18036 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 

1An SRO is defined, in relevant part, as ‘‘any 

national securities exchange, registered securities 

association, or registered clearing agency. . . .’’ 15 

U.S.C. 78c(a)(26). See also infra notes 26–28 and 

accompanying text. 

2See, e.g., 15 U.S.C. 78f(b) (requiring exchanges 

to be so organized as to enforce compliance by their 

members and persons associated with their 

members with the provisions of the Exchange Act). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–74581; File No. S7–05–15] 

RIN 3235–AL65 

Exemption for Certain Exchange 

Members 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

proposing to amend Rule 15b9–1 

(‘‘Rule’’) under the Securities Exchange 

Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’), 

which exempts certain brokers or 

dealers from membership in a registered 

national securities association 

(‘‘Association’’). The proposed 

amendments would replace the current 

gross income allowance in the Rule with 

a narrower exemption from Association 

membership for a broker or dealer that 

carries no customer accounts and effects 

transactions on a national securities 

exchange. The proposed amendments 

would create an exemption for a dealer 

that effects transactions off the exchange 

of which it is a member solely for the 

purpose of hedging the risks of its floorbased activity, or a broker or dealer that 

effects transactions off the exchange 

resulting from orders that are routed by 

a national securities exchange of which 

it is a member, to prevent tradethroughs consistent with the provisions 

of Rule 611 of Regulation NMS. 

DATES: Comments should be received on 

or before June 1, 2015. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/proposed.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

05–15 on the subject line; or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments to Brent J. 

Fields, Secretary, Securities and 

Exchange Commission, 100 F Street NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–05–15. This file number 

should be included on the subject line 

if email is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/

proposed.shtml). Comments are also 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

Studies, memoranda or other 

substantive items may be added by the 

Commission or staff to the comment file 

during this rulemaking. A notification of 

the inclusion in the comment file of any 

such materials will be made available 

on the Commission’s Web site. To 

ensure direct electronic receipt of such 

notifications, sign up through the ‘‘Stay 

Connected’’ option at www.sec.gov to 

receive notifications by email. 

FOR FURTHER INFORMATION CONTACT: 

David Michehl, Special Counsel, at 

(202) 551–5627; Nicholas Shwayri, 

Special Counsel, at (202) 551–5667; or 

Charles Sommers, Attorney-Adviser, at 

(202) 551–5787, Division of Trading and 

Markets, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–7010. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Regulatory History 

B. Regulatory Oversight of Off-Exchange 

Trading Activity 

II. Discussion of Amendments to Rule 

15b9–1 

A. Prior Comments on Association 

Membership 

B. Overview of Amendments 

C. Elimination of the De Minimis 

Allowance 

D. Floor Member Hedging Exemption 

E. Regulation NMS Routing Exemption 

III. Effective Date and Implementation 

IV. General Request for Comments 

V. Economic Analysis 

A. Baseline 

1. Regulatory Structure and Activity Levels 

of Non-Member Firms 

2. Current Market Oversight 

B. Broad Economic Considerations, 

Including Effects on Efficiency, 

Competition and Capital Formation 

1. Effects on Regulatory Supervision 

2. Firm Response and Effect on Market 

Activity 

3. Competition To Provide Liquidity Is 

Distorted by Regulatory Costs Borne by 

Only a Subset of Competitors, Member 

Firms 

4. Competitive Effects on Off-Exchange 

Market Regulation 

C. Consideration of Costs and Benefits 

1. Benefits 

2. Costs 

D. Alternatives 

1. Elimination of the Floor Member 

Hedging Exemption 

2. Improve Off-Exchange Supervision 

Through Action of Other SROs With or 

Without CAT 

3. Exchange Membership Alternative 

4. Retaining the De Minimis Allowance 

5. The Commission Assumes Regulatory 

Oversight Role for Non-Member Firms 

E. Request for Comment on Economic 

Analysis 

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 

H. Request for Comments 

VII. Consideration of Impact on Economy 

VIII. Regulatory Flexibility Act Certification 

IX. Statutory Authority—Text of the 

Proposed Amendments 

I. Background 

Rule 15b9–1generally provides an 

exemption for certain broker-dealers 

from the Exchange Act requirement to 

become a member of an Association. 

