behavior before making such referrals. 

The Commission believes that, 

particularly in the case of fixed income 

trading, FINRA is well positioned to 

efficiently investigate such instances of 

violative behavior because of its TRACE 

data collection and expertise in such 

trading, and such a role is consistent 

with the SRO structure mandated by the 

Exchange Act. 

The Commission discusses below a 

number of economic effects that are 

likely to result from the adoption of 

these amendments.248 As discussed in 

detail below, the effects are quantified 

to the extent practicable. Although the 

Commission is providing estimates of 

direct compliance costs where 

practicable, the Commission also 

anticipates that brokers and dealers 

affected by the amendments, as well as 

competitors of those broker and dealers, 

might modify their business practices 

regarding the provision of liquidity in 

both off-exchange markets and on 

exchanges. Consequently, much of the 

discussion below is qualitative in 

nature, but where possible, the 

Commission has provided quantified 

estimates.249 To the extent that nonFINRA member firms change their 

business practices, such as reducing or 

eliminating their off-member-exchange 

trading activity or joining FINRA and 

increasing their off-member-exchange 

activity, the amendments may impact 

competition and liquidity, particularly 

in the off-member-exchange markets. 

The adoption would increase costs for 

non-FINRA member firms that will have 

to register with FINRA, which might 

result in decreased liquidity provision 

by these non-FINRA member firms to 

certain markets. Additionally, the 

amendments to Rule 15b9–1 might 

create incentives for non-FINRA 

member firms that are impacted by the 

amendments to form a new Association. 

The creation of such a new Association 

would entail large startup costs but 

could spur competition with the 

existing Association and might lower 

general self-regulatory financial 

burdens. The amendments may also 

result in potential benefits to 

competition, since current FINRA 

members will be operating on a more 

level regulatory playing field relative to 

non-FINRA members. 

A. Baseline 

1. Regulatory Structure and Activity 

Levels of Non-FINRA Member Firms 

The Exchange Act governs the way in 

which the U.S. securities markets and 

their brokers and dealers operate. 

Section 3(a)(4)(A) of the Act generally 

defines a ‘‘broker’’ broadly as ‘‘any 

person engaged in the business of 

effecting transactions in securities for 

the account of others.’’ 250 In addition, 

section 3(a)(5)(A) of the Act generally 

defines a ‘‘dealer’’ as ‘‘any person 

engaged in the business of buying and 

selling securities . . . for such person’s 

own account through a broker or 

otherwise.’’ 251 Generally, any brokerdealer that wants to interact directly on 

a securities exchange must register with 

the Commission as a broker-dealer 

before applying to gain direct access to 

the exchange,252 and broker-dealers 

generally must become members of an 

Association to trade securities 

elsewhere than on an exchange to which 


ddrumheller on DSK120RN23PROD with RULES2
61872 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

253See supra note 19. 254Based on the number of firms that answered 

yes to items I8084 or I8085 on Schedule I in 

December 2022. The number of introducing broker 

dealers was estimated from the question ‘‘Does 

applicant refer or introduce customers to any other 

broker or dealer?’’, as reported on Form BD. 255Based on Dec. 2022 Annual FOCUS data 

filings. See also supra note 150. 256See infra section VII. 257Historically, floor brokers had only incidental 

trading on exchanges of which they were not 

members and limited off-exchange trading activity. 

The background and history of Rule 15b9–1 are 

discussed in section I. 258See supra note 37. Some commenters, citing 

the Commission’s proposal to amend the definition 

of ‘‘dealer,’’ stated that number of firms affected by 

the amendments to Rule 15b9–1 could increase if 

the definition of ‘‘dealer’’ is amended. See, e.g., 

STA Letter at 2. The economic analysis 

appropriately considers existing regulatory 

requirements, including recently adopted rules but 

not proposed rules, as part of its economic baseline 

against which the costs and benefits of the final rule 

are measured. To the extent the Commission 

amends the definition of ‘‘dealer’’ in the future, the 

adopted amendments to Rule 15b9–1 would 

become part of the baseline from which the effects 

of any such new rule on the definition of ‘‘dealer’’ 

are measured. See supra note 186 and 

accompanying text. 

259See Stephanie Dumont & Ola Persson, TRACE 

at 20—Reflecting on Advances in Transparency in 

Fixed Income (FINRA.org), Jun. 28, 2022, available 

at https://www.finra.org/media-center/blog/trace-at20-reflecting-advances-transparency-fixed-income 

(last visited July 20, 2023). See also FINRA Rule 

6750(c). 

260See supra note 122 and accompanying text. 

261See supra note 124 and accompanying text. 

262FINRA stated that it does not have visibility 

into the activity of PTFs in non-U.S. Treasury 

security fixed-income products. See FINRA Letter at 

9. 

263See supra section II.B for further discussion of 

trading activities of non-FINRA member firms. 

264ATSs report counterparties that are not FINRA 

members, allowing such activity to be identified in 

CAT data. 

265See Table 1 for information on trading 

activities on ATSs. 

a broker or dealer belongs as a 

member.253

There is diversity in the size and 

business activities of brokers and 

dealers. Carrying brokers and dealers 

hold customer funds and securities; 

some of these are also clearing brokers, 

which handle the clearance and 

settlement aspects of customer trades. In 

contrast, introducing brokers provide 

services to customers, but do not hold 

customers funds or execute or clear 

trades themselves. However, of 3,515 

registered brokers and dealers, only 210 

were classified as carrying or clearing 

brokers and dealers and around 1,200 

firms were classified as introducing 

brokers at the end of 2022.254 Thus, the 

majority of brokers and dealers engage 

in a wide range of other activities, 

which may or may not include handling 

customer accounts. These other 

activities include intermediating 

between customers and carrying/ 

clearing brokers; dealing in government 

bonds; private placement of securities; 

effecting transactions in mutual funds 

that involve transferring funds directly 

to the issuer; writing options; acting as 

a broker solely on an exchange; and 

providing liquidity to securities 

markets, which includes, but is not 

limited to, the activities of registered 

market makers. 

Sixty-six percent of brokers and 

dealers employ 15 or fewer associated 

persons and only 10% of brokers and 

dealers employ over 100 associated 

persons.255 Further, while there are 

many registered brokers and dealers, a 

small minority of brokers and dealers 

controls the majority of broker and 

dealer capital.256

The Commission has identified 64 

firms that, as of April 2023, were 

Commission registered broker-dealers 

and exchange members, but not 

members of FINRA, that may be 

required to either join an Association or 

change their trading practices under the 

amendments.257 In September 2022, 

there were 73 registered broker-dealers 

that were exchange members but not 

FINRA members.258 Because of Rule 

15b9–1’s exclusion of proprietary 

trading, a dealer that had not carried 

customer accounts might not be 

required to join an Association as long 

as it had been a member of an exchange 

SRO, even when that dealer had 

substantial off-member-exchange 

trading activity. 

The Commission is aware that some 

non-FINRA member firms trade U.S. 

Treasury securities. Covered ATSs 

report the U.S. Treasury securities 

trading activity of non-FINRA member 

firms to TRACE. The Commission 

estimates that, in 2022, seven of the 64 

non-FINRA member firms had $6 

trillion in U.S. Treasury securities 

volume reported to TRACE by covered 

ATSs. This accounts for approximately 

3.67% of U.S. Treasury volume as 

reported to TRACE throughout the year. 

In April 2023, there were five nonFINRA member firms with 

approximately $302 billion in U.S. 

Treasury securities volume executed on 

covered ATSs or approximately 2.65% 

of total U.S. Treasury securities 

transaction volume reported to TRACE 

that month. 

FINRA members are required to report 

transactions in TRACE-eligible 

securities. Market participants can gain 

real-time access to TRACE through 

market vendors, for most TRACEeligible securities, with a few exceptions 

including U.S. Treasury securities.259

However, FINRA does make public 

aggregate U.S. Treasury securities data 

on a daily basis.260 Non-FINRA member 

firms are not required to report their 

trading activity to TRACE, but if their 

transactions involve FINRA members or 

covered depository institutions, the 

FINRA members or covered depository 

institutions would report. With respect 

to trading activity in U.S. Treasury 

securities markets on a covered ATS, 

non-FINRA member counterparties are 

identified in TRACE.261 With respect to 

trading activity in other TRACE-eligible 

securities, non-FINRA member 

counterparties are not identified in 

TRACE.262 Therefore, the Commission 

is unable to estimate the level of trading 

activity of non-FINRA member firms for 

other fixed income securities. 

In September 2022, of the 73 nonFINRA member firms, 53 initiated 

equity orders that were not executed on 

an exchange, accounting for $440 billion 

(approximately 5.1%) in off-exchange 

traded dollar volume in listed 

equities.263 In April 2023, of the 64 nonFINRA member firms, 45 initiated 

equity orders that were not executed on 

an exchange, accounting for $405 billion 

(approximately 5.6%) in off-exchange 

traded dollar volume in listed equities. 

There is significant diversity in the 

business models of non-FINRA member 

firms. Some non-FINRA member firms 

may limit their equity trading to a single 

exchange, while others trade on 

multiple venues including off-exchange 

venues such as ATSs. Some firms are 

significant contributors to both offexchange and exchange volume. 

Because CAT requires reporting of all 

NMS stock trades, including offexchange trades, FINRA and the 

Commission are able to quantify the 

aggregate off-exchange activity of nonFINRA member firms in NMS stocks. 

Off-exchange equity trading occurs 

across many trading venues. In the 

fourth quarter of 2022, 32 ATSs actively 

traded NMS stocks, comprising 10.5% 

of NMS stock share volume. 

Furthermore, 214 named 264 brokerdealers transacted a further 32.4% of 

NMS stock share volume off-exchange 

without the involvement of an ATS. 

Although many market participants 

provide liquidity within this market, 

non-FINRA member firms are 

particularly active within ATSs.265

While some non-FINRA member firms 

trade actively cross-exchange and/or offexchange, some of these firms also 

supply and demand liquidity actively 

on multiple equity and options 

exchanges. Table 1 below shows the 

executed dollar volume in listed 

equities by trading venue type during 

September 2022 and April 2023 for the 

non-FINRA member firms. Table 2 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61873 

below shows the executed dollar 

volume, number of trades, and number 

of contracts in options during 

September 2022 and April 2023 for the 

non-FINRA member firms. 

TABLE 1—NON-FINRA MEMBERS NMS EQUITY TRADING VOLUME BY VENUE TYPE

Traded dollar volume 

Sept 2022 April 2023 

Billions 

($) % of total Billions ($) % of total 

I. All Non-FINRA Member Firms 1

Trading Venue: 

Off-Exchange: ATS ................................................................................... 369.59 12.6 352.38 14.6 

Off-Exchange: Non-ATS ........................................................................... 70.63 2.4 52.41 2.2 

On-Exchange: Exchange Member 2 ......................................................... 2,183.14 74.4 1,746.53 72.4 

On-Exchange: Not Exchange Member ..................................................... 311.62 10.6 261.91 10.9 

Total ................................................................................................... 2,934.98 100.0 2,413.23 100.0 

II. Largest Non-FINRA Member Firms 3

Trading Venue: 

Off-Exchange: ATS ................................................................................... 333.48 14.6 322.16 16.1 

Off-Exchange: Non-ATS ........................................................................... 57.60 2.5 41.62 2.1 

On-Exchange: Exchange Member 2 ......................................................... 1,639.34 71.9 1,415.99 70.8 

On-Exchange: Not Exchange Member ..................................................... 248.40 10.9 219.46 11.0 

Total ................................................................................................... 2,278.82 100.0 1,999.22 100.0 

Data Source: CAT. 

1 Non-FINRA Member firms that initiated NMS equity orders that were executed either on or off-exchange. There were 53 firms in September 

2022 and 45 firms in April 2023. 2Exchange Member refers to trades executed on an exchange where the non-FINRA member is a registered member. 

3The largest 12 non-FINRA member firms ranked by equity off-exchange traded dollar volume. 

TABLE 2—NON-FINRA MEMBERS OPTIONS TRADING VOLUME BY VENUE TYPE

Traded dollar volume 

Sept 2022 April 2023 

Billions 

($) % of total Billions ($) % of total 

Panel A: Option Dollar Volume 

I. All Non-FINRA Member Firms 1

Trading Venue: 

On-Exchange: Exchange Member 2 ......................................................... 50.01 93.8 44.62 94.4 

On-Exchange: Cross-Exchange 3 ............................................................. 3.31 6.2 2.65 5.6 

Total ................................................................................................... 53.33 100.0 47.27 100 

II. Largest Non-FINRA Member Firms 4

Trading Venue: 

On-Exchange: Exchange Member 2 ......................................................... 45.56 94.2 40.43 94.3 

On-Exchange: Cross-Exchange 3 ............................................................. 2.80 5.8 2.44 5.7 

Total ................................................................................................... 48.37 100.00 42.87 100 

Trades 

Sept 2022 April 2023 

Millions % of total Millions % of total 

Panel B: Number of Option Trades 

I. All Non-FINRA Member Firms 1

Trading Venue: 

On-Exchange: Exchange Member 2 ......................................................... 18.41 94.8 19.60 95.4 

On-Exchange: Cross-Exchange 3 ............................................................. 1.00 5.2 0.95 4.6 

Total ................................................................................................... 19.41 100 20.55 100 

II. Largest Non-FINRA Member Firms 4

Trading Venue: 

On-Exchange: Exchange Member 2 ......................................................... 16.41 95.4 17.09 95.8 


ddrumheller on DSK120RN23PROD with RULES2
61874 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

266The largest non-FINRA member firms are 

ranked by equity off-exchange traded dollar 

volume. Nine of the largest 12 firms in September 

2022 and eleven of the largest 12 firms in April 

2023 initiated options orders that were executed. 

267See note 269, infra. 

268The commenter stated that the proposed rule 

would not promote regulatory efficiency, since the 

costs of FINRA membership would be 

disproportionate to gains from membership. See 

CTC Letter at 4. Consideration of costs and benefits 

of the amendments are presented in section V.C. 

269More specifically, in September 2022, 53 of 

the 73 non-FINRA member firms initiated options 

orders that were executed off-member-exchange, 

valued at $3.31 billion and equal to about 0.3% of 

total options market volume. In April 2023, 45 of 

the 64 non-FINRA member firms initiated options 

orders that were executed off-member-exchange, 

valued at $2.65 billion, approximately 0.4% of total 

options market volume. See supra Table 2 for 

additional detail. One commenter raised a similar 

concern regarding the equities market. See STA 

Letter at 3. As equities trading represents a much 

larger portion (more than 25%) of non-FINRA 

member volume relative to options trading, the 

Commission views an even greater need for FINRA 

supervision in equities markets. 

TABLE 2—NON-FINRA MEMBERS OPTIONS TRADING VOLUME BY VENUE TYPE—Continued 

Traded dollar volume 

Sept 2022 April 2023 

Billions 

($) % of total Billions ($) % of total 

On-Exchange: Cross-Exchange 3 ............................................................. 0.79 4.6 0.75 4.2 

Total ................................................................................................... 17.20 100 17.84 100 

Contracts 

Sept 2022 April 2023 

Millions % of total Millions % of total 

Panel C: Number of Option Contracts 

I. All Non-FINRA Member Firms 1

Trading Venue: 

On-Exchange: Exchange Member 2 ......................................................... 147.31 94.5 179.13 95.6 

On-Exchange: Cross-Exchange 3 ............................................................. 8.58 5.5 8.20 4.4 

Total ................................................................................................... 155.88 100.0 187.34 100.0 

II. Largest Non-FINRA Member Firms 4

Trading Venue: 

On-Exchange: Exchange Member 2 ......................................................... 129.67 95.1 158.01 96.0 

On-Exchange: Cross-Exchange 3 ............................................................. 6.66 4.9 6.62 4.0 

Total ................................................................................................... 136.33 100.0 164.64 100.0 

Data Source: CAT. 

1 Non-FINRA Member firms that initiated options orders that were executed. There were 53 firms in September 2022 and 45 firms in April 

2023. While these are the same numbers of non-FINRA member firms that initiated NMS equity orders as reflected in Table 1, they are not all 

the same firms as there is not 100% overlap. Some firms that initiated NMS equity orders did not initiate options orders. Some firms that initiated 

options orders did not initiate NMS equity orders. The number of firms in these two groups is the same. 2Exchange Member refers to trades executed on an exchange where the non-FINRA member is a registered member. 

3 Cross-Exchange refers to trades executed on an exchange where the non-FINRA member is not registered member. 

4The largest 12 non-FINRA member firms ranked by equity off-exchange traded dollar volume. Nine of the largest 12 firms in September 2022 

and eleven of the largest 12 firms in April 2023 initiated options orders that were executed. 

Table 1 shows that in April 2023 nonFINRA member firms executed 

approximately 72.4% of their NMS 

equity trading volume on exchanges 

where the firm was a registered member. 

However, they also transacted on 

exchanges where the firm was not a 

member in addition to trading offexchange. Table 2 shows data for nonFINRA member firms that also executed 

trades in the options market and their 

total dollar, trades, and contract volume. 

In September 2022, 53 non-FINRA 

member firms and nine of the 12 largest 

firms 266 executed trades on options 

exchanges. Seven of the nine largest 

firms executed trades on five or more 

options exchanges. In April 2023, 45 

non-FINRA member firms and eleven of 

the 12 largest firms executed trades on 

options exchanges. 

Table 2 indicates that a larger share of 

options trading by non-FINRA members 

(relative to equities trading) takes place 

on exchanges wherein the firm is a 

registered member, ranging from 94%– 

96%. Therefore, about 5% of nonFINRA member options trading occurs 

on exchanges where the firm is not a 

member, the volume of which accounts 

for around 1% of overall options trading 

volume.267

One commenter indicated that 

because non-FINRA members’ offmember-exchange transactions 

represent a relatively small proportion 

of total options market volume, 

mandating FINRA membership will not 

promote regulatory efficiency, since (in 

the commenter’s assessment) the costs 

of Association membership will exceed 

any benefits provided by FINRA 

oversight of ‘‘a relatively small amount 

of trading activity, especially if this 

activity is already being conducted 

through a FINRA broker-dealer.’’ 268 The 

Commission, however, believes that the 

benefits stemming from Association 

oversight of these flows are not trivial 

and justify their accompanying costs. 

More specifically, while the 

Commission agrees that off-memberexchange options volume is not large 

relative to the size of the overall options 

market, it is nonetheless economically 

large, representing between $133 to 

$165 million of daily options dollar 

volume.269

2. Current Market Oversight 

The surveillance and regulation of 

each broker or dealer is partially 

dependent upon its individual SRO 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61875 

270See supra section II, discussing the 

requirement for SROs to examine for and enforce 

compliance with the Exchange Act, and the rules 

and regulations thereunder. 

271Municipal bond trades are not reported to 

TRACE. See supra note 240. 

272All ATSs are operated by FINRA member 

firms. 

273These reporting gaps were noted by FINRA, 

which indicated that it could not identify nonFINRA member firm transactions in U.S. Treasury 

securities that do not occur on a covered ATS. 

Similarly, FINRA stated that it has no visibility into 

the activity of non-member firms in transactions of 

non-U.S. Treasury fixed income securities. See 

FINRA Letter at 9. Beginning in Sept. 2022, FINRA 

began collecting transactions by certain banks in 

government securities. See supra note 123. 

274See supra note 13. 

275See supra note 13. See 17 CFR 240.17d–1. 