However, the equities markets have 

undergone a substantial transformation 

since the Commission previously 

considered the Rule. Over time, active, 

cross-market proprietary trading firms 

began relying on the Rule 15b9–1 

exemption in ways that were not 

envisioned when the Rule was adopted 

or amended. The Commission is 

proposing to amend Rule 15b9–1 to 

better align the scope of its exemption, 

in light of today’s market activity, with 

Section 15(b)(8) of the Exchange Act 

and the Commission’s purposes 

underlying the adoption of Rule 15b9– 

1. 

When the Exchange Act was adopted 

in 1934, the exchanges were the only 

self-regulatory organizations (‘‘SROs’’) 1

and were charged with regulating the 

activities of their broker-dealer 

members.2 Congress soon recognized, 

however, that the benefit of exchange 

regulation could be undermined by the 

absence of a complementary regulatory 


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Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 18037 

3 ‘‘Off-exchange’’ trading as used herein means 

any securities transaction in an exchange-listed 

security that is not effected, directly or indirectly, 

on a national securities exchange. See 17 CFR 

240.600(b)(45) (defining ‘‘national securities 

exchange’’). Off-exchange trading includes 

securities transactions that occur on alternative 

trading systems and directly with a broker-dealer, 

acting either as agent or principal, and is also 

referred to as over-the-counter (‘‘OTC’’) trading. The 

term ‘‘off-exchange’’ as used herein does not refer, 

as it does in some contexts, to transactions in 

securities, either in equities or other instruments, 

that are not listed on a national securities exchange. 

4See infra notes 31–33 and accompanying text 

(describing the early history and background 

behind the creation of national securities 

associations). 

5 15 U.S.C. 78o(b)(8). Section 15(b)(8) of the 

Exchange Act was adopted in 1964. See infra notes 

36–37 and accompanying text. Notably, however, 

from 1976–1983, broker-dealers engaged in offexchange trading could either join an Association 

or be subject to direct regulation by the Commission 

under the SEC Only (‘‘SECO’’) Program. See infra 

notes 38–48 and accompanying text. 

6As originally adopted in 1934, the regulation of 

broker-dealer activities on national securities 

exchanges was excluded from the Commission’s 

authority. See Section 15 as adopted in 1934, Public 

Law 73–291, 48 Stat. 881, 895–96 (1934), infra note 

27. Rather, regulation of broker-dealer activities on 

exchanges continued to be conducted by the 

exchanges themselves, many of which existed prior 

to the enactment of the Exchange Act. 

Consequently, this left regulation of the offexchange market with the Commission, until 

passage of the Maloney Act in 1938, providing for 

the creation of voluntary, self-regulating 

Associations with powers to adopt and enforce 

rules to regulate the off-exchange market. Public 

Law 75–719, 52 Stat. 1070 (1938) (the ‘‘Maloney 

Act’’); see also infra note 23 and accompanying text. 

In the Exchange Act Amendments of 1975 (Pub. 

L. 94–29, 89 Stat. 97 (1975), the ‘‘1975 

Amendments’’), Congress recognized that, at the 

time, the allocation of self-regulatory 

responsibilities among SROs resulted in some cases 

in duplicative regulation of firms that were 

members of multiple SROs and varying standards, 

both in substance and enforcement, among SROs. 

S. Doc. No. 93–13 at 164–165 (1973). As a result, 

Congress adopted Section 17(d) of the Act, which 

provides the Commission with the authority to 

allocate regulatory responsibilities among SROs 

with respect to matters as to which, in the absence 

of such allocation, such SROs would share 

authority. 15 U.S.C. 78q(d). In adopting Section 

17(d), a Senate Report accompanying the 1975 

Amendments expressed the view that ‘‘the 

Commission should play an affirmative role in 

allocating inspection and enforcement 

responsibilities among the self-regulatory 

organizations’’ and that ‘‘for reporting purposes 

each broker-dealer [should] be assigned to a 

designated principal self-regulator or government 

regulator who will be responsible for determining 

the broker-dealer’s operating and financial status.’’ 