FINRA serves as the DEA for the majority of 

member firms; there are exceptions, mostly 

involving firms that have specialized business 

models that focus on a particular exchange that is 

judged to be best situated to supervise the member 

firm’s activity. These firms are, however, subject to 

the same supervision of their trading activity as 

other member firms for which FINRA does act as 

DEA, and the DEA stipulates which SRO has 

responsibility to supervise the firm but does not 

allow for less supervision. 

276Under the amendments, non-FINRA member 

firms that join FINRA may or may not be assigned 

to FINRA for DEA supervision. See supra section 

III.A. 

277Comprehensive reporting requirements for all 

member firms that trade equities off-exchange give 

FINRA information on market activity levels and 

market conditions off-exchange. Because most offexchange equity trading venues do not publicly 

disseminate information on the liquidity available 

in their systems, comprehensive information from 

all participants through CAT allows FINRA to 

analyze and surveil the off-exchange market. See 

supra note 17. 

278For example, FINRA has extensive specific 

rules and dedicated staff applicable to fixed income 

markets. See FINRA.org, Key Topics: Fixed Income, 

available at https://www.finra.org/rules-guidance/ 

key-topics/fixed-income. 

279See supra section II for further discussion of 

the role of Associations in market oversight. 

280See supra note 26. 

281CAT data is available to all SROs. FINRA 

utilizes other data sources for their surveillance as 

well as CAT data. 

282 In most but not all cases, FINRA is empowered 

to take such actions. 

283See supra note 84. 

membership status. Each SRO is 

required to examine for and enforce 

compliance by its members and 

associated persons with the Exchange 

Act, the rules and regulations 

thereunder, and the SRO’s own rules, 

including, for exchange SROs, the rules 

on the trading that occurs on the 

exchange. Exchange SROs generally 

possess expertise in supervising 

members who specialize in trading on 

their exchange and in using the order 

types that may be unique or specialized 

on the exchange. This expertise 

complements the expertise of an 

Association in supervising off-memberexchange trading activity.270

In the markets for NMS equities and 

listed options, while all exchanges are 

SROs and have access to CAT data 

covering trading activity by their 

members both on and off exchanges, 

nearly all cross-market and off-exchange 

equity activity and much options 

activity of non-FINRA member brokerdealers is surveilled by FINRA through 

RSAs with exchange SROs. However, 

RSAs are voluntary, privately negotiated 

agreements that can expire or be 

terminated, and accordingly, these 

agreements may not in the future 

provide the consistency and stability of 

direct FINRA oversight. U.S. Treasury 

security trading and other fixed income 

trading,271 however, is not covered by 

CAT; instead transactions in these 

securities are only reported to FINRA’s 

TRACE database when there is a FINRA 

member or covered depository 

institution that is party to the trade or 

the trade occurs on an ATS because 

such reporting results from a FINRA 

rule.272 Where no FINRA member or 

covered depository institution is party 

to the transaction, and the transaction 

does not take place on an ATS, it goes 

unreported to TRACE.273

Some exchanges serve as DEA for 

certain of their members.274 Financial 

and operational requirements share 

many commonalities across SROs, such 

as net capital requirements and books 

and records requirements. Because 

many brokers and dealers are members 

of multiple SROs with similar 

requirements, one SRO is appointed as 

the broker’s or dealer’s DEA to examine 

common members for compliance with 

the financial responsibility 

requirements imposed by the Act, or by 

Commission or SRO rules.275 The 

exchange serving as DEA has regulatory 

responsibility for their common 

members’ compliance with the 

applicable financial responsibility 

rules.276 However, the non-DEA 

exchange maintains responsibility for 

compliance with its own rules and 

provisions of the Federal securities laws 

governing matters other than financial 

responsibility, including sales practices 

and trading activities and practices, 

although the SROs may also allocate 

other regulatory responsibilities. 

All registered brokers and dealers are 

required to join an Association unless 

they effect transactions in securities 

solely on a national securities exchange 

of which they are a member or are 

exempt from the membership 

requirement pursuant to Rule 15b9–1. 

The vast majority of broker-dealers join 

an Association and, because FINRA is 

the only Association, broker-dealers are 

subject to relatively uniform regulatory 

requirements and levels of surveillance 

and supervision for their activities 

overseen by FINRA. Supervision by 

FINRA covers a market that is 

fragmented across many trading venues, 

including the more opaque off-exchange 

market.277 Additionally, FINRA 

oversees its members’ activity in equity, 

fixed income, and derivative markets 

and thus has the ability to surveil asset 

classes that may be outside the expertise 

of certain exchange SROs (e.g., options 

exchanges may lack expertise in fixed 

income securities).278

The existing Association, FINRA, 

serves crucial functions in the current 

regulatory structure.279 The Exchange 

Act’s statutory framework generally 

places responsibility for off-memberexchange trading with an 

Association.280 Accordingly, FINRA has 

established a regulatory regime for 

FINRA members, including FINRA 

members conducting business in the offmember-exchange market for various 

asset classes, and developed 

surveillance technology and specialized 

regulatory personnel to provide 

surveillance, supervision, and 

enforcement of activity occurring offmember-exchange. Consequently, the 

current regulatory structure achieves 

off-member-exchange supervision 

through the surveillance actions of 

FINRA of the market generally and its 

examination of its members. 

Additionally, despite the fact that 

FINRA does not have jurisdiction over 

non-FINRA member firms or provide 

regulatory oversight services to nonFINRA member firms that are not 

covered by RSAs, FINRA surveils 100% 

of the equities and options markets with 

CAT data as well as other data 

sources.281 Moreover, where it identifies 

potential concerns relating non-FINRA 

member firms’ activities, FINRA refers 

cases for enforcement to the SRO with 

jurisdiction or to the Commission. If 

FINRA is performing regulatory services 

for an exchange SRO pursuant to an 

RSA, FINRA may, on behalf of the 

exchange SRO, investigate and bring an 

enforcement action against an exchange 

SRO member that is not a FINRA 

member, assuming that those services 

are covered by the RSA.282 However, 

each RSA is independently negotiated 

and thus not standardized. Therefore, 

FINRA’s ability to provide oversight can 

vary based on the nature of its RSA with 

the exchange SRO. Additionally, the 

ultimate responsibility for that 

regulatory oversight under an RSA still 

rests with the exchange SRO, not with 

FINRA.283 SROs may also use 17d–2 

plans which allow SROs with common 

members to designate a single SRO to 


ddrumheller on DSK120RN23PROD with RULES2
61876 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

284See supra note 13. 

285See supra section V.A.1 and accompanying 

text for more information on trading in U.S. 

Treasury securities markets. 

286The Commission estimates from 2023 TRACE 

data that in Apr. 2023 there were 916 total firms 

that traded U.S. Treasury securities. 

287See 2022 Re-Proposal, supra note 1, 87 FR 

49932; see also Qualifications and Fees Release, 

supra note 33. 

288See supra note 66. 

289See, e.g., Cboe Letter at 2; ABCV Letter at 3; 

CTC Letter at 3; Group One Letter at 1; MMI Letter 

at 2; PEAK6 Letter at 2. 

290These data record the origination, receipt, 

execution, routing, modification, or cancellation of 

every order a member firm handles for NMS stocks 

and options, with the exception of primary market 

transactions. See generally FINRA Rule 6800 Series 

and 17 CFR 242.613. 291See STA Letter at 2. 292See ABCV Letter at 3; Cboe Letter at 6; FIA 

PTG Letter at 2. Commenters also stated that 

options exchanges surveil the equities trading of 

their members. However, non-FINRA members 

conduct 15 to 17 percent of equity trades offexchange, instances where FINRA surveillance is 

more efficient than exchange SROs. See supra Table 

1. 293See Nasdaq Letter at 3. 294See supra notes 237–238. 295See Cboe Letter at 3; CTC Letter at 5; Group 

One Letter at 2; PEAK6 Letter at 4. 

296See FINRA Letter at 5. 

297See id. at 7–8. 

298See infra section V.C.2.b. for more information 

on these fees. 

299Covered securities include all equity, options, 

and U.S. Treasury securities. For an explanation of 

what is included and exempt from the TAF, see 

FINRA Rules and Guidance, available at https://

www.finra.org/rules-guidance/rulebooks/corporateorganization/section-1-member-regulatory-fees. 

After the 2022 Re-proposal, FINRA proposed an 

amendment that would exempt from the TAF 

transactions executed by proprietary trading firms 

on an exchange of which the firm is a member. See 

TAF Amendment, supra note 146. 

300 15 U.S.C. 78ee. 

301The seller’s clearing broker may pass that fee 

on to the non-FINRA member firm. 

examine common members. However, 

17d–2 plans do not confer jurisdiction 

to FINRA as they apply only to common 

firms of which each SRO would already 

have jurisdiction.284 Exchange SROs 

may not be efficient, relative to FINRA, 

at monitoring off-member-exchange 

activity. 

Some non-FINRA member firms trade 

significantly in the course of their 

normal business activities on exchanges 

of which they are not members. This 

activity is not limited to equities and 

options; non-FINRA member firms play 

a large role in U.S. Treasury securities 

markets as well.285 In 2022, there were 

seven non-FINRA member firms that 

together traded more than $6 trillion in 

U.S. Treasury securities volume on 

covered ATSs, which accounted for 

3.67% of total U.S. Treasury securities 

trading volume 286 reported to TRACE. 

The Commission estimates that in April 

2023, five non-FINRA member firms 

totaled $302 billion in U.S. Treasury 

securities volume executed on covered 

ATSs, accounting for 2.65% of total U.S. 

Treasury securities transaction volume 

reported to TRACE that month. 

This is very different from when Rule 

15b9–1 was first adopted, when firms’ 

exchange activity typically was a floor 

business conducted on a single national 

securities exchange.287 While the Act 

provides for regulation of exchange 

trading by the exchanges themselves, it 

additionally grants regulatory oversight 

of off-exchange trading by an 

Association.288 FINRA, currently the 

sole Association, has specific tools and 

expertise to provide oversight to offexchange activity. However, FINRA’s 

regulatory jurisdiction is limited to its 

membership. 

Some commenters have suggested that 

the current regulatory structure already 

subjects non-FINRA member firms to 

robust SRO oversight because exchange 

SROs have access to both on- and offmember-exchange equity and options 

trading data of their members via 

CAT.289 Indeed, SRO rules require their 

members to report CAT data daily.290

One commenter noted that this has 

helped dramatically improve the ability 

of regulators to identify violative 

activity which is initiated off-memberexchange, across both the equity and 

options markets.291

Some commenters also stated that 

option exchange SROs have specialized 

expertise that makes them well suited 

for effectively overseeing options 

trading.292 In addition, one commenter 

stated that there are existing 

mechanisms for SROs to coordinate 

surveillance of cross-exchange options 

trading, such as the ISG and its 

subgroups.293 The commenter further 

stated that the ISG ‘‘provides a 

nonexclusive forum for discussions and 

referrals to occur and/or to coordinate 

on matters of joint interest to its 

members, while preserving each SRO’s 

independent decision-making and 

enforcement authority.’’ However, with 

regard to off-member-exchange activity, 

which in the case of options firms, also 

includes equity trading activity, SRO 

oversight is based on RSAs, which are 

subject to certain limitations. For 

example, RSAs can expire or be 

terminated.294

Some commenters stated that nonFINRA member off-member-exchange 

activity is frequently conducted through 

FINRA member broker-dealers,295 and is 

therefore already accessible to FINRA 

surveillance. However, trading through 

FINRA members does not confer direct 

authority to FINRA over these nonmembers. This is relevant given that 

FINRA stated that it identified nonmember firms as potential respondents 

in five percent of its 2020 and 2021 

market regulation investigations.296 In 

addition, FINRA stated that ‘‘for certain 

products and exchanges, some nonmember firm conduct may not fully be 

subject to exchange rules that provide 

for important protections in connection 

with the execution of customer orders 

(e.g., not all exchanges have comparable 

best execution rules).’’ 297

Non-FINRA member firms that are 

exempt from the Exchange Act’s 

Association membership requirement 

are not required to pay the costs of 

Association membership, which might 

be significant, especially for firms with 

substantial trading activity (e.g., they 

would incur TAF and other expenses if 

they chose to join FINRA in response to 

the amendments). Fees associated with 

FINRA membership include the annual 

Gross Income Assessment (GIA), the 

annual personnel assessment, and the 

TAF and section 3 fees.298 FINRA 

members pay the TAF for all sales 

transactions of covered securities that 

are not performed in the firm’s capacity 

as a registered specialist or market 

maker upon an exchange.299 In 

particular, transactions in U.S. Treasury 

securities are not part of the ‘‘covered 

securities’’ for the purpose of TAF fee. 

FINRA members also must pay 

Transaction Reporting Fees for TRACE 

reportable securities, with the exception 

of U.S. Treasury securities. 

The FINRA section 3 fee is the second 

of two primary FINRA fees (the other 

being TAF) that are assessed upon each 

transaction by or through a FINRA 

member. Under section 31 of the Act,300

SROs must pay transaction fees based 

on the volume of their covered sales. 

These fees are designed to offset the 

costs of regulation incurred by the 

government—including the 

Commission—for supervising and 

regulating the securities markets and 

securities professionals. FINRA obtains 

money to pay its section 31 fees from its 

membership, in accordance with section 

3 of Schedule A to the FINRA By-Laws. 

FINRA assesses these section 3 fees on 

the sell side of each off-exchange trade, 

when possible. When the sell side of a 

transaction is a non-FINRA member 

firm and the seller engages the services 

of a clearing broker that is a member 

firm, FINRA can assess the section 3 fee 

against the member firm clearing 

broker.301 When the seller is a nonFINRA member firm that self-clears, 

FINRA has no authority to assess the 

section 3 fee against the seller. In such 

case, FINRA would seek to assess the 

fee against the buyer, if the buyer 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61877 

302One commenter agreed that the amendments 

‘‘will safeguard against certain market participants, 

in this case high-frequency trading firms, from 

retaining a competitive advantage in the market due 

to outdated regulations.’’ See Better Markets Letter 

at 8. 

303See supra section III.B.1. 

304See supra section III.B.2. 

305Changes to the exclusion are discussed in 

section III.B, supra. 

306 15 U.S.C. 78o(b)(8). 

307This sentiment was echoed by one commenter 

who stated that FINRA registration ‘‘represents a 

significant barrier to entry’’ for market making 

firms. See Group One Letter at 3. Some proprietary 

trading firms, however, are already members of 

FINRA. As a result, FINRA has experience 

addressing these issues regarding registration 

barriers by facilitating new members’ registration 

processes. Additionally, the rule amendments 

would provide FINRA and the Commission with 

greater visibility into the activities of these firms. 

includes a member firm counterparty or 

a member firm acting as clearing broker 

for a non-FINRA member firm buy side 

counterparty. Any broker-dealer that 

carries customer accounts is required to 

be a member of an Association and thus 

bear the aforementioned fees. These 

costs may be passed on in part or in 

whole to the investing public or the 

non-FINRA member counterparty. 

3. Current Competition To Provide 

Liquidity 

The market for liquidity provision on 

equity and options exchanges is 

competitive. In September 2022 across 

all exchanges, each equity security had 

a registered market maker providing 

liquidity, and some had as many as 48 

registered market makers. The median 

equity security had 4 registered market 

makers and twenty-five percent of 

equity securities had 5 or more 

registered market makers. Sixty percent 

of equity securities have at least two 

registered market makers and forty 

percent had one registered market 

maker. In addition to these registered 

market makers, the Commission 

believes that other market participants 

effectively provide liquidity in equity 

securities through their trading 

activities. In the options market, each 

exchange had as many as 24 market 

makers providing liquidity. The average 

number of market makers per options 

security across exchanges is 

approximately 5.9. While counting the 

number of market makers does not 

necessarily indicate whether each 

market maker is an active competitor, it 

does provide a good indication as to the 

number of firms in the business of 

providing liquidity, and the 

Commission believes that many market 

makers do actively compete, both with 

other registered market makers and 

market participants generally, to 

provide liquidity. 

As stated above, non-FINRA member 

firms do not have the same regulatory 

costs as FINRA member firms, which 

may give non-FINRA member firms a 

competitive advantage in providing 

liquidity in equities, options, and fixed 

income markets.302 As such, non-FINRA 

member firms may be able to provide 

liquidity at a lower cost than FINRA 

member firms given that non-FINRA 

member firms have a lower variable 

cost, all else equal, for trading compared 

to FINRA member firms. 

The Commission believes that nonFINRA member firms are active 

participants in the market to provide 

liquidity in off-exchange markets. The 

Commission estimates that non-FINRA 

member firms account for between 5.1% 

and 5.6% of off-exchange dollar volume 

in equities from September 2022 

through April 2023. Additionally, 

nearly 16.8% of all non-FINRA member 

equity trading activity occurs in offexchange markets. Approximately 5.0% 

of non-FINRA member options trading 

activity involves a non-member 

exchange. In U.S. Treasury securities 

markets, non-FINRA broker-dealer 

trading activity that is reported by 

covered ATSs accounts for 3.67% of all 

transaction volume. 

B. Effects on Efficiency, Competition, 

and Capital Formation 

In addition to the specific, individual 

benefits and costs discussed below, the 

Commission expects the amendments 

might have varying effects on efficiency, 

competition, and capital formation. 

These potential effects are described in 

this section. The amendments will 

likely result in improved efficiency of 

capital allocation. To the extent that 

liquidity provision changes as a result of 

the amendments, market efficiency 

might be impacted. Additionally, the 

amendments will have mixed effects on 

competition to provide liquidity, as 

current non-FINRA member firms might 

be less likely to provide liquidity but 

current FINRA members may be more 

likely to provide liquidity. The 

Commission believes that the 

amendments would not likely have a 

meaningful effect on capital formation. 

1. Firm Response and Effect on Market 

Activity and Efficiency 

Although non-FINRA member firms 

could achieve compliance with the 

amendments in multiple ways, each 

route might involve changes to firms’ 

business models. Some non-FINRA 

member firms might limit their trading 

to exchanges of which they are 

members, and the Commission believes 

that some may not trade off-memberexchange other than to comply with 

Rule 611 of Regulation NMS or the 

Options Linkage Plan,303 or to execute 

the stock leg of a stock-option order.304

These firms would remain exempt from 

the requirement to become a member of 

an Association, if they comply with 

section 15(b)(8) of the Act or the rule as 

amended.305 Other firms would no 

longer be exempt, and would need to 

take action to comply with the amended 

rule. Under the amended rule, a nonFINRA member firm that trades equities, 

options, or fixed income securities offexchange, or upon exchanges of which 

it is not a member, can comply in at 

least four ways. The first option would 

be to join an Association. The second 

option would be to join all exchanges 

upon which the non-FINRA member 

firm wishes to trade, and to cease any 

off-exchange trading, other than offmember-exchange trading consistent 

with the routing exemption and stockoption order exemption. Third, a nonFINRA member firm could comply by 

trading solely upon those exchanges of 

which it is already a member, consistent 

with the statutory exemption in section 

15(b)(8).306 Finally, a non-FINRA 

member firm could cease trading 

securities entirely. 

The changes non-FINRA member 

firms make to their business model to 

comply with the amendments may 

affect competition in the equity, 

options, and fixed income securities 

markets, particularly for off-memberexchange liquidity provision.307 The 

Commission believes that the 

amendments will result in a more level 

regulatory playing field between current 

FINRA and non-FINRA members, as 

well as enhanced oversight and 

transparency of the markets in which 

these firms compete. In response, it is 

possible that current FINRA member 

firms might choose to commit 

additional capital to liquidity provision 

when the trading environment has more 

uniform regulatory requirements. If this 

results in an increased overall 

commitment of liquidity both to 

exchanges and the off-exchange market, 

there are likely to be positive effects on 

capital market efficiency, such as lower 

quoted spreads on exchanges. In 

addition to lowering immediate 

execution costs on exchanges, lower 

exchange quoted spreads are likely to 

reduce transaction costs off-exchange as 

well, because off-exchange trades are 

typically priced with reference to 

quoted exchange prices. 

The amendments may result in 

improved efficiency of capital allocation 


ddrumheller on DSK120RN23PROD with RULES2
61878 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

308 Direct capital formation is the assignment of 

financial resources to meet the funding 

requirements of a profitable capital project, is in 

this case, the provision of liquidity to financial 

markets. 

309Non-FINRA member firms may also reduce 

their off-exchange trading outside of ATSs, such as 

on single-dealer platforms, as part of an effort to 

avoid being required to join FINRA. However, nonFINRA member firms currently can only take (not 

make) liquidity on these platforms. It is possible 

that additional off-exchange liquidity may be 

available outside of ATSs for other market 

participants as a result of the amendments to Rule 

15b9–1 due to a reduction in non-FINRA member 

firm trading on single-dealer platforms. 

310 Industry white papers sometimes discuss the 

concept of natural counterparties for institutional 

trades. These papers may explicitly or implicitly 

identify proprietary automated trading firms as 

sources of information leakage in dark pools. The 

Commission understands that some ATSs segment 

orders so that institutional investors do not trade 

with PTFs. See, e.g., Hitesh Mittal, Are You Playing 

in a Toxic Dark Pool? A Guide to Preventing 

Information Leakage, J. Trading, Summer 2008, at 

20 (ITG white paper), available at https://jot.pmresearch.com/content/3/3/20. Other industry 

participants describe a more benign role for 

automated trading firms as liquidity providers in 

ATSs. See Terry Flanagan, High-Speed Traders Go 

Dark, Markets Media Commentary (2012), available 

at https://www.marketsmedia.com/high-speedtraders-go-dark/. 

311There is some evidence that some proprietary 

trading firms are net takers rather than net suppliers 

of liquidity in equity markets, although the 

evidence is not conclusive. Using Nasdaq data from 

2008–2010, Carrion estimates that these firms 

supply liquidity to 41.2% of trading dollar volume 

and take liquidity in 42.2% of trading dollar 

volume. See Allen Carrion, Very fast money: Highfrequency trading on the NASDAQ, 16 J. Fin. Mkts. 

680 (2013). Another study finds that electronic 

trading firms act as net liquidity suppliers during 

periods of extreme price movements. See Jonathan 

Brogaard, Allen Carrion, Thibaut Moyaert, Ryan 

Riordan, Andriy Shkilko & Konstantin Sokolov, 

High Frequency Trading and Extreme Price 

Movements, 128 J. Fin. Econ. 253 (2018). 

312Several commenters expressed concerns that 

the amendments would negatively impact market 

liquidity in this respect. See Cboe Letter at 7; 

PEAK6 Letter at 4; ABCV Letter at 3. 

313Firms with very low ATS activity are unlikely 

to directly connect to an ATS, instead accessing 

ATSs through a FINRA-member firm. For firms 

with very limited off-member-exchange activity, 

ceasing off-member-exchange activity is likely to be 

less costly than joining an Association. The costs 

of joining FINRA are discussed in detail in infra 

section V.C.2; for firms with very limited offmember-exchange activity, it is unlikely that the 

profits generated from this activity would offset 

FINRA membership costs. However, for firms that 

generate profits from off-member-exchange 

activities that exceed FINRA membership costs, it 

may be less costly to join FINRA than to cease their 

off-member-exchange activity. 

314After the 2015 Proposal and again following 

the 2022 Re-proposal, FINRA evaluated the 

structure of the TAF to assure that it appropriately 

considered the business model of certain nonFINRA member firms that might have joined FINRA 

as a result of the proposed amendments. FINRA has 

proposed an amendment that would exempt from 

the TAF transactions executed by proprietary 

trading firms on an exchange of which the firm is 

a member. See TAF Amendment, supra note 146. 

The Commission’s analysis of TAF is based on the 

proposed TAF structure as outlined in the FINRA 

By-Laws, Schedule A. TAF and section 3 fees are 

discussed further in section V.C.2.b, infra. Firms 

would also face additional fixed costs both to 

establish and maintain Association membership; 

those costs are discussed in section V.C.2, infra. 

315See, e.g., MMI Letter at 1; ABCV Letter at 3; 

PEAK6 Letter at 5. 

by the financial industry.308 While the 

Commission acknowledges that FINRA 

membership could act as an entry 

deterrent to new proprietary trading 

firms, there are benefits to ensuring a 

certain level of oversight for proprietary 

trading firms. The Commission believes 

that the adopted amendments to Rule 

15b9–1 are consistent with the 

Exchange Act’s statutory framework for 

complementary exchange SRO and 

Association oversight of broker-dealer 

trading activity and thus to the extent 

such firms are required to register with 

FINRA as a result of the amendments, 

the Commission believes that the costs 

are justified by the benefits of regulatory 

oversight. 

While the amendments might reduce 

the capital commitment of non-FINRA 

member firms to liquidity provision, the 

Commission believes these effects are 

not likely to be significant because the 

market to provide liquidity is very 

competitive. These markets are served 

by a number of liquidity providers with 

different business strategies and a 

strategic change by relatively few 

competitors is unlikely to disturb 

liquidity provision overall. 

Additionally, any subsequent removal 

of liquidity from the market may 

improve execution quality on offexchange markets.309 Some institutional 

investors transacting in off-exchange 

markets might seek institutional 

investor counterparties and avoid 

transacting with proprietary trading 

firms. To this extent, the removal of 

non-FINRA member firm liquidity 

might be seen as improving liquidity 

quality within ATSs by some 

institutional investors.310

It is also possible that reducing the 

activity of non-FINRA member firms 

within ATSs might result in more ATS 

liquidity if non-FINRA member firms 

are acting as net takers of liquidity 

within these systems.311 At a minimum, 

liquidity levels in ATSs may change. In 

addition, these firms may reduce their 

off-exchange trading outside of ATSs 

such as on single-dealer platforms. If 

this occurs, it is possible that this will 

result in a transfer of volume from offexchange venues to exchanges, but it is 

also possible that overall market trading 

volume will diminish if decreased 

volume from off-exchange trading does 

not migrate to exchanges.312 The 

Commission acknowledges that nonFINRA member firms, in response to the 

amendments, may become less willing 

to compete to provide liquidity offmember-exchange, decreasing liquidity 

off-exchange and on exchanges where 

such firms are not members. For 

example, non-FINRA member firms may 

choose to cease their off-memberexchange activity rather than join an 

Association—although it is likely that 

firms that trade heavily off-memberexchange may find it more costly to 

cease their off-member-exchange 

activity than to join an Association.313

In addition, non-FINRA member firms 

that choose to join an Association may 

reduce their off-member-exchange 

trading because joining an Association 

would increase variable costs to trade in 

the off-member-exchange market, as 

these trades would incur section 3 and 

possibly additional fees, although some 

section 3 fees may already be passed on 

from FINRA member firms to nonFINRA member firms.314 An increase in 

costs would reduce the profitability of 

off-member-exchange trading and thus 

potentially reduce aggregate offmember-exchange trading. 

The Commission believes that 

required membership in an Association, 

consistent with section 15(b)(8) of the 

Act and amended Rule 15b9–1, could 

facilitate an appropriate level of 

oversight. The Commission also 

recognizes that the loss of liquidity 

provision in off-member-exchange 

trading might impose costs on investors 

in the form of higher trading costs than 

they would otherwise realize. These 

effects may differ across asset classes. In 

the case of non-FINRA member brokerdealers trading U.S. Treasury securities, 

costs to join an Association include the 

costs of establishing TRACE reporting. 

Depending on the firm’s activity level in 

that market, firms might be more likely 

to withdraw from that market if their 

anticipated profit levels from U.S. 

Treasury securities trading do not justify 

the additional reporting requirements. 

The impact on liquidity in U.S. 

Treasury securities markets is not likely 

to significantly impact investor costs to 

trade these securities because U.S. 

Treasury securities are generally very 

liquid and competition to provide this 

liquidity is robust. If some non-FINRA 

member broker-dealers stop competing 

in the market to provide this liquidity, 

other broker-dealers are likely to 

increase their activity in this market, but 

the Commission acknowledges that if 

competition to provide liquidity 

decreases, investor costs to trade U.S. 

Treasury securities could increase. 

Several commenters expressed 

liquidity concerns with regard to 

options markets.315 One commenter 

stated that FINRA membership costs 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61879 

316See ABCV Letter at 3. 

317See PEAK6 Letter at 5. According to the 

commenter, FINRA fees are partially based on the 

number of transactions in order to provide 

protection that is proportional to the number of 

customer orders of a broker-dealer. This is 

theoretically at odds with the business model of 

proprietary traders, which do not have customers. 

For this reason, the commenter asserts that FINRA 

fees are ‘‘imbalanced,’’ i.e., disproportionately 

costly to proprietary trading firms relative to the 

benefits provided by FINRA oversight of these 

firms. 

318 Id. 

319See infra note 330 and discussion in infra 

section V.B.2. 

320Currently, a non-FINRA member firm can 

indirectly access an exchange of which it is not a 

member through a firm that is an exchange member. 

In light of the elimination of the exclusion for 

proprietary trading, this activity would not be 

consistent with the amendments, unless the activity 

complies with the routing or stock-option order 

exemptions. See supra sections III.B.1 and III.B.2. 

321These firms could unwind positions on 

exchanges of which they are a member, but the cost 

to do so may be higher than if all liquidity sources, 

including off-exchange liquidity, were available. 

322 It is possible non-FINRA member firms that 

choose to join an Association may avoid some 

additional costs by registering as market makers on 

additional venues, mitigating these charges. 

Furthermore, they may see a reduction in fees that 

were formerly paid to their DEA if FINRA assumes 

that role. 

323Exchange membership also imposes costs on 

broker-dealers. Some non-FINRA member firms are 

members of many exchanges, but not FINRA, while 

some FINRA-member firms are members of many 

exchanges as well as FINRA. To the extent that a 

broker-dealer can avoid FINRA membership, its fee 

burden might be lower than a broker-dealer that 

cannot or does not avoid FINRA membership. The 

Commission believes that many non-FINRA 

member firms would retain their exchange 

membership when the amendments are adopted in 

order to maintain the benefits of being a member 

of the exchange. Therefore, the Commission only 

considers the additional cost to the firms that are 

specific to joining FINRA. The exchange SRO fees 

are not considered as they are not expected to 

change. However, a firm may decide to drop its 

membership on exchanges where it no longer 

wishes to trade after joining FINRA, because 

maintaining exchange memberships is costly and 

firms are unlikely to maintain membership on 

exchanges where they do not plan to have activity. 

See infra section V.C.2, for more information on the 

fees associated with FINRA membership. 

324See section V.C.2.f, infra. 

325See section V.B.1, supra for discussion of 

competitive effects and investor costs. 

326See ABCV Letter at 3–4; Cboe Letter at 7; 

Group One Letter at 3; Nasdaq Letter at 3. 

might have ‘‘the potential for impaired 

liquidity, especially during times of 

market stress.’’ 316 Another commenter 

indicated that the FINRA TAF fee 

structure is disproportionally 

burdensome for proprietary trading 

firms and risks stifling liquidity in 

options markets.317 The commenter also 

stated that there are fewer incentives to 

provide the same liquidity under 

FINRA’s proposed fee structure as there 

are under Cboe’s regulatory fee 

structure.318 The Commission, however, 

believes that options market liquidity 

provision will not be impaired even if 

these amendments cause options market 

makers to exit. The Commission 

observes that bid-ask spreads have 

remained consistent since 2015 even 

though, over that same period of time, 

options market makers have entered and 

exited the market through varying 

market conditions.319

Changes in business models for nonFINRA member firms may affect market 

quality on exchanges as well. In 

addition to trading extensively in the 

off-exchange market, many non-FINRA 

member firms are among the most active 

participants on exchanges. Business 

model changes by these firms in 

response to the amendments might lead 

to less exchange liquidity for several 

reasons. First, non-FINRA member firms 

that choose not to join an Association 

will no longer be able to rely on the rule 

and trade indirectly on exchanges of 

which they are not members, unless 

they comply with the routing or stockoptions order exemptions.320 Second, 

non-FINRA member firms that do not 

join an Association will no longer be 

able to access off-member-exchange 

liquidity to unwind positions acquired 

on exchanges, which might reduce their 

willingness to provide liquidity on 

exchanges.321 Third, non-FINRA 

member firms that choose to join an 

Association might be subject to 

additional variable costs (primarily 

regulatory fees) on their exchange-based 

trading as well as on their off-memberexchange trading.322 These firms might 

respond by trading less actively on 

exchanges. Finally, non-FINRA member 

firms might choose to cease trading 

rather than join an Association or 

change their business models. Reduced 

liquidity upon exchanges can result in 

higher spreads and increased volatility. 

Increased spreads on exchanges can 

lead to increased costs for off-exchange 

investors as well as investors transacting 

on exchanges, because most offexchange transactions (including many 

retail executions) are derivatively priced 

with reference to prevailing exchange 

prices. Overall, however, the 

Commission believes that the 

amendments will most likely not result 

in a disturbance of liquidity provision 

due to the robust competitive conditions 

of the current market landscape. 

2. Effect on Competition To Provide 

Liquidity 

The amendments might impact 

competition to provide liquidity by 

increasing the regulatory cost for current 

non-FINRA member firms. Non-FINRA 

member firms do not bear the costs 

associated with FINRA membership. As 

such, FINRA member firms bear a 

number of costs not borne by nonFINRA member firms including a 

number of regulatory fees and indirect 

costs that are assessed or imposed upon 

member firms.323 These costs are a part 

of equity, options, and fixed income 

markets and include direct costs such as 

trading fees that are either assigned only 

to member firms, such as TAF, or in the 

case of section 3 fees, member firms 

may be assigned costs that could be 

assigned to non-FINRA member firms’ 

off-exchange securities sales. There are 

indirect costs of disparate regulatory 

regimes as well.324 Under the 

amendments current non-FINRA 

members that choose to join FINRA will 

become subject to the regulatory costs 

associated with FINRA membership, 

including TAF, GIA and section 3 fees. 

These changes to regulatory costs for 

non-FINRA member firms might change 

competitive forces in the market for 

providing liquidity as the current nonFINRA member broker-dealers have 

lower regulatory costs, which might 

make it less costly for non-FINRA 

member broker-dealers to provide 

liquidity.325 To the extent that nonFINRA member firms do have lower 

costs for providing liquidity than FINRA 

member firms, the amendments might 

eliminate such an advantage, and lead 

to a reduction in liquidity provided by 

current non-FINRA member firms. 

However, to the extent that these 

negative effects on liquidity occur, the 

Commission believes they will be minor 

in light of several factors. First, while 

non-FINRA members have been able to 

avoid direct costs associated with 

Association membership, in reality, they 

may have already been bearing a portion 

of these costs, as FINRA member firms 

may pass through their fees to nonFINRA member counterparties. In 

addition, following the implementation 

of the amendments, current FINRA 

members will be operating on a more 

level regulatory cost playing field, 

which may expand their own provision 

of liquidity and perhaps balance out any 

reduction in liquidity from current nonFINRA members. Finally, the provision 

of liquidity appears to be somewhat 

resilient to changing market conditions, 

and more specifically, appears to have 

been unaffected by the exit of numerous 

non-member firms since the 2015 

Proposal, as discussed below. 

Several commenters expressed 

concern about decreased competition 

among options market makers.326 One 

commenter specifically noted that 

‘‘[s]maller options market makers may 

not have the economies of scale to 


ddrumheller on DSK120RN23PROD with RULES2
61880 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

327See Cboe Letter at 7. 

328See Better Markets Letter at 8. 

329See STA Letter at 3–4. 

330See Figure 1 of Jefferson Duarte, et al., Very 

Noisy Option Prices and Inferences Regarding the 

Volatility Premium, J. Fin., Forthcoming. 

331See NYSE Data Insights, 2021 Options Year in 

Review, available at https://www.nyse.com/datainsights/2021-options-year-in-review. 

332These broker-dealers could also choose to 

remain exempt by joining any remaining exchanges 

on which they currently trade but are not members. 

Additionally, they could remain exempt by 

retaining their current exchange memberships and 

only discontinue trading on the exchanges for 

which they currently do not carry membership. 

333The TAF exemption will be for trading on 

exchanges at which the proprietary firm is a 

member. See supra note 162 and accompanying 

text. 

334This assumes no hidden depth at the best 

price. If non-displayed depth is present at the best 

price, the remaining 100 shares will be filled at the 

best price if at least 100 shares of hidden depth 

exist at the best price. 

335See supra note 9 and accompanying text. 

336See 15 U.S.C. 78o–3. 337See 15 U.S.C. 78o–3(b)(3). Section 15A of the 

Exchange Act specifically states that an Association 

shall not be registered as a national securities 

association unless the Commission determines, 

among other things, that ‘‘the rules of the 

association provide that any registered broker or 

dealer may become a member of such association 

and any person may become associated with a 

member thereof.’’ 

338See 15 U.S.C. 78o–3(b)(11). 

339See 15 U.S.C. 78o–3(b)(2). 

adequately absorb [FINRA registration] 

costs, which could lead to consolidation 

and decreased competition.’’ 327 On the 

other hand, another commenter 

suggested that the amendments might 

increase competition and that they ‘‘will 

safeguard against certain market 

participants, in this case high frequency 

trading firms, from retaining a 

competitive advantage in the market 

due to outdated regulations.’’ 328

Despite a recent decline in the 

number of non-FINRA member options 

liquidity providers, the Commission 

does not believe that the amendments 

will negatively impact options market 

liquidity provision. Since the 2015 

Proposal, the number of non-FINRA 

member firms has declined from 125 to 

64. One commenter pointed out that 

while some non-members may have 

since become FINRA members or have 

been acquired by other market makers, 

most of the decline in option market 

making non-members are firms that 

have ceased trading securities.329

However, despite this decline in the 

number of firms, options market 

liquidity has remained robust. One 

academic study shows that options bidask spreads have remained flat since 

2015.330 NYSE Data Insights similarly 

suggests that options quoted spreads 

have remained flat or slightly declined 

in recent years as overall option trading 

volumes have continued to hit record 

highs.331 While a decrease in the 

number of competitors can lead to a 

decline in competition, these data do 

not appear to suggest that options 

market liquidity conditions have 

weakened with the increased industry 

consolidation. 

The Commission does not believe that 

the costs imposed by these amendments 

will be large enough to undermine 

options market liquidity provision or 

the overall degree of competition in the 

market. The Commission cannot rule 

out the possibility, however, that the 

addition of FINRA costs will serve as 

catalyst for one or more small nonmember options market makers to exit 

the market,332 although FINRA’s 

exemption of TAF fees for non-member 

firms,333 which several commenters 

supported, should reduce the likelihood 

that firms will choose to exit in 

response to the rule. To the extent that 

options market makers exit, competition 

to provide liquidity in options markets 

may be adversely impacted. 