See 1975 Amendments, Report of the Senate 

Committee on Banking, Housing, and Urban Affairs 

to Accompany S. 249, S. Rep. No. 94–75, 94th 

Cong., 1st Session 33 (1975). 

As a general matter, SROs and the Commission 

have used the flexibility provided by Section 17(d) 

of the Act to allocate regulatory responsibilities in 

such a manner. 15 U.S.C. 78q(d). See, e.g., Exchange 

Act Release No. 63750 (January 21, 2011), 76 FR 

4948 (January 27, 2011) (order approving 17d–2 

plan to allocate regulatory responsibility to FINRA 

relating to surveillance, investigation, and 

enforcement of insider trading rules); Exchange Act 

Release No. 70052 (July 26, 2013), 78 FR 46665 

(August 1, 2013) (order approving 17d–2 plan to 

add Topaz Exchange, LLC to existing plan with all 

other options exchanges to allocate regulatory 

responsibility to FINRA relating to, among other 

things, opening of accounts, supervision, 

suitability, discretionary accounts, advertising, 

customer complaints, customer statements, 

disclosure documents, and certification of 

personnel); Exchange Act Release No. 73641 

(November 19, 2014), 79 FR 70230 (November 25, 

2014) (order approving 17d–2 plan to allocate 

regulatory responsibility to FINRA for the Miami 

International Securities Exchange, LLC (‘‘MIAX’’), 

with respect to examination and enforcement 

responsibility relating to compliance by common 

members with the substantially similar rules of the 

two SROs and applicable provisions of the federal 

securities laws). See also infra notes 62–63 and 

accompanying text (discussing the allocation of 

regulatory responsibilities among SROs). 

7The Commission by rule or order, as it deems 

consistent with the public interest and the 

protection of investors, may conditionally or 

unconditionally exempt from paragraph (8) of this 

subsection any broker or dealer or class of brokers 

or dealers specified in such rule or order. See 15 

U.S.C. 78o(b)(9); Public Law 98–38, 97 Stat. 205 

(1983). 

8 17 CFR 240.15b9–1. See also infra notes 38–48 

and accompanying text for a discussion on Rule 

15b8–1, the predecessor to Rule 15b9–1. 

9See SECO Programs; Direct Regulation of 

Certain Broker-Dealers; Elimination, Exchange Act 

Release No. 20409 (November 22, 1983), 48 FR 

53688 (November 29, 1983) (‘‘SECO Programs 

Release’’). 

10See infra note 22 and accompanying text 

(explaining that the Rule is limited to receipt of a 

portion of the commissions paid on occasional 

over-the-counter transactions and certain other 

activities incidental to their activities as 

specialists). 

11The exclusion for proprietary trading 

(conducted with or through another registered 

broker-dealer) was not part of the original 

exemption, but was added in 1976. See infra notes 

43–44 and accompanying text. 

12See Qualifications and Fees Relating to Brokers 

or Dealers Who Are Not Members of National 

Security [sic] Association, Exchange Act Release 

No. 7697 (September 7, 1965), 30 FR 11673, 11675 

(September 11, 1965) (‘‘Qualifications and Fees 

Release’’) (describing specialist or floor broker’s 

proprietary off-exchange activity as generally 

limited to occasional commissions on introduced 

accounts and other transactions incidental to their 

activity as specialists or floor brokers). See also 

infra note 22. 

13 In adopting the exclusion for proprietary 

trading, the Commission indicated that an exchange 

floor broker, through another broker-dealer, could 

effect transactions for its own account on an 

exchange of which it was not a member. The 

Commission noted that such transactions ultimately 

would be effected by a member of that exchange. 

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

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

Securities Exchange Act Release No. 12160 (March 

3, 1976), 41 FR 10599, 10600 (March 12, 1976) 

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

also infra note 44. 