The impact on equity liquidity due to 

non-FINRA members joining FINRA in 

response to the amendments is 

uncertain. The existing differential 

regulatory cost burdens of FINRA 

member firms and non-FINRA member 

firms may have consequences with 

respect to market quality both for 

exchange-based and off-exchange 

trading. For example, because nonFINRA member firms, all else equal, 

currently face lower variable costs of 

trading compared to member firms, nonFINRA member firms may be able to 

provide liquidity at a lower cost than 

member firms. It may also reduce direct 

execution costs (such as quoted and 

effective spreads) for both exchange and 

off-exchange trades, the latter of which 

are normally derivatively priced with 

reference to prevailing exchange quotes. 

The differential regulatory burden, 

however, may also reduce depth at best 

prices because a member firm may not 

be able to trade profitably at a price 

established by a non-FINRA member 

firm that faces lower regulatory costs. 

Lower liquidity at best exchange prices 

implies greater price effect of trades, 

which may increase trading costs, 

particularly for large orders. For 

example, if the best price on an 

exchange is associated with 100 shares 

of depth, a 200 share order will exhaust 

depth at the best price and the second 

100 share lot may execute at an inferior 

price.334 If depth at the best price tends 

to be larger, it is less likely that an order 

will exceed the depth available at the 

best price. The change in the best price 

associated with an execution that 

exhausts the depth available at the best 

price is the price effect of the trade upon 

the exchange. 

3. Competitive Effects on Off-Exchange 

Market Regulation 

Currently, FINRA is the only 

Association.335 It is possible, however, 

for new Associations to enter the 

regulatory oversight market and 

compete with FINRA. The amendments 

to Rule 15b9–1 might create incentives 

for a new Association (or Associations) 

to form. The large non-FINRA member 

firms have commonalities in business 

models; for example, they typically do 

not carry customer accounts. They 

might consider forming a new 

Association together, which would 

allow the member of the new 

Association to be subject to rules and 

regulations that better fit their business 

practices. This might allow the new 

Association to more efficiently provide 

oversight for current non-FINRA 

member firms. For example, because 

these firms collectively conduct a 

significant portion of off-exchange 

volume, the creation of a new 

Association tailored to these firms may 

be economically viable. 

To be registered as a new Association, 

in addition to requirements that parallel 

the requirements to be a national 

securities exchange, a new Association 

must ‘‘[b]y reason of the number and 

geographical distribution of its members 

and the scope of their transactions’’ be 

able to carry out the purposes of section 

15A.336 Any new Association would 

have to be approved by the Commission. 

Additionally, a new Association must 

permit any registered broker or dealer 

that meets a new Association’s 

qualification standards to become a 

member.337 It also must have rules 

regarding the form and content of 

quotations relating to securities sold 

otherwise than on a national securities 

exchange that are designed to produce 

fair and informative quotations, to 

prevent fictitious or misleading 

quotations, and to promote orderly 

procedures for collecting, distributing, 

and publishing quotations.338 A new 

Association must also be so organized 

and have the capacity to enforce 

compliance by its members and persons 

associated with its members with, 

among other things, its own rules and 

the Exchange Act and the rules and 

regulations thereunder.339

The ability to form an Association is 

characterized by barriers to entry. The 

amendments include a 365-day 

implementation period, which might 

provide a significant time constraint to 

form a new Association. A new 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61881 

340See supra note 9. 

341See CAT NMS Plan Approval Order, supra 

note 15, 81 FR 84836–39, for a discussion on the 

benefits provided by CAT with regard to 

surveillance by SROs. 

342See sections 19(g) and (h) of the Exchange Act, 

15 U.S.C. 78s(g) and (h). 

343Some limitations on Association membership 

or operations would require exemptive relief for the 

Association to register with the Commission. 

344Non-FINRA member firms that provide 

liquidity on multiple exchanges and trade heavily 

off-member-exchange are unlikely to be small in 

terms of net capital and are not low trading volume 

firms by definition. However, as discussed in supra 

section V.A.1, many non-FINRA member firms are 

members of a single exchange. Such firms are more 

likely to have limited exposure to off-memberexchange markets. Such firms will either be exempt 

from the rule by virtue of having no off-exchange 

trading or no trading on exchanges of which they 

are not members or be able to rely on the stockoption order exemption to continue their limited 

off-member-exchange trading related to their 

exchange-based brokerage activities. 

345The diversity of non-FINRA member firms is 

discussed in supra section V.A.1. 

346See supra section V.B.1., which discusses how 

firms might change their business models in 

response to the rule. 

Association would likely incur 

significant fixed costs to create the 

infrastructure needed to perform the 

surveillance and oversight requirements 

imposed on Associations by statute and 

regulation. It might also incur 

substantial costs, including personnel, 

training, travel, and other costs to 

provide for effective surveillance and 

supervision of the off-exchange equity, 

cross-exchange options, and U.S. 

Treasury securities markets. Indeed, the 

only existing Association, FINRA, has 

resources that enable it to surveil and 

oversee the off-exchange market.340

Additionally, while some costs may be 

lower because CAT already collects 

information and makes it available to 

query, a new Association would still 

have to build its own infrastructure, 

surveillance logics, and analytical tools, 

which may create a substantial cost for 

a new Association.341

The existence of multiple 

Associations might provide benefits to 

the market as a whole. If a new 

Association could provide high quality 

services to members with a lower fee 

structure, all Associations will have 

incentives to reduce fees to attract 

members. This might result in cost 

savings to brokers and dealers. Second, 

a new Association might innovate to 

develop different surveillance and 

supervision methods that could be more 

efficient than FINRA’s methods. 

Competition among Associations 

might also entail substantial costs. If the 

market for Associations is characterized 

by economies of scale, aggregate costs 

for the same level of regulation might be 

higher in a market with two 

Associations than in a market with a 

single Association. These additional 

costs would ultimately be borne by the 

broker and dealer members of either 

Association, and could be passed on to 

investors. Second, Associations might 

compete on the basis of providing ‘‘light 

touch’’ regulation, in essence surveilling 

less and providing less supervision. As 

a result, the quality of market 

supervision might decrease, although 

the Commission does itself oversee selfregulatory organizations, such as 

Associations, and accordingly, would 

not permit a ‘‘race to the bottom.’’ 342

Furthermore, some of the benefits of the 

amendments will be diminished if 

current non-FINRA member firms 

created a new Association as opposed to 

joining FINRA. For example, the new 

Association will not have the 

experience or expertise of FINRA in 

overseeing off-member-exchange market 

activity. Additionally, the members of a 

new Association will not be required to 

report their U.S. Treasury securities 

market trading activity to TRACE if they 

are not FINRA members. 

The amendments may increase 

barriers to entry and thus affect the 

potential for competition among 

regulators of off-exchange markets. 

Currently, the primary barrier to entry is 

the high fixed cost involved in forming 

and operating an Association. The 

amendments bring nearly all offexchange trading under the jurisdiction 

of an Association, including the trading 

of firms that currently are not members 

of an Association (non-FINRA member 

firms). If these firms join the only 

existing Association, FINRA, any newly 

formed Association might have 

increased difficulty attracting the 

members needed to support the high 

fixed costs associated with forming an 

Association because every broker or 

dealer that participates in the offexchange market would already be a 

FINRA member. This increased 

difficulty results because many firms 

may be reluctant to change 

Associations, either because of the costs 

to change compliance infrastructures or 

uncertainty in the regulatory 

environment of the new Association. 

Thus, if the amendments result in more 

firms becoming members of FINRA, a 

new Association might face increased 

difficulties attracting members in the 

future. If the new Association is 

introduced after implementation of the 

rule, these stated effects might become 

more likely as the current non-FINRA 

member firms would have already 

joined FINRA. If a competing 

Association limited the scope of its 

members or operations, it might not 

have to duplicate all of the surveillance 

and supervision functions required to be 

provided by an Association that does 

not have those limits. This might lower 

the costs of forming an Association and 

alter the barriers to entry.343

C. Consideration of Costs and Benefits 

This section discusses costs and 

benefits of the amendments. While the 

Commission has attempted, where 

possible, to provide estimated 

quantifiable ranges, both costs and 

benefits are difficult to quantify for the 

amendments for a number of reasons. 

The overall benefits of the 

amendments relate to more stable and 

uniform surveillance of off-memberexchange activity by the direct, 

membership-based Association 

oversight to oversee such activity. As 

such, the benefits the Commission 

anticipates from the amendments are 

largely qualitative and by their nature 

difficult to measure quantitatively. 

The amendments will induce initial, 

ongoing, and indirect costs which 

would be similarly difficult to measure 

for a variety of reasons. First, market 

participants are heterogeneous in their 

type, existing exchange memberships, 

and activity level in the off-memberexchange market. Consequently, 

compliance costs will vary across firms 

in a number of dimensions. Second, 

estimating costs is complicated by the 

fact that non-FINRA member firms can 

comply with the proposal in a number 

of ways, and presumably each will 

choose to seek compliance in the 

manner that minimizes the sum of its 

direct costs (related to joining and 

maintaining memberships in additional 

SROs) and indirect costs (which include 

forgone opportunities to trade profitably 

and costs associated with revising 

business strategies). Furthermore, some 

firms are likely to remain exempt but 

the Commission lacks data to identify 

those firms with certainty.344 At the 

other end of the spectrum, the minority 

of non-FINRA member firms that are 

large and contribute significantly to 

both member exchange and off-memberexchange trading are unlikely to remain 

exempt.345 For the 64 non-FINRA 

member firms, the Commission believes 

that most will lose their exempt status, 

and, while most firms will likely join 

FINRA, some firms may seek other ways 

to comply with the amendments (e.g., 

remaining exempt by expanding their 

exchange memberships to cover all of 

the exchanges on which they currently 

trade or reducing their trading activity 

to the exchanges on which they 

currently trade).346


ddrumheller on DSK120RN23PROD with RULES2
61882 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

347See supra section I. 

348See supra section V.A.1. 

349See supra Table 1. 

350Exchange SRO rules would continue to apply 

to broker-dealer firms that are exchange members 

and become FINRA members as a result of the 

amendments to Rule 15b9–1. The Commission 

believes that Rule 17d–1 DEA designations and 

Rule 17d–2 plans will likely be utilized in areas of 

overlapping rules to mitigate duplicative 

application of exchange SRO and FINRA oversight, 

in the same fashion as they already are utilized for 

the many broker-dealer firms that are exchange 

members and FINRA members. 

351See supra section I. 

352This discussion presumes that the most likely 

response by non-members to the amendments will 

be to join FINRA, rather than choosing another 

option, such as remaining exempt from Association 

membership by joining every exchange on which 

the broker-dealer trades, ceasing trading operations, 

or forming a new Association. 

353See, e.g., ABCV Letter at 2; Cboe Letter at 7; 

FIA PTG Letter at 2; Group One Letter at 1; MMI 

Letter at 3; Nasdaq Letter at 4. 

354See FINRA Letter at 7. 

355See CAT NMS Approval Order, supra note 

341. 

356See, e.g., Cboe Letter at 2; ABCV Letter at 3; 

CTC Letter at 3; Group One Letter at 1; PEAK6 

Letter at 2; STA Letter at 2. 

357See FINRA Letter at 6. FINRA also stated that 

it identified non-member firms as potential 

respondents in five percent of its market regulation 

investigations conducted in 2020 and 2021. 

358See supra section III.A. 

359Currently, oversight of off-member exchange 

trading is coordinated through RSAs, which are 

subject to certain limitations. See supra note 294. 

360See, e.g., ABCV Letter at 2; PEAK6 Letter at 

2; Group One Letter at 1–2; STA Letter at 3–4. 

361Based on 2022 filings under 17 CFR 242.606 

(‘‘Rule 606’’). 

362See FINRA Letter at 7–8. 

363See Nasdaq Letter at 3; PEAK6 Letter at 2. 

364See supra note 269. 

1. Benefits 

As discussed above,347 some of the 

firms relying on the Rule 15b9–1 

exemption are significant participants in 

both on and off-member-exchange 

markets.348 For example, in September 

of 2022, $440 billion in listed equities 

was traded off-exchange by non-FINRA 

member firms, and $311 billion in listed 

equities was traded on an exchange to 

which the firm did not belong.349 Thus, 

a substantial amount of off-exchange 

volume is conducted outside of the 

regulatory jurisdiction of FINRA, which 

under the Exchange Act has primary 

responsibility for overseeing offexchange activity. Although FINRA has 

the ability to surveil 100% of crossmarket and off-exchange equity trading 

activity via CAT, it does not have 

jurisdiction for firms that are not FINRA 

members. Association membership will 

supplement the existing oversight of the 

exchanges, to the extent a firm remains 

an exchange member, and provide 

consistent and ongoing application of 

rules, which vary between exchanges. 

Regarding off-member-exchange trading, 

under the current regulatory structure 

using RSAs, FINRA applies the rules of 

the different exchanges and the 

exchanges’ interpretations of those rules 

to such trading. This can result in 

different interpretations and FINRA 

registration would promote consistent 

interpretations and efficiencies in 

enforcement and regulation with respect 

to this growing part of the market.350 As 

discussed above,351 the Commission 

believes the inclusion of more nonFINRA member firms in an 

Association 352 will improve such 

Association’s ability to supervise offmember-exchange trading activity, 

particularly in U.S. Treasury securities 

markets. This would enhance FINRA’s 

ability and—through the information 

FINRA shares with the Commission— 

the Commission’s ability to effectively 

oversee regulation of trading on equity, 

fixed income, and option markets. 

Some commenters expressed concern 

that there are no clear benefits resulting 

from the amendments because they 

believe that exchange SROs provide 

sufficient regulatory functions.353 The 

Commission, however, believes that the 

amendments to Rule 15b9–1 would 

improve supervision of non-FINRA 

member firms by leveraging FINRA’s 

experience and investigative tools, 

particularly those targeted at offmember-exchange markets. FINRA, 

currently the only Association, has 

considerable experience and expertise 

from overseeing a large number of 

brokers and dealers that trade offexchange or across exchanges. This 

makes FINRA’s potential regulation of 

non-FINRA member firms with offexchange or cross-market trading 

activity particularly efficient. FINRA 

stated that ‘‘[d]irect FINRA jurisdiction 

would yield a number of benefits 

including ensuring that PTFs are subject 

to FINRA rules and providing for more 

consistent regulatory treatment across 

entities engaging in similar trading 

activity, which would result in more 

thorough oversight and stronger crossmarket and cross-product 

surveillance.’’ 354

In addition, the amendments, as 

adopted, would enhance the 

supervision and enforcement for 

equities and options beyond the benefits 

from the CAT NMS Plan.355 While CAT 

improves data accessibility for all SROs, 

it does not address FINRA’s lack of 

jurisdiction over non-FINRA member 

firms with off-member-exchange trading 

activity. Several commenters believed 

that reporting of non-FINRA member 

identifying information and activity 

pursuant to the CAT NMS Plan would 

eliminate the need for firms to join 

FINRA and would provide FINRA a 

near complete picture of off-memberexchange trading activity.356 However, 

FINRA stated that even with non-FINRA 

member firm trading activity 

information, ‘‘FINRA does not have the 

independent ability to examine for, 

investigate, or enforce potential 

violations of the federal securities laws 

or FINRA rules with respect to nonmember firms it identifies through 

surveillance or other means.’’ 357 The 

Commission agrees that, although 

FINRA now has additional information 

with respect to non-FINRA member firm 

activity, it still lacks jurisdiction over 

non-FINRA member firms, and the 

amendments would provide such 

jurisdiction, thereby leading to 

expanded supervision and enforcement 

of existing FINRA rules and 

regulations.358 In particular, offmember-exchange trading by current 

non-FINRA members will receive more 

efficient oversight following 

implementation of the amendments.359

Some commenters stated that 

Association membership should not be 

mandated for options market makers 

because FINRA regulation is focused on 

protecting customers and options 

market makers do not carry customer 

accounts.360 However, non-FINRA 

member firms play a significant role in 

the execution of retail customer orders 

routed to them by introducing brokerdealers. Commission data indicate that 

two of the three largest options 

consolidators, which handled 

approximately 43% of wholesaled retail 

customer options orders in 2022, are 

presently not FINRA members.361

Further, FINRA stated that ‘‘for certain 

products and exchanges, some nonmember firm conduct may not fully be 

subject to exchange rules that provide 

for important protections in connection 

with the execution of customer orders 

(e.g., not all exchanges have comparable 

best execution rules).’’ 362

Commenters also stated that FINRA 

membership was unwarranted for 

options market makers since offmember-exchange trading represents 

only a very small share of the overall 

trading activity of these firms.363

However, Commission analysis reveals 

that the overall level of off-memberexchange options activity by non-FINRA 

member firms involves non-trivial 

trading volume, exceeding $130 million 

per day, and therefore warrants 

Association oversight or exemption via 

mandated membership on all exchanges 

on which the broker-dealer trades.364 In 

addition, options market makers 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61883 

365See Cboe Letter at 3; Nasdaq Letter at 4; CTC 

Letter at 5; PEAK6 Letter at 4. 

366See Cboe Letter at 3; ABCV Letter at 4, PEAK6 

Letter at 4. 

367One commenter stated that a general hedging 

exemption would ‘‘increase fraudulent activity in 

the market by obfuscating risk activities in the 

options market.’’ See letter from Cullin Coyle (Oct. 

31, 2022). 

368The Commission estimates that seven such 

firms accounted for $6 trillion in U.S. Treasury 

securities volume executed on covered ATSs in 

2022 that was reported to TRACE, which was more 

than 3.67% of the total U.S. Treasury securities 

volume traded in 2022 that was reported to TRACE, 

and that five such firms’ U.S. Treasury securities 

volume executed on covered ATSs in Apr. 2023 

that was reported to TRACE accounted for 

approximately 2.65% of total U.S. Treasury 

securities volume in Apr. 2023 that was reported to 

TRACE. See supra section II.B. 

369Or trades not involving certain depository 

institutions, which are mandated to report U.S. 

Treasury securities trades to TRACE. See supra note 

123. 

370FINRA agreed that the benefits of additional 

U.S. Treasury securities market oversight are likely 

to be substantial and reported that non-FINRA 

member broker-dealer firms and non-broker-dealer 

firms were identified in 17% of the FINRA 

surveillance alerts generated by its Treasuries 

manipulation patterns in 2020 and 2021. See 

FINRA Letter at 10; see also supra note 119. 

371FINRA stated that ‘‘non-member firms’ activity 

accounts for a very significant portion of trading in 

Treasuries securities.’’ See FINRA Letter at 9. 

372One commenter stated that the amendments 

‘‘will help to enhance transparency in the Treasury 

markets by increasing the percentage of transactions 

being reported to the TRACE reporting system.’’ See 

Better Markets Letter at 10. 

373See FIA PTG Letter at 3. The commenter also 

stated that to the extent that any reporting gaps in 

U.S. Treasuries exist, it would be preferable to 

implement a more targeted solution requiring nonmembers to report these transactions via account 

ownership identifiers rather than mandating FINRA 

membership. See FIA PTG Letter at 3. 

374See id. 

375See supra note 55. 

376See supra section V.A.1. Non-U.S. Treasury 

fixed income securities that are TRACE-reported 

include corporate debt, agency debt, and asset 

backed securities (such as student and auto loans). 

See FINRA, Frequently Asked Questions (FAQ) 

about the Trade Reporting and Compliance Engine 

(TRACE), available at https://www.finra.org/filingreporting/trace/faq#Reporting. In May 2023, average 

daily trading volume reported to TRACE for nonconvertible corporate debt was $39.9 billion; agency 

debt, $3.7 billion; asset back securities, $1.2 billion. 

See FINRA, TRACE Volume Reports—Total Trades, 

available at https://www.finra.org/finra-data/ 

browse-catalog/trace-volume-reports/trace-volumetotal-trades. These are predominantly over-thecounter markets. For example, for information 

about corporate bond trading see Maureen O’Hara 

and Xing (Alex) Zhou Corporate Bond Trading: 

Finding the Customers’ Yachts J. Portfolio 

Management (2022). For a recent study on fixed 

income markets, see Understanding Fixed Income 

Markets in 2023 available at https://www.sifma.org/ 

resources/research/understanding-fixed-incomemarkets-in-2023/. 

377See supra note 259 for information on the 

difference between the dissemination of TRACE for 

U.S. Treasury securities and TRACE for other 

TRACE eligible securities. See also FINRA, TRACE 

Reporting Timeframes and Transparency Protocols, 

available at https://www.finra.org/filing-reporting/ 

trade-reporting-and-compliance-engine-trace/tracereporting-timeframes. 

378FINRA publishes aggregate TRACE U.S. 

Treasury security data. See About TRACE Treasury 

Aggregate Statistics, available at https://

www.finra.org/filing-reporting/trace/data/tracetreasury-aggregates/about. 

379See letters from: Joseph Crowe (Aug. 12, 2022) 

and Joe Edwards (Aug. 12, 2022). 

comprise the majority of the twelve nonFINRA firms among which off-exchange 

equity volume is concentrated. 

Therefore, mandating Association 

membership for non-FINRA member 

options market makers will also result 

in enhanced oversight of the offexchange equity trading of these firms, 

which is currently covered by RSAs. 

Some commenters stated that offmember-exchange activity was 

frequently carried out for general 

hedging purposes, which, they stated, is 

trading activity that does not justify 

mandatory FINRA oversight and its 

associated costs,365 especially if this 

activity serves to facilitate options 

market making.366 While the 

Commission is cognizant of the critical 

role played by market makers, it 

nevertheless believes that such trading 

activity is not immune to violative 

behavior and therefore does not justify 

exemption from the amendments.367

The benefits of the adopted 

amendments will be pronounced in the 

U.S. Treasury securities markets. A 

significant amount of volume in U.S. 

Treasury securities markets comes from 

broker-dealers that are likely to be 

required to become FINRA members as 

a result of the amendments.368 If these 

broker-dealers become FINRA members, 

they will be required to comply with 

FINRA rules, including TRACE 

reporting requirements. This will have a 

positive impact on market quality by 

increasing coverage of data reported to 

TRACE for trades not occurring on a 

covered ATS.369 The amendments will 

also provide additional market oversight 

by bringing non-FINRA member trading 

in the Treasury markets under FINRA 

jurisdiction.370 Non-FINRA member 

firms do not report to TRACE, and they 

are only specifically identified by MPID 

in TRACE when their U.S. Treasury 

securities trades occur on a covered 

ATS; they are not identified by MPID for 

other trades of U.S. Treasury securities 

that do not occur on covered ATSs, such 

as direct dealer-to-dealer 

transactions.371 Thus, the amendments 

will improve the quality and complete 

the coverage of TRACE data to include 

all non-FINRA member firm 

transactions and increase regulatory 

transparency into the U.S. Treasury 

securities markets.372 One commenter 

suggested that current TRACE reporting 

captures effectively all non-FINRA 

member U.S. Treasury securities 

transactions and that no present gap in 

U.S. Treasury securities transaction 

reporting exists.373 The Commission 

believes that, while the majority of U.S. 

Treasury securities transactions are 

already reported to TRACE,374 there are 

coverage gaps—even as the Commission 

cannot estimate the actual amount of 

U.S. Treasury securities trading activity 

not currently reported to TRACE.375

The Commission believes that the 

amendments could provide more 

substantial benefits to the market for 

other TRACE-reported (e.g., non-U.S. 

Treasury securities fixed income) 

securities, since transactions by nonFINRA members in these securities are 

completely hidden from FINRA 

oversight.376 Moreover, unlike U.S. 

Treasury securities, transactions data on 

several non-U.S. Treasury TRACEreported securities, including corporate 

bonds and agency debt securities, are 

disseminated immediately to the 

public.377 This immediate 

dissemination has allowed non-FINRA 

member firms to observe other firms’ 

anonymized trades in non-U.S. Treasury 

fixed income securities 378 without 

facing the burden of reporting their own 

trades, potentially providing non-FINRA 

members a competitive advantage, the 

cost of which is borne by the investing 

public through reduced price discovery. 

Therefore, an increase in FINRA 

membership due to the amendments 

could be particularly beneficial to the 

transparency of these markets, although 

the trading volume in these securities by 

non-FINRA members, and thus the full 

extent of these benefits, remains 

uncertain since non-FINRA members do 

not have to report their trades in these 

securities. 

While current members of an 

Association would not be directly 

affected by this rule, they will benefit by 

having a more level playing field in 

reporting trades in the U.S. Treasury 

securities markets. With more uniform 

regulatory requirements, firms might 

compete more equitably to supply 

liquidity both on exchanges and in the 

off-exchange market. 

Two commenters raised concerns 

about exchanges acting as SROs and 

potential conflict of interest in 

regulating effectively versus catering to 

the exchange’s customers.379 In this 

scenario, switching from exchange SROs 

to FINRA serving as DEA should reduce 

concerns held by these commenters 

regarding conflict of interest. 

Although fewer firms will be able to 

rely on the narrower exemptions, the 

narrower exemptions will continue to 

provide the existing benefits for nonFINRA members as well as other market 


ddrumheller on DSK120RN23PROD with RULES2
61884 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

380See supra section III.B.1 for more information 

on the purpose of the routing exemption. 

381See supra section III.B.2 for more information 

on the stock-option order exemption. 

382 Initial costs include the FINRA membership 

application fee and fees associated with employing 

outside counsel to assist with the application, See 

Table 3, infra. 

383See Table 3 and Table 4, infra, for a 

breakdown of these costs. The Commission 

estimates that the total aggregate initial and ongoing 

annual cost of the amendments across the 12 largest 

non-FINRA member firms (all 64 non-FINRA 

member firms) is approximately $31 million ($45 

million), not inclusive of potential TRACE reporting 

costs set forth in section V.C.2.c, infra. Firms with 

no trading volume in April 2023 are included in 

these estimates. See supra section II.B. They are 

unlikely to join FINRA because generally firms that 

do not effect transactions in, or induce or attempt 

to induce the purchase or sale of, any security other 

than transactions they effect in securities solely on 

a national securities exchange of which they are 

members are not required to join FINRA under 

section 15(b)(8) of the Act. Therefore, these firms 

are less likely to incur initial and/or ongoing FINRA 

membership costs, and by including them in the 

costs estimates, the Commission likely has 

overestimated significantly the total initial and 

ongoing annual costs. 

384See, e.g., Nasdaq Letter at 4; Cboe Letter at 7. 

385See also FINRA Letter at 5–7. 

386See FINRA By-Laws, Schedule A, section 4. 

387 Id. 

388Based on 2022 FOCUS data, no non-FINRA 

member firm has more than 150 registered 

representatives. FINRA stated that ‘‘FINRA believes 

that most non-member firms would not incur 

application fees exceeding $12,500.’’ See FINRA 

Letter at 12. 

389See id. at 12–13. 

participants. These exemptions will 

continue to provide the current cost 

savings for non-FINRA members as they 

will continue to not be required to join 

FINRA and thus avoid the costs of doing 

so. Additionally, the routing exemption 

will facilitate regulatory compliance 

designed to improve market quality.380

The Commission also believes that the 

stock-option order exemption will 

facilitate liquidity in both stock and 

options markets, which is likely to 

improve market quality.381

2. Costs 

The amendments, by narrowing the 

existing exemption, would result in 

brokers and dealers that no longer 

qualify for the exemption having to 

comply with section 15(b)(8) of the 

Exchange Act by either limiting their 

trading to exchanges of which they are 

members, joining an Association, or 

abiding by one of the stated exemptions. 

Under the amendments, therefore, nonFINRA member firms that choose to 

continue any off-member-exchange 

activity will be faced with choices that 

would involve corresponding costs. For 

example, non-FINRA member firms 

might incur costs related to membership 

in an Association or costs necessitated 

by additional exchange memberships. 

Additionally, some non-FINRA member 

firms might incur the costs of losing the 

benefits of trading in the off-memberexchange market if they decide not to 

join an Association. There might also be 

indirect costs associated with the 

amendments, depending on whether a 

non-FINRA member chooses to join an 

Association or not. 

Most of the direct costs incurred in 

joining an Association and maintaining 

membership therein are dependent on 

firm characteristics and activity level. 

Furthermore, some non-FINRA member 

firms might comply by ceasing their offmember-exchange trading activity, 

avoiding many of these costs but 

forgoing the opportunity to trade 

profitably in some venues. The 

Commission estimates that, if all 12 of 

the non-FINRA member firms that had 

the most significant off-memberexchange trading volume in equities in 

April 2023 were to join FINRA, the 

median initial cost 382 of the 

amendments for these firms would be 

about $95,000 and the median ongoing 

annual costs would be about $1.07 

million. The Commission estimates that, 

if all 64 non-FINRA member firms as of 

April 2023 were to join FINRA, the 

median initial costs would be about 

$95,000 and median ongoing annual 

costs would be about $103,416.383 Some 

commenters stated that the costs of 

FINRA registration are substantial and 

are likely to have a profound economic 

impact on small non-FINRA member 

firms.384 While the Commission agrees 

that the costs of FINRA membership are 

significant, the aggregate costs for the 

subset of 12 largest non-FINRA member 

firms represent the majority 

(approximately 76%) of the aggregate 

ongoing costs potentially stemming 

from the amendments, and these large 

non-member firms are more readily able 

to bear such costs through economies of 

scale and greater economic profits. The 

Commission believes that smaller nonFINRA member firms as well as new 

entrants will experience much lower 

costs. In particular, the initial costs for 

such firms will be close to the lower 

estimates discussed below, because 

these costs are largely dependent on the 

size and complexity of the firms. 

Additionally, because smaller firms and 

new entrants have lower trading 

activity, the ongoing costs will also be 

significantly lower as ongoing costs are 

highly impacted by said trading activity. 

Finally, any non-FINRA member could 

choose to avoid these costs and remain 

exempt from Association membership 

by joining all exchanges on which they 

trade but do not currently carry 

membership. 

a. Costs of Joining an Association 

Based on discussions with FINRA,385

and industry participants, the direct 

compliance costs on non-FINRA 

member firms of joining FINRA are 

composed of FINRA membership 

application fees and any legal or 

consulting costs necessary for 

effectively completing the application to 

become a member of FINRA (e.g., 

ensuring compliance with FINRA rules 

including drafting policies and 

procedures as may be required). 

The fees associated with a FINRA 

membership application can vary. As an 

initial matter, the application fee to join 

FINRA is tier-based according to the 

number of registered persons associated 

with the applicant. This one-time 

application fee ranges from $7,500 to 

$55,000.386 The initial membership fee 

for FINRA is $7,500 for firms with ten 

or fewer representatives registered with 

FINRA, $12,500 for firms with 11 to 100 

representatives registered with FINRA, 

and $20,000 for firms with 101 to 150 

representatives registered with 

FINRA.387 Based on its knowledge of 

the size and business models of nonFINRA member firms, the Commission 

believes that the median application fee 

would be $12,500 and that most nonFINRA member firms would not incur 

FINRA application fees exceeding 

$20,000.388

In addition to the application fees and 

data reporting costs, the Commission 

has taken into account the cost of legal 

and other advising necessary for 

effectively completing the application to 

be a member of FINRA. Some firms 

might choose to perform this legal work 

internally while others may use outside 

counsel for the initial membership 

application. In making this choice, nonFINRA member firms will likely take 

into account factors such as the size and 

resources of the firm, the complexity of 

the firm’s business model, and whether 

the firm previously used outside 

counsel to register with any exchanges 

or the Commission. Based on 

conversations with industry participants 

that assist with FINRA membership, for 

non-FINRA member firms that choose to 

employ outside counsel to assist with 

their FINRA membership application, 

the cost of such counsel ranges from 

approximately $40,000 to $125,000, 

with a midpoint of $82,500. FINRA 

stated in a comment letter that ‘‘FINRA 

anticipates being able to process most of 

these new membership applications 

pursuant to the expedited process 

within 60 days after submission of the 

application.’’ 389 Factors affecting the 

specific costs and anticipated timeframe 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61885 

390There are additional fees associated with 

maintaining a FINRA membership (e.g., CAT fees). 

There are also additional continuing education and 

testing requirements, which will impose costs upon 

firms joining FINRA. Additionally, there are de 

minimis fees (branch registration fee and system 

processing fee, among others). See FINRA By-Laws, 

Schedule A. The Commission also believes that 

non-FINRA member firms would not need to 

register additional associated persons because the 

exchange SRO rules are already comprehensive in 

this regard. See infra section V.C.2.d. These 

additional fees are not quantified since their 

estimation requires unavailable specialized firm 

data. Nonetheless, the Commission believes that the 

fees specified in Table 4 represent the vast majority 

of ongoing FINRA membership costs. 

391See FINRA By-Laws, Schedule A. For 

example, FINRA imposes a 2023 GIA as follows: (1) 

$1,200 on a member firm’s annual gross revenue up 

to $1 million; (2) a charge of 0.1511% on a member 

firm’s annual gross revenue between $1 million and 

$25 million; (3) a charge of 0.3232% on a member 

firm’s annual gross revenue between $25 million 

and $50 million; and so on as provided in Schedule 

A. When a firm’s annual gross revenue exceeds $25 

million, the maximum of current year’s revenue and 

average of the last three years’ revenue is used as 

the basis for the income assessment. 

392See FINRA By-Laws, Schedule A, section 2. 

See also FOCUS Report Form X–17A–5, Part II and 

IIA. 

393Based on 2022 Quarterly Part II/IIA FOCUS 

data. 

394 ($1,200 for the first $1 million of revenue) + 

(0.1511% × annual revenue greater than $1 million 

up to $25 million) + (0.3232% × annual revenue 

greater than $25 million up to $50 million) + 

(0.0644% of annual revenue greater than $50 

million up top $100 million) + (0.0454% of annual 

revenue greater than $100 million to $5 billion) + 

(0.0494% of annual revenue greater than $5 billion 

up to $25 billion) + (0.1063% of annual revenue 

greater than $25 billion). Although the average 

annual total revenue exceeds the median annual 

total revenue, there are a number of firms that have 

low GIA, which causes the midpoint of GIA to 

exceed the average GIA. Non-FINRA member firms 

vary in size. GIA for the 12 largest firms used in 

these calculations, is anticipated to be far larger 

than for the remaining smaller non-FINRA member 

firms. See FINRA By-Laws, Schedule A, section 

1(c). The total ongoing annual GIA cost for the 12 

largest non-FINRA member firms (all 64 non-FINRA 

member firms) is approximately $8 million ($11.5 

million). 

395See FINRA By-Laws, Schedule A, section 1(b). 

396 Insofar as options trading is concerned, the 

estimated TAF includes trading activity on an 

exchange where a firm is not a member. If a firm’s 

equity or options trading activity is on an exchange 

where it is a member, it does not incur the TAF, 

and if a firm’s activity is on an exchange where it 

is not a member the activity incurs the TAF unless 

it is covered by an exemption in FINRA’s By-Laws. 

See infra note 403 and accompanying test; see also 

FINRA By-Laws, Schedule A, section (1)(b)(2)(F). 

The Commission does not have information on 

what proportion of non-FINRA member firm 

activity on any exchange where such a firm is not 

a member would qualify for exemption from the 

TAF under FINRA By-Laws. To the extent that such 

activity would qualify for a TAF exemption, the 

TAF estimates set forth herein may overestimate the 

actual TAF that firms would incur if they join 

FINRA. In addition, firms that join FINRA may be 

able to reduce their TAF cost by joining additional 

exchanges. Estimates of the TAF are based on the 

off-member-exchange sell volume reported to CAT 

for non-FINRA member firms. The estimated TAF 

is equal to estimated off-exchange equity sell 

volume × $0.000145 and options contract volume 

× $0.00244. The $0 minimum is associated with 

firms that have almost no off-member-exchange 

volume. 

397See supra section III.A. 

398The total ongoing annual TAF cost for the 12 

largest non-FINRA member firms (all 64 non-FINRA 

member firms) is approximately $3.7 million ($4.4 

million). 

399See, e.g., CTC Letter at 4; FIA PTG Letter at 

4; PEAK6 Letter at 4; STA Letter at 4. 

400See supra section V.B.1 for more information 

on how firms may change their trading practices in 

response to the rule. 

401See supra note 161. 

402See supra note 146; see also supra note 162 

and accompanying text. 

of a particular firm include the number 

of associated persons, the level of 

complexity or uniqueness of the firm’s 

business plan, and whether the firm has 

previously completed exchange 

membership applications with similar 

requirements. 

TABLE 3—MEDIAN FIRM

IMPLEMENTATION COSTS 1

Cost Median 

Application to join FINRA ............. $12,500 

Legal consulting ............................ 82,500 

Total ....................................... 95,000 

1 Medians are used where possible. Cost 

estimates are reported as ranges for legal 

consulting and compliance work; for these estimates, the midpoint is used. 

b. Costs of Maintaining an Association 

Membership 

With respect to ongoing costs, three 

components of such costs are any 

ongoing fees associated with FINRA 

membership, costs of legal work relating 

to FINRA membership, and costs 

associated with additional compliance 

activities. The ongoing membershiprelated fees associated with FINRA 

membership include the annual GIA; 

and the TAF and section 3 fees, among 

others.390

With certain assumptions, the 

Commission attempted to estimate 

direct compliance costs that a nonFINRA member firm is likely to face to 

comply with the amendments. The 

estimates apply primarily to the 12 nonFINRA member firms that have 

significant off-member-exchange trading 

activities in equities; smaller firms will 

face lower costs compared to these 12 

firms because they have less revenue 

and trading volume that would be 

subject to GIA, TAF, and section 3 fees. 

However, non-FINRA member firms 

may already indirectly bear some of 

these costs, as they may be passed 

through by FINRA member 

counterparties or executing brokers. 

Ongoing annual cost estimates are 

broken down in Table 4. 