14 In the Special Study of the Securities Markets 

in 1963, the Commission described how regional 

exchange specialists reduced their exposure, 

including by offsetting those positions on other 

exchanges. The Commission noted that 

‘‘[s]pecialists on the Boston, PhiladelphiaBaltimore-Washington, Pittsburgh, and Montreal 

stock exchange are in communication with each 

other by direct wires linking their floors and each 

may trade on the other exchanges at member rates’’ 

Continued 

framework for the off-exchange market 3

and, in 1938, Congress provided for the 

creation of national securities 

associations.4 Congress later mandated 

Association membership for all offexchange market participants through 

Section 15(b)(8) of the Exchange Act,5

which requires a broker-dealer to 

become a member of an Association 

unless it effects transactions solely on 

an exchange of which it is a member. 

This provision, among others, reflects 

an overarching principle in the 

Exchange Act that the SRO best 

positioned to conduct regulatory 

oversight should assume those 

responsibilities 6 and, correspondingly, 

that off-exchange trading is primarily 

the responsibility of an Association or 

Associations. 

Section 15(b)(9) of the Exchange Act,7

provides the Commission with authority 

to exempt any broker-dealer from the 

requirements of Section 15(b)(8), if that 

exemption is consistent with the public 

interest and the protection of investors. 

Pursuant to that authority, the 

Commission adopted Rule 15b9–1,8

which was last substantively updated in 

1983.9 That Rule was intended to 

address the limited activities of 

exchange-based specialists and floor 

brokers that were conducted off the 

exchange of which they were a member 

and that were ancillary to their floorbased business.10 Specifically, the Rule 

exempts a broker-dealer from the 

requirement to become a member of an 

Association if it is a member of a 

national securities exchange, carries no 

customer accounts, and has annual 

gross income of no more than $1,000 

that is derived from securities 

transactions effected otherwise than on 

a national securities exchange of which 

it is a member (the ‘‘de minimis 

allowance’’). Importantly, the Rule 

permits income derived from 

transactions for the dealer’s own 

account with or through another 

registered broker-dealer, to not count 

toward the $1,000 de minimis allowance 

(hereinafter, the ‘‘exclusion for 

proprietary trading’’).11 As discussed 

more fully below, the de minimis 

allowance originally was designed to 

permit broker-dealers doing business on 

exchange floors to share in the 

commissions paid on occasional offexchange transactions in customer 

accounts they introduced to other 

broker-dealers, up to a nominal 

amount.12 In addition, when the 

exclusion for proprietary trading was 

adopted in 1976,13 the circumstances 

under which an exchange specialist or 

floor broker would trade proprietarily 

off-exchange remained quite limited, 

such as when a regional exchange 

specialist would hedge risk on the 

primary listing market.14


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18038 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 

and ‘‘[s]pecialists who are sole members [of an 

exchange] also offset [their positions] with over-thecounter houses dealing in listed securities. Many of 

the offsetting transactions are done on the primary 

market, the NYSE, with the [specialist] buying or 

selling on that exchange as his needs dictate.’’ 

Report of Special Study of Securities Markets of the 

Securities and Exchange Commission, H.R. Doc. No. 

88–95, at 935 (1963) (‘‘Special Study’’). The 

Commission believes that the business of regional 

exchange specialists was substantially the same 

when the exclusion for proprietary trading in Rule 

15b9–1 was adopted in 1976. 

15See infra note 22. 

16See Concept Release Concerning Equity Market 

Structure, Exchange Act Release No. 61358 (January 

14, 2010), 75 FR 3594, 3594–3596 (January 21, 

2010) (‘‘Concept Release’’) (discussing the evolution 

from ‘‘a market structure with primarily manual 

trading to a market structure with primarily 

automated trading’’). 

17ATSs fall within the statutory definition of 

national securities exchange, but are exempt from 

having to register as an exchange if they comply 

with Regulation ATS. See Regulation of Exchanges 

and Alternative Trading Systems, Exchange Act 

Release No. 40760 (December 8, 1998), 63 FR 

70844, 70856 (December 22, 1998). Regulation ATS 

requires ATSs to be registered as broker-dealers 

with the Commission, which entails becoming a 

member of an Association and complying with the 

broker-dealer regulatory regime. 17 CFR 

242.301(b)(1). Unlike a registered national securities 

exchange, an ATS is not required to file proposed 

rule changes with the Commission. ATSs include 

both dark pools and electronic communications 

networks (‘‘ECNs’’). ECNs provide their best-priced 

orders for inclusion in the consolidated quotation 

data, while dark pools do not. See Concept Release, 

supra note 16 at 3599. See also infra notes 158— 

161 and accompanying text (describing some of 

these firms’ activity on exchanges). ATSs did not 

exist when Rule 15b9–1 was last amended in 1983. 