The annual GIA generally requires 

members to pay a percentage of the 

member firm’s total annual revenue 

based on a graduated scale.391 The 

magnitude of the annual GIA is based 

on the total annual revenue, excluding 

commodities income, reported by the 

member firm on its FOCUS Form Part II 

or IIA.392 Based on 2022 FOCUS Form 

data from the 12 aforementioned nonFINRA member firms, the Commission 

has determined that the average annual 

total revenue of non-FINRA member 

firms is approximately $1.2 billion, with 

a median of $491 million.393 FINRA’s 

graduated GIA scale results in a median 

GIA of $327,870 for the 12 large nonFINRA member firms and a median GIA 

of $33,655.65 for all 64 non-FINRA 

member firms as of April 2023.394

The magnitude of the TAF depends 

on the transaction volume of a FINRA 

member that is covered by the TAF as 

described in the FINRA By-Laws.395 The 

Commission estimates that off-memberexchange equity and options trading by 

the 12 large non-FINRA member firms 

would generate a median incurred TAF 

of around $119,255.85 with an average 

TAF of $304,994.44.396 The 

Commission believes that the TAF for 

non-FINRA member firms not among 

the 12 identified large non-FINRA 

member firms would be far lower 

because the median non-FINRA member 

firm has far lower trading volume than 

the typical firm of the 12 identified in 

the data.397 Specifically, the 

Commission estimates that the median 

(average) annual TAF for all 64 nonFINRA member firms would be 

$6,746.92 ($68,433.18).398

Some off-member-exchange trading by 

non-FINRA member firms may no 

longer be profitable when TAF is 

incurred. Several commenters expressed 

concerns that TAF costs would be 

significant.399 Consequently, nonFINRA member firms may reduce their 

trading both on exchanges and offexchange after joining an 

Association.400 In May of 2015, FINRA 

issued a Regulatory Notice proposing to 

amend the TAF such that it would not 

apply to transactions by a proprietary 

trading firm effected on exchanges of 

which the firm is a member, to coincide 

with originally proposed changes to 

Rule 15b9–1. FINRA re-opened the 

comment period on its Regulatory 

Notice in December 2022, after the 2022 

Re-Proposal.401 And in June 2023, 

FINRA filed its TAF Amendment.402

FINRA’s TAF Amendment will exempt 

proprietary trading firms when they 

trade securities on exchanges of which 

they are a member, which several 


ddrumheller on DSK120RN23PROD with RULES2
61886 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

403See, e.g., MMI Letter at 3; PEAK6 Letter at 4; 

STA Letter at 4. 404 In the 2015 Proposing Release, supra note 1, 

the Commission solicited comment on the effect of 

the proposed TAF amendments, including the effect 

should the TAF be assessed to non-FINRA member 

firms that choose to become FINRA members. With 

regard to the TAF, one commenter stated that ‘‘[t]he 

potentially most significant impact from a 

transaction cost perspective is FINRA’s Trading 

Activity Fee.’’ See FIA PTG at 4. The Commission 

believes that proposed changes to TAF fees to 

exempt on-member-exchange trading activity might 

reduce the associated fees by as much as 75% 

(95%) for some firms trading in equity (options) 

markets. Based on discussions with FINRA, TAF 

relief could amount to nearly $9 million for some 

current non-member firms. 

405Section 3 fees are estimated using non-FINRA 

member firm off-exchange sell dollar volume 

calculated in CAT. The section 3 fee obligation is 

calculated as: Non-FINRA member firm Sell Dollar 

Volume × $8.00/$1,000,000. The $8.00/$1,000,000 

is the FINRA fee rate for Fiscal Year 2023. See 

FINRA By-Laws of the Corporation, Schedule A to 

the By-Laws of the Corporation, section 3— 

Regulatory Transaction Fee. See also Securities 

Exchange Act Release No. 96724 (Jan. 23, 2023) and 

press release, Commission, Fee Rate Advisory #2 for 

Fiscal Year 2023 (Jan. 23, 2023), available at https:// 

www.sec.gov/news/press-release/2023-15. 

406The total ongoing annual section 3 cost for the 

12 largest non-FINRA member firms (all 64 nonFINRA member firms) is approximately $17.5 

million ($19.5 million). 407Currently, when the sell side of an offexchange transaction is a non-FINRA member firm, 

FINRA may assess the section 3 fees on the buy side 

counterparty. See the discussion of section 3 fees 

in section V.A.2, supra, for more information. 

408Ongoing compliance activities may include 

core accounting functions, updating policies and 

procedures, and updating forms filed with 

regulators. 

409For firms that choose to do this work in-house, 

the Commission estimates that the costs of ongoing 

compliance may be less than $96,000. This figure 

assumes non-FINRA member firms may have 

experience in ongoing compliance work with SROs 

through their exchange membership(s) and 

therefore only captures the incremental cost of 

compliance with Association rules. 

410See FINRA By-Laws, Schedule A, section 1(e). 

411Based on 2022 FOCUS data, the number of 

registered representatives of non-FINRA member 

firms that connect directly to ATSs ranges from 0– 

163, with an average of 29 and a median of 0. 

412Furthermore, to the extent that section 3 fees 

and TAF are not currently being passed on to nonmembers, the implementation of the amendments 

will result in a reduction of such fees for current 

members transacting on the buy-side that have been 

paying these fees in lieu of their non-member 

counterparties. 

commenters supported.403 This change 

to the TAF will likely lower the cost for 

non-FINRA member firms to join an 

Association.404

In addition to the TAF, non-FINRA 

member firms that choose to join FINRA 

may incur additional section 3 fees. 

Using data on off-exchange equities 

trading during April 2023, the 

Commission estimated that section 3 

fees incurred by the 12 large non-FINRA 

member firms due to their off-exchange 

trading would have a median incurred 

section 3 fee of $564,217.42 annually, 

with an average incurred section 3 fee 

of $1,455,114.27.405 The median 

(average) section 3 fee for all 64 nonFINRA member firms as of April 2023 

is estimated to be $3,013.56 

($303,595.36).406 Some of these fees 

may already be paid by non-FINRA 

member firms that engage the services of 

a member firm clearing broker. 

However, FINRA lacks the authority to 

assess section 3 fees against non-FINRA 

member firms, in which case FINRA 

may assess the fee to the member firm 

counterparty to the transaction. In these 

cases, the FINRA-member may passthrough a portion of the fee to the nonFINRA member counterparty or 

executing broker. While these fees 

would represent a cost to non-FINRA 

member firms, the cost would be largely 

offset to the industry as a whole by a 

reduction of section 3 fees incurred by 

member firms (or clearing brokers acting 

on behalf of a member firm) when they 

buy from a self-clearing, non-FINRA 

member firm.407

Ongoing compliance costs would 

depend on the business circumstances 

of each firm and the types of issues that 

could arise. As in the case of the initial 

membership, some non-FINRA member 

firms may choose to conduct ongoing 

compliance activities in-house while 

others may seek to outsource this 

work.408 Based on discussions with 

industry participants, the Commission 

estimated that the ongoing compliance 

cost for firms that outsource this work 

would range from $24,000 to $96,000 

per year, with a median of $60,000.409

In the case of some non-FINRA member 

firms, i.e., those that are affiliates of 

FINRA members, this cost is likely to be 

lower as they may be able to leverage 

compliance work already being 

performed. 

FINRA members may also be required 

to pay the Personnel Assessment fee.410

The annual Personnel Assessment fee 

ranges from $160 to $180 per employee 

and applies to principals or 

representatives in the FINRA member’s 

organization. Using FOCUS data, the 

Commission estimates that the average 

non-FINRA member firm would incur a 

Personnel Assessment fee of no more 

than $2,400, and the median non-FINRA 

member firm would incur a Personnel 

Assessment fee of $0.411 The 

Commission further estimates that the 

maximum Personnel Assessment fee 

incurred by one of these non-FINRA 

member firms would be $22,250. 

The Commission estimates that the 

median ongoing cost for the identified 

largest 12 non-FINRA member firms 

would be $1,071,344 and the median 

ongoing cost for all 64 non-FINRA 

member firms would be $103,416. 

However, as discussed above, these 

costs could vary. The section 3 fees 

which make up a large portion of these 

costs are likely to be overestimated for 

reasons stated above. However, FINRA 

members currently pay section 3 fees 

and TAF when transacting on the buyside with non-FINRA members. To the 

extent that these costs are currently 

passed on to non-FINRA members, both 

section 3 fees and TAF are likely to be 

overestimated.412

TABLE 4—MEDIAN FIRM ONGOING ANNUAL COSTS 1

Cost 

Median 

(12 largest 

non-member 

firms) 

Median 

(all 

non-member 

firms) 

Gross Income Assessment .......................................................................................................................... $327,870.00 $33,655.65 

Trading Activity Fee ..................................................................................................................................... 119,255.85 6,746.92 

Personnel Assessment ................................................................................................................................ 0 0 

Section 3 Fee .............................................................................................................................................. 564,217.42 3,013.56 

Compliance Work ........................................................................................................................................ 60,000 60,000 

Total ...................................................................................................................................................... 1,071,344 103,416 

1 Non-FINRA members are recognized as of April 2023. See supra note 394 and accompanying text. The TAF cost also represents a transfer 

from current non-FINRA member firms to current member firms. The TAF is calculated using off-exchange sell volume from CAT. The section 3 

fee estimate assumes that the firms currently pay no section 3 fees. It is likely that firms that clear through a member firm are currently assessed 

these fees indirectly. Median Personnel Assessment Fees are estimated to be zero based on analysis using FOCUS data. See supra note 410. 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61887 

413See Group One Letter at 3. 

414For example, Rule 17d–1 authorizes the 

Commission to name a single SRO as the DEA to 

examine a common SRO member. Rule 17d–2 

permits SROs to propose joint plans among two or 

more SROs for the allocation of regulatory 

responsibility with respect to their common 

members. See supra section III.A. 

415See CTC Letter at 4 (‘‘estimates the one-time 

costs to join FINRA, and the ongoing annual 

compliance costs for FINRA membership, to each 

be millions of dollars’’), and FIA PTG Letter at 4 

(‘‘it is very difficult to estimate the annual cost, but 

we would not be surprised if it is greater than 

$1,000,000 per year for some firms’’). These 

estimates are higher than those presented by the 

Commission in Table 4, in part because these 

estimates do not incorporate FINRA’s TAF relief 

amendment. As the estimates in Table 4 are only 

for the 12 largest non-FINRA member firms, the cost 

for the average non-FINRA member firm is expected 

to be much lower. 

416See, e.g., ABCV Letter at 2; Cboe Letter at 7; 

CTC Letter at 4; FIA PTG Letter at 4; Group One 

Letter at 3; Nasdaq Letter at 2; STA Letter at 4; Virtu 

Letter at 5. 

417See, e.g., ABCV Letter at 2; Cboe Letter at 7; 

CTC Letter at 4; FIA PTG Letter at 4; Group One 

Letter at 3; Nasdaq Letter at 3; PEAK6 Letter at 4– 

5; STA Letter at 4. 

418See MMI Letter at 3. 

419See FIA PTG Letter at 4. 

420TRACE charges a Transaction Reporting Fee 

for TRACE reported securities other than U.S. 

Treasury securities. The fee is as follows: $0.475/ 

trade for trade size up to and including $200,000 

par value; $0.000002375 times the par value of the 

transaction (i.e., $0.002375/$1000) for trade size 

over $200,000 and up to and including $999,999.99 

par value; $2.375/trade for trade size of $1,000,000 

par value or more. 

421See FINRA Rule 7730, available at https://

www.finra.org/rules-guidance/rulebooks/finrarules/7730. Firms may incur additional fees for 

trade cancellations or corrections. 

422See supra section V.A.1. 

In addition to the cost estimates 

discussed above, the Commission 

recognizes that both non-FINRA 

member firms and SROs would incur 

other direct and indirect costs because 

of the increased regulatory requirements 

of the amendments. Specifically, there 

would be compliance costs associated 

with regulation by FINRA. However, 

non-FINRA member firms that choose to 

join an Association may have FINRA 

assigned as their DEA. Such an 

assignment could eliminate separate 

DEA fees that the non-FINRA member 

firms may pay to their current DEA. 

Alternatively, one commenter stated 

that if FINRA is not assigned as their 

DEA, then existing DEA fees paid to an 

SRO might be duplicative upon joining 

an Association.413 The Commission 

acknowledges the possibility of 

duplicate DEA fees in these 

circumstances but believes that Rule 

17d–1 could be utilized by FINRA and 

the exchange SROs to mitigate 

duplicative DEA financial responsibility 

oversight over their common members 

and Rule 17d–2 plans could similarly be 

utilized to mitigate the potential for 

duplicative SRO oversight over their 

common members in areas other than 

financial responsibility.414

To the extent that they do not already 

do so, firms would face additional costs 

related to coming into compliance with 

Association rules. Additional costs 

would include actions that are required 

to accommodate normal supervision 

and examination by an Association. The 

Commission was not able to estimate 

these costs, although the costs would 

vary among non-FINRA member firms. 

Several commenters submitted 

estimates for the cost of becoming 

FINRA members.415 In addition, many 

commenters stated that FINRA fees 

would be substantial and constitute a 

considerable sum, believing that FINRA 

fees would be unduly burdensome and 

outweigh perceived benefits.416 Several 

commenters believed in particular that 

FINRA membership would be costly to 

proprietary trading firms with no 

customer business.417 One commenter 

stated that the Commission did not 

consider other costs associated with 

FINRA membership, including 

opportunity costs associated with 

FINRA examinations.418 The 

Commission evaluated the most 

significant costs of FINRA membership 

but acknowledges that being subject to 

regular examination by FINRA is an 

additional cost of FINRA membership. 

One commenter noted that additional 

regulatory costs associated with FINRA 

membership would be manageable 

compared to the cost of the TAF.419 As 

stated above, given that FINRA has 

amended the TAF, the ongoing costs 

could be lower than prior estimates. 

However, FINRA fees must be filed with 

the Commission and such fees must be 

consistent with the Exchange Act. 

c. Costs of TRACE Reporting for NonFINRA Member Firms That Trade U.S. 

Treasury Securities 

Additionally, to the extent that a firm 

trades fixed income securities, they will 

also have implementation and ongoing 

costs associated with TRACE reporting. 

The Commission believes that seven 

non-FINRA member firms have had 

significant trading activities in U.S. 

Treasury securities markets and, since 

they do not presently incur the costs of 

reporting U.S. Treasury (or non-U.S. 

Treasury) securities to TRACE, may 

currently have a competitive cost 

advantage over FINRA member brokerdealers. The Commission estimates that 

these non-member firms will each have 

an initial cost of $2,025, associated with 

setting up systems for TRACE reporting. 

This cost includes the Direct Circuit 

Connectivity Fee for TRACE reporting 

through Nasdaq, in which Nasdaq 

facilitates the reporting to TRACE. 

FINRA does not charge a Transaction 

Reporting Fee for trading activity in U.S. 

Treasury securities markets.420 The 

Commission estimates an aggregate 

ongoing cost for each firm of $125,100. 

There are three ways for firms to 

connect into TRACE. First, firms may 

directly report with the FIX protocol 

through Nasdaq, who is the vendor. 

Second, firms may use a third-party 

service bureau with FIX protocols to 

submit to TRACE. The costs of reporting 

via FIX protocols are outlined in Table 

5. The Commission estimates the cost of 

third-party reporting to TRACE to be 

approximately $2,000 per month.421

Finally, firms with lower reporting 

requirements have the option of 

reporting using the Secure Web 

Interface known as FINRA TRAQS for a 

fee of $20 per month, which would 

allow these firms to avoid port fees and 

connection fees to Nasdaq’s FIX 

reporting system. Additionally, costs for 

these firms might be significantly lower 

for firms with low volume, as the 

reporting cost is based on the volume. 

To the extent that non-FINRA member 

firms trade in other TRACE reportable 

securities, such firms would also have 

higher reporting costs. If those firms 

trade U.S. Treasury securities, their 

implementation costs are included in 

the Commission’s estimates above and 

they will incur only the additional 

marginal costs caused by their volume 

in other TRACE-reportable securities. 

However, to the extent that some nonFINRA member firms trade in other 

TRACE reportable securities but not 

U.S. Treasury securities, those firms 

will each incur implementation costs as 

described above. The Commission 

cannot estimate how many firms are in 

this group of non-FINRA member firms 

that trade TRACE-reportable securities 

but not U.S. Treasury securities because 

the Commission can identify nonFINRA member counterparties in 

TRACE only for U.S. Treasury securities 

transactions that occur on covered 

ATSs, as discussed previously.422

TABLE 5—AVERAGE FIRM TRACE 

REPORTING IMPLEMENTATION COSTS

Cost Median or 

average 1

FIX Port Fee ............................. $575 

Direct Circuit Connectivity Fee 

for TRACE Reporting through 

Nasdaq .................................. 1,500 


ddrumheller on DSK120RN23PROD with RULES2
61888 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

423For a broker or dealer to possibly be exempt 

from the requirement to be an Association member 

currently or under the amendments, the broker or 

dealer must be a member of at least one exchange. 

424Form U4 is the Uniform Application for 

Securities Industry Registration or Transfer. 

Representatives of brokers and dealers, investment 

advisers, or issuers of securities use Form U4 to 

become registered in the appropriate jurisdictions 

and/or with SROs. All SROs currently use Form U4. 

See, e.g., Cboe BYX Rule 2.5 Interpretations and 

Policies .01(c), and Nasdaq PHLX Rule General 3, 

section 7. 

425 IEX does not assess any initial fees. See IEX 

Exchange Fee Schedule, available at https://

exchange.iex.io/resources/trading/fee-schedule/ 

(last visited July 20, 2023) (omitting any mention 

of an initial membership fee). Other exchanges do 

have initial application fees. See, e.g., Nasdaq ISE 

Fee Schedule, Options 7, section 9, available at 

https://listingcenter.nasdaq.com/rulebook/ise/rules/ 

ise-options-7 (last visited July 20, 2023) (assessing 

a one-time application fee of $3,500 for an 

‘‘Electronic Access Member’’); Membership 

Application for New York Stock Exchange LLC and 

NYSE American LLC at 2 (Oct. 2019), available at 

https://www.nyse.com/publicdocs/nyse/markets/ 

nyse/NYSE_Application_for_Membership.pdf (last 

visited July 20, 2023) (discussing the Non-Public 

Firm Application Fee of $2,500); Nasdaq Price List, 

available at http://www.nasdaqtrader.com/

Trader.aspx?id=PriceListTrading2 (last visited July 

20, 2023) (discussing the Nasdaq Application Fee 

of $2,000); Cboe Fee Schedule at 10 (June 30, 2022), 

available at https://cdn.cboe.com/resources/ 

membership/Cboe_FeeSchedule.pdf (last visited 

July 20, 2023) (typically assessing a trading permit 

holder organization application fee on all of its 

members of $5,000). If a firm is organized as a sole 

proprietorship, the application fee for Cboe is only 

$3,000. Id. 

TABLE 5—AVERAGE FIRM TRACE REPORTING IMPLEMENTATION COSTS— 

Continued 

Cost Median or 

average 1

Total ................................... 2,025 

1 Medians are used where possible. Direct 

Circuit Connection Fees can be found at http://

nasdaqtrader.com/ 

Trader.aspx?id=PriceListTrading2. 

TABLE 6—AVERAGE FIRM TRACE 

REPORTING ONGOING ANNUAL COSTS

Cost Median or 

average 1

Systems Fees ........................... $4,800 

Data Fee ................................... 90,000 

Nasdaq Connection Fee ........... 30,000 

Rule 7730 Service Fee ............. 300 

Total ................................... 125,100 

1The systems fee is calculated using Level 

II Full Service Web Browser Access fee for 

four datasets at $140 a month plus a subscription for four additional user IDs at $260 per 

month for a total of $400 per month multiplied 

by 12 months, for an annual systems fee of 

$4,800. Data Fees are calculated using 

$7,500 per month flat fee for the professional 

real time data display. Connectivity fee is calculated at $2,500 a month for an annual cost 

of $30,000. Fees can be found at https://

www.finra.org/rules-guidance/rulebooks/finrarules/7730. Nasdaq FIX connection fees can 

be found at http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2. 

d. Costs of Joining Additional 

Exchanges Under the Rule as Amended 

Under the amendments, non-FINRA 

member firms must be members of all 

exchanges upon which they transact 

business if they decide not to join an 

Association. With limited exceptions for 

certain off-exchange activity, some nonFINRA member firms might choose to 

join additional exchanges to be 

excluded from the requirement to 

become a member of an Association. 

Alternatively, these firms might cease 

trading on exchanges of which they are 

not members. 

Based on discussions with FINRA and 

industry participants, the Commission 

understands that completing a 

membership application with an 

additional exchange is generally less 

complicated and time consuming than 

completing a membership application 

with FINRA. The compliance burden on 

non-FINRA member firms for joining an 

additional exchange is likely to be 

significantly less than that of joining 

FINRA as those non-FINRA member 

firms that choose to join an additional 

exchange are likely able to perform this 

work internally, given that they are 

already members of at least one 

exchange, and that such work should 

take less time than the time required to 

complete an application with FINRA. 

However, the aggregate cost of joining 

multiple exchanges would likely be 

more costly than the cost of joining 

FINRA. 

In addition to the registration costs, 

non-FINRA member firms joining 

additional exchanges as a result of the 

amendments will incur membership 

and related fees. To the extent that nonFINRA member firms choose to become 

members of additional exchanges, the 

fees associated with such memberships 

will vary depending on the type of 

access sought and the exchanges of 

which non-FINRA member firms choose 

to become members. 

The exchange membership fees that 

apply to non-FINRA member firms 

joining such exchanges will be those 

fees that apply to either introducing 

brokers or dealers or proprietary trading 

firms. This assumption is consistent 

with the fact that any brokers or dealers 

carrying customer accounts could not 

qualify for the current exemption of 

Rule 15b9–1. Thus, any exchange 

membership fees that apply to firms that 

provide clearing services or conduct a 

public business would not apply to nonFINRA member firms. 

Furthermore, because all non-FINRA 

member firms are members of at least 

one exchange,423 they will have already 

completed a Form U4, to register 

associated persons.424 Non-FINRA 

member firms will not need to register 

additional associated persons because 

the exchange SRO rules already require 

them to register associated persons. All 

exchanges can access the Form U4 

filings within the CRD which is 

maintained by FINRA. 

The estimates of the cost of joining 

additional exchanges are based on a 

review of membership-related fee 

structures of all twenty-four national 

securities exchanges. The view that the 

potential burden of joining additional 

exchanges will likely be less than that 

of joining FINRA includes the 

assumption that the costs imposed on 

non-FINRA member firms by the 

amendments will be membership fees, 

and not costs relating to trading, such as 

trading permit fees and connectivity 

fees. The Commission recognizes that 

membership alone in an exchange may 

not guarantee the ability to trade 

because many exchanges charge fees for 

trading rights, ports, various degrees of 

connectivity, and floor access and 

equipment, should those be desired. 

The fees associated with trading on an 

exchange are not the result of the 

amendments because, under the 

amendments, a non-FINRA member 

firm might continue to trade through 

another broker or dealer on an exchange 

as long as that non-FINRA member firm 

is a member of every exchange on which 

it trades or is a member of FINRA. In 

other words, the amendments 

themselves do not impose the cost of 

connectivity and related fees, but only 

the costs associated with membership 

on exchanges on which non-FINRA 

member firms could trade. To the 

extent, therefore, that non-FINRA 

member firms continue to trade through 

other brokers or dealers in a manner 

consistent with how they currently 

operate, the amendments impose only 

the costs associated with membership. 

The estimates of the cost of joining 

additional exchanges aggregate all fees 

associated with a firm’s initial 

application to an exchange (‘‘initial 

fee’’) and separately aggregated the fees 

associated with any monthly or annual 

membership costs to obtain a separate 

annual cost (‘‘annual fee’’). Based on 

these aggregations, a range for both the 

initial fee and the annual fee across 

exchanges is obtained. The initial fee is 

as low as $0 for some exchanges. Most 

exchanges have an initial fee that is 

greater than $0 and no more than 

$5,000.425

Regarding monthly or annual 

membership fees, most exchanges’ 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61889 

426See, e.g., Cboe BYX Exchange, Inc. Fee 

Schedule (eff. Nov. 1, 2022), available at https://

www.cboe.com/us/equities/membership/fee_

schedule/byx/ (last visited July 20, 2023) (noting an 

annual membership fee of $2,500); Cboe EDGA 

Exchange, Inc. Fee Schedule (eff. Nov. 30, 2022), 

https://www.cboe.com/us/equities/membership/fee_

schedule/edga/ (last visited July 20, 2023) (same); 

NYSE Chicago, Inc. Fee Schedule (updated Jan. 3, 

2023), available at https://www.nyse.com/ 

publicdocs/nyse/NYSE_Chicago_Fee_Schedule.pdf 

(last visited July 20, 2023) (assessing an annual 

membership fee of $7,200); MIAX Fee Schedule at 

20 (Sept. 1, 2022), available at https://

www.miaxoptions.com/sites/default/files/fee_

schedule-files/MIAX_Options_Fee_Schedule_

09012022.pdf (last visited July 20, 2023) (assessing 

a monthly trading permit fee for an ‘‘Electronic 

Exchange Member’’ of $1,500). 

427See supra note 383. 

428See supra section III.B.2. 

429This figure is based on the following: 

(Compliance Manager at 5 hours) + (Compliance 

Attorney at 2.5 hours) + (Director of Compliance at 

0.5 hours) = 8 burden hours per dealer. See infra 

note 446. As is discussed in more detail in the 

Paperwork Reduction Act discussion, the 

Commission based this estimate on the estimated 

burdens imposed by other rules applicable to 

brokers and dealers, such as Regulation SBSR. See 

also infra note 447. 

430This figure is based on the following: 

(Compliance Manager at 30 hours) + (Compliance 

Attorney at 12 hours) + (Director of Compliance at 

6 hours) = 48 burden hours per broker or dealer. 

See infra note 448. 

431For firms that perform this work internally, 

the initial cost estimate assumes 5 hours of work 

performed by a Compliance Manager at an hourly 

rate of $293, 2.5 hours performed by Compliance 

Attorneys at an hourly rate of $346, and 0.5 hour 

of work performed by the Director of Compliance 

at an hourly rate of $461. The annual cost estimate 

assumes 30 hours of work by a Compliance 

Manager at an hourly rate of $293, 12 hours by 

Compliance Attorneys at an hourly rate of $346, 

and 6 hours by the Director of Compliance at an 

hourly rate of $461. Hourly salary figure is from 

SIFMA’s Management & Professional Earnings in 

the Securities Industry 2013, modified by 

Commission staff to account for an 1800 hour workyear and inflation and multiplied by 5.35 to account 

for bonuses, firm size, employee benefits and 

overhead. 

432The exemption related to routing to comply 

with Regulation NMS and the Options Linkage Plan 

is discussed in supra section III.B.1. 

433Firms in the business of providing 

connectivity to exchanges are likely to compete on 

the basis of their technology. The Commission 

assumes that some firms that do not join FINRA 

will have some orders (those governed under the 

Regulation NMS or the Options Linkage Plan 

provisions to prevent trade-throughs) routed using 

technology inferior to the technology of their firm 

of choice. 

ongoing monthly or annual membership 

fees generally range from $1,500 to 

$7,200.426 Again, these ongoing 

exchange membership costs are 

generally much lower than the annual 

costs estimated for being a member of 

FINRA. 

The costs of the amendments 

associated with joining additional 

exchanges are included in the total cost 

estimates for joining an Association 

provided above in this section.427 This 

is because, in the event that a nonFINRA member firm chooses to join one 

or more exchanges and not become a 

FINRA member, that firm would not 

incur any of the costs for joining an 

Association. The Commission believes 

that a firm may make this choice when 

the costs of joining FINRA exceed the 

costs of joining additional exchanges to 

cover all of the exchanges on which 

they currently trade. Consequently, the 

costs for such firms are expected to be 

no higher than the costs they are 

estimated to incur in joining FINRA. 

Thus, all firms will either join FINRA 

and incur the costs described above or 

join one or more exchanges and instead 

incur costs no higher than those 

described above, so that the total 

Association costs can be taken as an 

upper bound on the total costs over both 

possibilities. 

e. Policies and Procedures Related to the 

Narrowed Criteria for Exemption From 

Association Membership 

Non-FINRA member firms that choose 

not to join an Association but wish to 

continue to trade off-exchange (or on 

exchanges of which they are not 

members) must do so in a manner that 

conforms to the routing or stock-option 

order exemptions. To rely on the stockoption order exemption, the 

amendments will require non-FINRA 

member firms to establish, maintain, 

and enforce policies and procedures as 

discussed above.428 The Commission 

estimates that firms would incur a 

burden of 8 hours in initially preparing 

these policies and procedures.429

Furthermore, the burden of maintaining 

and enforcing such policies and 

procedures, including a review of such 

policies at least annually, will be 

approximately 48 hours.430 The 

Commission estimated an initial 

implementation cost of approximately 

$2,561 and an annual ongoing cost of 

approximately $15,708 for non-FINRA 

member firms that wish to utilize the 

exemptions and perform this work 

internally; for firms that outsource this 

work, costs are likely to be higher.431

Firms that choose to join FINRA will 

not incur these costs as the exemptions 

would not be relevant. 

f. Indirect Costs 

In addition to possibly incurring costs 

related to joining exchanges, non-FINRA 

member firms that choose not to join an 

Association will lose the benefits of 

trading in off-member-exchange 

markets. As mentioned above, nonFINRA member firms are significant 

participants in off-exchange activity. 

Much of this trading is attributed to 12 

non-FINRA member firms, and the 

activity level across those firms varies 

widely. The Commission estimates that 

those 12 non-FINRA member firms 

executed $391 billion in off-exchange 

equity volume in September 2022, while 

the remaining non-FINRA member firms 

executed $49 billion. The Commission 

cannot estimate the likelihood of these 

firms choosing to cease off-exchange 

activity rather than joining an 

Association. However, given the large 

volume in off-exchange equity volume 

traded by non-FINRA members, the 

Commission believes that the 

probability of non-FINRA members 

ceasing off-exchange activity is very 

small. 

Finally, those firms that choose not to 

join an Association would be limited in 

their ability to route their own 

transactions to comply with the 

requirements of Regulation NMS and 

the Options Linkage Plan.432 Their 

transactions will have to be routed by an 

exchange of which they are a member or 

routed by a broker-dealer exclusively to 

exchanges of which they are members. 

This loss in choice could lead to higher 

costs for routing and costs associated 

with increased latency because the 

exchange’s routing broker-dealer may 

have a telecommunications 

infrastructure that is inferior to that of 

the broker-dealer that previously 

provided connectivity between the 

exchange and the non-FINRA member 

firm.433

D. Alternatives 

1. Include a Floor Member Hedging 

Exemption 

The Commission could provide an 

exemption from Association 

membership if a dealer that meets the 

criteria of paragraphs (a) and (b) of the 

rule, conducts business on the floor of 

a single exchange, and its trading 

elsewhere is proprietary and solely for 

the purpose of hedging its floor-based 

exchange trading activity on its member 

exchange. The hedging exemption might 

be limited to firms that trade on the 

floor of a national securities exchange. 

Specifically, the alternative would 

provide that a dealer that conducts 

business on the floor of only a single 

national securities exchange may affect 

transactions in securities otherwise than 

on that exchange, for the dealer’s own 

account with or through another 

registered broker or dealer, that are 

solely for the purpose of hedging the 

risks of its floor-based exchange activity, 

by reducing or otherwise mitigating the 

risks thereof. This alternative also could 

require a dealer seeking to rely on this 

exemption to establish, maintain, and 

enforce written policies and procedures 


ddrumheller on DSK120RN23PROD with RULES2
61890 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

434The amendments provide limited exemptions 

for order routing to satisfy certain provisions of 

Regulation NMS and the Options Linkage Plan and 

for executing the stock leg of a stock-option order. 

435 In order to trade on exchanges of which it is 

not a member, the firm would have to trade with 

or through another broker or dealer that is a 

member of that exchange. 

436See supra section III.A. 

437FINRA agreed that the de minimis exception 

should be eliminated in part because ATSs are 

‘‘typically interposed between [non-members] and 

other ATS subscribers, non-member PTFs can 

engage in substantial OTC trading, including with 

orders from ATS subscribers or other brokerdealers, without technically triggering the gross 

income limitation.’’ See FINRA Letter at 3. 

reasonably designed to ensure and 

demonstrate that such hedging 

transactions reduce or otherwise 

mitigate the risks of the financial 

exposure the dealer incurs as a result of 

its floor-based activity, and to preserve 

a copy of its policies and procedures in 

a manner consistent with 17 CFR 

240.17a–4 until three years after the 

date the policies and procedures are 

replaced with updated policies and 

procedures. 

The Commission believes that this 

alternative could provide a limited 

exemption from Association 

membership that is consistent with the 

original design of Rule 15b9–1’s 

exclusion for proprietary trading. 

Today, few dealers limit their quoting 

and other non-hedging trading activities 

to a particular exchange. Under this 

alternative, the registered dealers among 

this group that limit their primary 

trading business to a single exchange 

floor may continue to hedge the risk of 

that business by effecting securities 

transactions on another exchange or in 

the off-exchange market that are solely 

for the purpose of hedging the dealers’ 

on-exchange activity, without such 

transactions triggering a requirement to 

join an Association. 

The Commission also believes that 

this alternative approach, and in 

particular the limitation of its coverage 

to dealers that engage in floor trading 

and are a member of only a single 

exchange, could be consistent with the 

public interest and the protection of 

investors. A dealer’s hedging activity 

resulting from its trading activity on 

multiple exchanges of which the dealer 

is a member presents cross-market 

surveillance concerns as previously 

discussed, and therefore FINRA would 

be in the best position to conduct 

regulatory oversight to the extent that 

the dealer’s hedging transactions take 

place elsewhere than on exchanges of 

which it is a member. By contrast, so 

long as a dealer’s hedging activity 

results from floor trading activity that is 

confined to a single exchange of which 

the dealer is a member, that exchange 

could be able to adequately supervise 

the hedging activities of the dealer, 

consistent with the public interest and 

protection of investors. 

In addition, requiring written policies 

and procedures, as described above, 

would facilitate exchange supervision of 

dealers relying on such floor member 

hedging exemption, as it could provide 

an efficient and effective way for the 

relevant exchange to assess compliance 

with the proposed exemption. This 

could further serve the public interest 

and help protect investors. 

Because the alternative hedging 

exemption for floor traders is intended 

to allow a dealer to reduce or otherwise 

mitigate its risk, such as position risk, 

incurred in connection with its 

exchange-based dealer activities, it 

would be limited to transactions for the 

dealer’s own account. In addition, 

because the dealer would not itself be a 

member of any other national securities 

exchange on which hedging transactions 

may be effected, or of an Association, 

such transactions would need to be 

conducted with or through another 

registered broker or dealer that is a 

member of such other national 

securities exchange or a member of an 

Association (or of both). However, the 

Commission believes that this 

alternative exemption would currently 

apply to very few and as little as zero 

non-FINRA member firms. Given that so 

few non-FINRA member firms would 

qualify for the exemption, the 

Commission believes that there is little 

value in including such an exemption. 

2. Exchange Membership Alternative 

The amendments, in accordance with 

section 15(b)(8), preclude any firm that 

is not a member of an Association from 

trading on exchanges of which it is not 

a member.434 Further, under the 

amendments, if a firm becomes a 

member of an Association, it would not 

have to become a member of each 

exchange upon which it trades.435 The 

Commission has also considered 

requiring brokers and dealers to become 

a member of every exchange on which 

they trade and to become a member of 

an Association to trade off-exchange 

(‘‘Exchange Membership Alternative’’). 

In considering the Exchange 

Membership Alternative, the 

Commission weighed whether the same 

issue of off-exchange activity not being 

subject to effective regulatory oversight 

that exists when a non-FINRA member 

firm trades off-exchange is present when 

a member or non-FINRA member firm 

trades on an exchange of which it is not 

a member (through a member of that 

exchange). The Commission continues 

to believe that the amendments 

adequately address the issue of 

establishing effective oversight of offexchange activity and that the more 

onerous Exchange Membership 

Alternative would not provide any 

additional regulatory benefit beyond the 

benefits the amendments provide for 

several reasons. First, while some 

exchanges may lack specialized 

regulatory personnel to directly surveil 

their members’ trading off-exchange, 

FINRA has these resources to surveil the 

activity of member firms both on 

exchanges and off-exchange. 

Accordingly, requiring member firms to 

also become members of each exchange 

on which they effect transactions, 

including indirectly, would be 

unnecessarily duplicative because 

FINRA already has the resources 

necessary to surveil the activity of a 

member firm trading on an exchange of 

which it is not a member. In addition, 

while some exchanges do not have a 

specialized rule set to govern their 

members’ activity in the off-exchange 

market, FINRA’s rules are often 

consistent with the trading rules of 

exchanges on which members transact. 

If a member firm were to violate an 

exchange rule on an exchange of which 

it is not a member, FINRA would have 

the jurisdiction needed to address the 

resulting violation. Therefore, not 

requiring that the member firm also 

become a member of that exchange 

would not prevent FINRA from 

exercising jurisdiction over the matter. 

The Exchange Membership 

Alternative might have required firms to 

become members of more SROs than 

required under the amendments, which 

would impose additional costs. In 

particular, some non-FINRA member 

firms that would become member firms 

under the amendments would also need 

to become members of additional 

exchanges or cease trading on those 

exchanges. In addition, some current 

member firms would also need to 

become members of additional 

exchanges. 

3. Retaining the De Minimis Allowance 

The Commission considered retaining 

the $1,000 de minimis allowance for 

trading other than on an exchange of 

which the non-FINRA member firm is a 

member but removing the exception for 

proprietary trading conducted with or 

through another registered broker or 

dealer. As discussed above,436 the 

Commission continues to believe that 

the magnitude of the de minimis 

allowance is no longer economically 

meaningful.437 Furthermore, the 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61891 

438See supra note 33. 

439One commenter suggested, as an alternative to 

the amendments, that the Commission could 

impose ‘‘a more limited FINRA membership that 

would provide for limited oversight covering the 

reporting of over-the-counter transactions to FINRA 

and related surveillance’’ if said exemption were to 

be eliminated. See Virtu Letter at 3. 

440See CTC Letter at 3; FIA PTG Letter at 3; Virtu 

Letter at 2. 

441Although most trading in U.S. Treasury 

securities is reported to TRACE and therefore 

surveilled by FINRA, this surveillance is not 

equivalent to the more extensive oversight that 

FINRA has over its members. Therefore, when 

FINRA encounters potentially problematic conduct 

by firms that are not FINRA members, its ability to 

investigate potential violations of, or enforce 

compliance with Federal securities laws, 

Commission rules, or FINRA rules is limited. See 

discussion in supra section III.A. 

442See FINRA Letter at 10; supra note 119; see 

also Better Markets Letter at 7. 

443 44 U.S.C. 3501 et seq. 

444 44 U.S.C. 3507; 5 CFR 1320.11. 

Commission continues to believe that 

the commission sharing arrangements 

discussed previously 438 are rarely, if 

ever, used. 

4. Eliminate the Rule 15b9–1 Exemption 

The Commission could eliminate Rule 

15b9–1 altogether, leaving no exemption 

from section 15(b)(8) of the Act. This 

would cause all current non-FINRA 

member firms that effect off-memberexchange securities transactions to be 

required by section 15(b)(8) to join 

FINRA, which could improve FINRA’s 

ability to surveil activity of member 

firms off-member-exchange, as well as 

investigate potentially violative 

behavior.439 This improvement in 

FINRA’s abilities may not be large 

relative to the adopted amendments due 

to the fact that the adopted exemptions 

are narrow. However, eliminating the 

exemption for firms that would qualify 

for the routing exemption or the stockoption order exemption may prove to 

unnecessarily increase the costs for such 

firms. The Commission also believes 

that the routing exemption and stockoption order exemption will provide 

important avenues for providing 

liquidity and, therefore, eliminating the 

exemptions may drive these firms from 

the market and lead to a reduction in 

liquidity and market quality. 

5. Mandate TRACE U.S. Treasury 

Securities Reporting Without Requiring 

Association Membership 

In order to address the reporting gap 

within U.S. Treasury securities trading 

by non-FINRA members, the 

Commission could require that all last 

sale U.S. Treasury securities transaction 

data be reported to and disseminated by 

TRACE. Some commenters suggested 

that this reporting requirement could 

improve transparency in the U.S. 

Treasury securities markets without 

imposing costs of Association 

membership.440

However, since U.S. Treasury 

securities trade predominantly offexchange, the Commission believes that 

U.S. Treasury securities markets will 

benefit from enhanced regulatory 

supervision that comes with Association 

membership.441 FINRA stated that 

although non-FINRA member brokerdealers and non-broker-dealer firms 

were identified in 17 percent of the 

surveillance alerts generated by FINRA’s 

Treasuries manipulation patterns in 

2020 and 2021, FINRA has no authority 

to address any potential market 

misconduct by non-FINRA members in 

these instances.442 Accordingly, the 

Commission agrees that Association 

membership will benefit U.S. Treasury 

securities and other fixed income 

markets under these circumstances by 

providing more effective oversight 

relative to the alternative of simply 

mandating TRACE reporting. 

VI. Paperwork Reduction Act 

Certain provisions of the proposed 

amendments to Rule 15b9–1 contain 

‘‘collection of information 

requirements’’ within the meaning of 

the Paperwork Reduction Act of 1995 

(‘‘PRA’’).443 The Commission requested 

comment on the collection of 

information requirements in the 2022 

Re-Proposal and submitted relevant 

information to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with the PRA and 

its implementing regulations.444 The 

title of this new collection of 

information is ‘‘Rule 15b9–1 

Exemptions.’’ An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless the agency displays 

a currently valid OMB control number. 

The Commission has received an OMB 

control number (3235–0743) for this 

collection of information. As discussed 

in section III.B, the amendments to Rule 

15b9–1 require brokers or dealers 

relying on the stock-option order 

exemption to establish, maintain, and 

enforce certain written policies and 

procedures. Compliance with these 

collection of information requirements 

is mandatory for firms relying on the 

amended rule. The Commission 

received no comments on the estimates 

for the collection of information 

requirements included in the 2022 ReProposing Release. 

A. Summary of Collection of 

Information 

The amendments to Rule 15b9–1 

include a collection of information 

within the meaning of the PRA for 

brokers or dealers relying on the stockoption order exemption under the 

amended rule. The stock-option order 

exemption under the amendments to 

Rule 15b9–1 permits a qualifying broker 

or dealer to effect off-member-exchange 

securities transactions, with or through 

another broker or dealer, that are solely 

for the purpose of executing the stock 

leg of a stock-option order. Brokers or 

dealers relying on this exemption are 

required to establish, maintain, and 

enforce written policies and procedures 

reasonably designed to ensure and 

demonstrate that such transactions are 

solely for the purpose of executing the 

stock leg of a stock-option order. In 

addition, such brokers or dealers are 

required to preserve a copy of their 

policies and procedures in a manner 

consistent with Rule 17a–4 until three 

years after the date the policies and 

procedures are replaced with updated 

policies and procedures. 

B. Proposed Use of Information 

The policies and procedures required 

under amended Rule 15b9–1 will be 

used by the Commission and SROs to 

understand how brokers and dealers 

relying on the exemption evaluate 

whether the off-member-exchange 

securities transactions that they effect 

are solely for the purpose of executing 

the stock leg of a stock-option order and, 

more generally, how such brokers and 

dealers are complying with the 

requirements of the exemption and Rule 

15b9–1. These policies and procedures 

will be used generally by the 

Commission as part of its ongoing 

efforts to examine and enforce 

compliance with the Federal securities 

laws, including section 15(b)(8) of the 

Act and Rule 15b9–1 thereunder. In 

addition, SROs may use the information 

to monitor and enforce compliance by 

their members with applicable SRO 

rules and the Federal securities laws. 

C. Respondents 

The Commission believes that a small 

number of brokers or dealers will rely 

on the stock-option order exemption. 

The Commission estimates that, based 

on publicly available information 

reviewed covering the end of April 

2023, there are approximately 64 brokerdealers registered with the Commission 

that are members of an exchange but not 

members of an Association. The 

Commission believes that some, but not 

all, of these broker-dealers will likely 


ddrumheller on DSK120RN23PROD with RULES2
61892 Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 

445See supra section III.B.2. 

446This figure is based on the following: 

(Compliance Manager at 5 hours) + (Compliance 

Attorney at 2.5 hours) + (Director of Compliance at 

0.5 hour) = 8 burden hours per broker or dealer. 

447This figure is based on the following: 

(Compliance Manager at 30 hours) + (Compliance 

Attorney at 12 hours) + (Director of Compliance at 

6 hours) = 48 burden hours per broker or dealer. 

448This figure is based on the following: ((8 

burden hours per broker or dealer) + (48 burden 

hours per broker or dealer)) × (17 brokers and 

dealers) = 952 burden hours during the first year. 

In estimating these burden hours, the Commission 

also examined the estimated initial and ongoing 

burden hours imposed on registered security-based 

swap dealers under Regulation SBSR—Reporting 

and Dissemination of Security-Based Swap 

Information. See Securities Exchange Act Release 

No. 74244 (Feb. 11, 2015) 80 FR 14564, 14683 (Mar. 

19, 2015) (‘‘Regulation SBSR’’). Regulation SBSR 

requires registered security-based swap dealers to 

establish, maintain, and enforce written policies 

and procedures that are reasonably designed to 

ensure compliance with any security-based swap 

transaction reporting obligations. Id. The estimated 

initial and ongoing compliance burden on 

registered security-based swap dealers under 

Regulation SBSR were 216 burden hours and 120 

burden hours, respectively. Id. The policies and 

procedures under amended Rule 15b9–1 are much 

more limited in nature. 

449This figure is based on the following: (48 

burden hours per broker or dealer) × (17 brokers 

and dealers) = 816 ongoing, annualized aggregate 

burden hours. 

450See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x 

(governing the public availability of information 

obtained by the Commission). 

451 17 CFR 240.17a–4. Registered brokers and 

dealers are already subject to existing recordkeeping 

and retention requirements under Rule 17a–4. 

However, amended Rule 15b9–1 contains a 

requirement that a broker or dealer relying on the 

stock-option order exemption preserve a copy of its 

policies and procedures in a manner consistent 

with Rule 17a–4 until three years after the date the 

policies and procedures are replaced with updated 

policies and procedures. The burdens associated 

with this recordkeeping obligation have been 

accounted for in the burden estimates discussed 

above for amended Rule 15b9–1. 

452 5 U.S.C. 601 et seq. 

453 5 U.S.C. 605(b). 

454Although section 601(b) of the RFA defines 

the term ‘‘small entity,’’ the statute permits agencies 

to formulate their own definitions. The Commission 

has adopted definitions for the term ‘‘small entity’’ 

for the purposes of Commission rulemaking in 

accordance with the RFA. Those definitions, as 

relevant to this rulemaking, are set forth in 17 CFR 

240.0–10 (Rule 0–10 under the Exchange Act). See 

Securities Exchange Act Release No. 18451 (Jan. 28, 

1982), 47 FR 5215 (Feb. 4, 1982) (File No. AS–305). 

455Rule 17a–5(d) under the Exchange Act. 

456See 17 CFR 240.0–10(c). 

457See 5 U.S.C. 605(b). See also 2022 ReProposal, supra note 1, 87 FR 49972–73. 

458See Nasdaq Letter at 4. 

choose to avail themselves of the stockoption order exemption, because not all 

of them handle stock-option orders or, 

for those that do handle stock-option 

orders, they may effect the execution of 

stock leg components of those orders on 

an exchange where they are a member. 

The Commission estimates that 17 firms 

could potentially rely on the stockoption order exemption and would 

therefore be required to comply with the 

policies and procedures requirement.445

The Commission believes that some of 

these 17 firms could want the ability to 

effect off-member-exchange securities 

transactions that are not for the purpose 

of executing the stock leg of a stockoption order, and may, accordingly, 

choose to join an Association as a result 

of the amendments to Rule 15b9–1. 

D. Total Initial and Annual Reporting 

and Recordkeeping Burdens 

The Commission estimates that the 

one-time, initial burden for a broker or 

dealer to establish written policies and 

procedures as required under amended 

Rule 15b9–1 will be approximately 8 

hours.446 This figure is based on the 

estimated number of hours to develop a 

set of written policies and procedures, 

including review and approval by 

appropriate legal personnel. The 

policies and procedures in the amended 

rule are limited to those transactions 

that are solely for the purpose of 

executing the stock leg of a stock-option 

order. In addition, the Commission 

estimates that the annual burden of 

maintaining and enforcing such policies 

and procedures, including a review of 

such policies at least annually, will be 

approximately 48 hours for each broker 

or dealer.447 This figure includes an 

estimate of hours related to reviewing 

existing policies and procedures, 

making necessary updates, conducting 

ongoing training, maintaining relevant 

systems and internal controls, 

performing necessary testing and 

monitoring of stock-leg transactions as 

they relate to the broker’s or dealer’s 

activities and maintaining copies of the 

policies and procedures for the period 

of time required by the amended rule. 

The Commission estimates that the 

initial, first year burden associated with 

amended Rule 15b9–1 will be 56 hours 

per broker or dealer, which corresponds 

to an initial aggregate burden of 952 

hours.448 The Commission estimates 

that the ongoing annualized burden 

associated with Rule 15b9–1 will be 48 

hours per broker or dealer, which 

corresponds to an ongoing annualized 

aggregate burden of 816 hours.449

E. Collection of Information is 

Mandatory 

All of the collection of information 

discussed above is mandatory. 

F. Confidentiality of Responses to 

Collection of Information 

To the extent that the Commission 

receives confidential information 

pursuant to the collection of 

information, such information will be 

kept confidential, subject to the 

provisions of applicable law.450

G. Retention Period for Recordkeeping 

Requirements 

Brokers or dealers seeking to take 

advantage of the stock-option order 

exemption will be required to preserve 

a copy of their policies and procedures 

in a manner consistent with Rule 17a– 

4 451 until three years after the date the 

policies and procedures are replaced 

with updated policies and procedures. 

VII. Regulatory Flexibility Act 

Certification 

The RFA requires that Federal 

agencies, in promulgating rules, 

consider the impact of those rules on 

small entities.452 Section 3(a) of the RFA 

requires the Commission to undertake a 

regulatory flexibility analysis of the 

impact of the rule amendments on small 

entities unless the Commission certifies 

that the rule amendments would not 

have a significant economic impact on 

a substantial number of small 

entities.453 For purposes of Commission 

rulemaking in connection with the 

RFA,454 a small entity includes a broker 

or dealer that: (1) had total capital (net 

worth plus subordinated liabilities) of 

less than $500,000 on the date in the 

prior fiscal year as of which its audited 

financial statements were prepared 

pursuant to 17 CFR 240.17a–5(d) (‘‘Rule 

17a–5(d)’’),455 or, if not required to file 

such statements, a broker or dealer with 

total capital (net worth plus 

subordinated liabilities) of less than 

$500,000 on the last day of the 

preceding fiscal year (or in the time that 

it has been in business, if shorter); and 

(2) is not affiliated with any person 

(other than a natural person) that is not 

a small business or small 

organization.456

In the 2022 Re-Proposal, after an 

examination of FOCUS data for the 

then-active broker-dealers registered 

with the Commission, the Commission 

certified, pursuant to section 605(b) of 

the RFA, that amended Rule 15b9–1 

would not, if adopted, have a significant 

impact on a substantial number of small 

entities.457 One commenter disagreed 

with the Commission’s certification, 

stating that there are 39 non-FINRA 

members of Nasdaq exchanges, 13 of 

which are overseen by Nasdaq PHLX 

LLC as the DEA.458 The commenter 

further stated that certain of those 

members trade off-exchange and would 

not be eligible for the re-proposed 

exemptions in amended Rule 15b9–1, 

and that the economic impact of the rule 

amendments on these members would 


ddrumheller on DSK120RN23PROD with RULES2
Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / Rules and Regulations 61893 

459See id. 

460See supra section II.B. 

461See supra section III. The costs of FINRA 

membership are discussed in detail section V, 

supra. In addition, section V.D, supra, discusses the 

alternatives considered by the Commission. As 

discussed supra in section III.A, these three firms 

are not among the 12 largest non-FINRA member 

broker-dealer firms identified by the Commission as 

of April 2023, and so, as discussed in that section 

as well as section V.C.2 supra, their initial and 

ongoing FINRA membership costs, should they join 

FINRA, likely would be low, suggesting that, while 

they would be significantly impacted if they are 

required to join FINRA as a result of the adopted 

rule amendments, their trading businesses 

nevertheless might not be materially impeded by 

the costs of FINRA membership. 

462 Data from FOCUS for Quarter 2 of 2023. 

be significant based on the 

Commission’s estimate of the costs of 

FINRA membership.459 However, the 

commenter did not specify whether any 

of its 39 non-FINRA members are small 

entities under RFA standards or identify 

those non-FINRA members. 

Specifically, the commenter did not 

assert that any of these non-FINRA 

members have total capital of less than 

$500,000 and are not affiliates of any 

person (other than a natural person) that 

is not a small business or small 

organization. 

The Commission re-examined recent 

FOCUS data for the approximately 3,500 

active broker-dealers registered with 

Commission as of April 2023, including 

the 64 non-FINRA member brokerdealer firms that the Commission 

identified as of April 2023.460 Based on 

this re-examination, the Commission 

estimates that not more than three of the 

non-FINRA member broker-dealer firms 

have total capital of less than $500,000 

and are not affiliates of any person 

(other than a natural person) that is not 

a small business or small organization 

and would, as a result, be considered 

small entities under RFA standards. 

These three small firms could be 

significantly impacted by the adopted 

rule amendments because they could be 

required to become a member of FINRA 

under section 15(b)(8) of the Act, if they 

effect off-member-exchange securities 

transactions and do not qualify for one 

of the adopted exemptions.461

Of the approximately 3,500 brokerdealers registered with the Commission, 

786 qualify as small entities because 

they have total capital of less than 

$500,000 and are not affiliates of any 

person (other than a natural person) that 

is not a small business or small 

organization.462 Since three of these 

small broker-dealer entities were not 

FINRA members as of April 2023, the 

Commission estimates that 

approximately 783 of these small 

broker-dealer entities are already 

registered with FINRA. The activities of 

these 783 FINRA member broker-dealers 

could be impacted by the amendments 

to Rule 15b9–1 because the amendments 

have changed the terms upon which 

they could deregister from FINRA. 

Specifically, they will not be able to 

deregister with FINRA unless they 

comply with Rule 15b9–1, as amended, 

which, compared to the pre-amendment 

rule, sets forth much narrower grounds 

upon which a broker-dealer may be 

exempt from FINRA membership. 

Because the Commission estimates that 

not more than three small entities will 

be significantly impacted by the 

amendments to Rule 15b9–1, compared 

to 786 total small entities that could be 

impacted by the rule amendments, the 

Commission does not believe that a 

substantial number of small entities will 

be significantly impacted by the 

amendments to Rule 15b9–1. Therefore, 

the Commission certifies that the 

amendments to Rule 15b9–1 will not 

have a significant economic impact on 

a substantial number of small entities. 

VIII. Other Matters 

If any of the provisions of this rule, or 

the application thereof to any person or 

circumstance, is held to be invalid, such 

invalidity shall not affect other 

provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

Pursuant to the Congressional Review 

Act, the Office of Information and 

Regulatory Affairs has designated these 

rules as not a major rule, as defined by 

5 U.S.C. 804(2). 

Statutory Authority 

The Commission is adopting the final 

amendments contained in this release 

under the authority set forth in the 

Exchange Act, 15 U.S.C. 78a et seq., and 

particularly sections 3, 15, 15A, 17, 19, 

23, and 36 thereof. 

List of Subjects in 17 CFR Part 240 

Brokers, Dealers, Registration, 

Securities. 

Text of Amendments 

For the reasons set out in the 

preamble, the Commission is amending 

title 17, chapter II of the Code of Federal 

Regulations as follows. 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The authority citation for part 240 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 

78g, 78i, 78j, 78j–1, 78j–4, 78k, 78k–1, 78l, 

78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 

78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, 

78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 

3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 

U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 

U.S.C. 1350; and Pub. L. 111–203, 939A, 124 

Stat. 1376 (2010); and Pub. L. 112–106, sec. 

503 and 602, 126 Stat. 326 (2012), unless 

otherwise noted. 

* * * * * 

■ 2. Section 240.15b9–1 is revised to 

read as follows: 

§ 240.15b9–1 Exemption for certain 

exchange members. 

Any broker or dealer required by 

section 15(b)(8) of the Act (15 U.S.C. 

78o(b)(8)) to become a member of a 

registered national securities association 

shall be exempt from such requirement 

if it: 

(a) Is a member of a national securities 

exchange; 

(b) Carries no customer accounts; and 

(c) Effects transactions in securities 

solely on a national securities exchange 

of which it is a member, except that 

with respect to this paragraph (c): 

(1) A broker or dealer may effect 

transactions in securities otherwise than 

on a national securities exchange of 

which the broker or dealer is a member 

that result solely from orders that are 

routed by a national securities exchange 

of which the broker or dealer is a 

member to comply with § 242.611 of 

this chapter or the Options Order 

Protection and Locked/Crossed Market 

Plan; or 

(2) A broker or dealer may effect 

transactions in securities otherwise than 

on a national securities exchange of 

which the broker or dealer is a member, 

with or through another registered 

broker or dealer, that are solely for the 

purpose of executing the stock leg of a 

stock-option order. A broker or dealer 

seeking to rely on this exception shall 

establish, maintain and enforce written 

policies and procedures reasonably 

designed to ensure and demonstrate that 

such transactions are solely for the 

purpose of executing the stock leg of a 

stock-option order. Such broker or 

dealer shall preserve a copy of its 

policies and procedures in a manner 

consistent with § 240.17a–4 until three 

years after the date the policies and 

procedures are replaced with updated 

policies and procedures. 

By the Commission. 

Dated: August 23, 2023. 

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2023–18658 Filed 9–6–23; 8:45 am] 

BILLING CODE 8011–01–P 


ddrumheller on DSK120RN23PROD with RULES2