18Many, but not all, such proprietary trading 

firms are often characterized by: (1) The use of 

extraordinarily high-speed 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 over 

night). See Concept Release, supra note 16, at 3606. 

See also Staff of the Division of Trading and 

Markets, Commission, ‘‘Equity Market Structure 

Literature Review, Part II: High Frequency 

Trading,’’ at 4–5 (March 18, 2014) (available at 

http://www.sec.gov/marketstructure/research/hft_

lit_review_march_2014.pdf). 

19These firms are registered with the Commission 

as broker-dealers but have elected to avail 

themselves of the Rule 15b9–1 exemption from 

membership in an Association. 

20Financial Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) is currently the sole Association. See 

infra note 34. In 1939, the Commission approved 

the National Association of Securities Dealers, Inc. 

(‘‘NASD’’) as the first national securities 

association. See 4 FR 3564 (August 9, 1939). In 

2007, the Commission approved changes that 

consolidated the member firm regulatory functions 

of the NASD, an Association, and NYSE Regulation, 

Inc., and changed the name of the combined entity 

to FINRA. See Exchange Act Release No. 56145 

(July 26, 2007), 72 FR 42169 (August 1, 2007). 

21ATSs received approximately 230 billion 

orders during 2014 that were sent directly to an 

ATS (i.e., orders received by a broker-dealer that are 

then sent to another trading desk of that brokerdealer (so called ‘‘desk-reports’’) are generally 

excluded from these order totals). Orders from NonMember Firms accounted for 49% of orders sent 

directly to ATSs during the first quarter of 2014, 

49% of orders sent directly to ATSs during the 

second quarter of 2014, 48% of orders sent directly 

to ATSs during the third quarter of 2014, and 45% 

of orders sent directly to ATSs during the fourth 

quarter of 2014. In 2013, ATSs received 

approximately 163 billion orders that were sent 

directly to an ATS. Orders from Non-Member Firms 

accounted for 34% of orders sent directly to ATSs 

during the first quarter of 2013, 38% of orders sent 

directly to ATSs during the second quarter of 2013, 

42% of orders sent directly to ATSs during the third 

quarter of 2013, and 45% of orders sent directly to 

ATSs during the fourth quarter of 2013. On a 

volume-weighted basis (i.e., accounting for 

variations in total order volume sent to ATSs), NonMember Firms accounted for 48% of orders sent 

directly to ATSs in 2014, 40% in 2013, and 32% 

in 2012. This information is from data obtained 

from FINRA’s Order Audit Trail System (‘‘OATS’’). 

22 In adopting Rule 15b8–1, the Commission 

stated: ‘‘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.’’ See 

Accordingly, those broker-dealers 

exempt from Association membership 

pursuant to Rule 15b9–1 when it was 

first adopted were broker-dealers with a 

business focused on the floor of an 

exchange of which they were a 

member.15 The Commission crafted 

Rule 15b9–1 to accommodate limited 

activities ancillary to that floor-based 

business, and thereby left it to the 

exchange of which the specialist or floor 

broker was a member to continue to 

regulate the entirety of that brokerdealer’s activities. Therefore, the scope 

of Rule 15b9–1 originally was consistent 

with the principle underlying Section 

15(b)(8) of the Exchange Act, noted 

above, that the SRO best positioned to 

conduct regulatory oversight should 

assume those responsibilities. 

However, the equities markets have 

undergone a substantial transformation 

since the Commission previously 

considered Rule 15b9–1, evolving from 

markets with both manual and 

automated features and trading volumes 

concentrated on the primary listing 

exchanges, to a highly electronic, 

decentralized market with substantial 

competition among a large number and 

great variety of trading venues.16 New 

types of proprietary trading firms have 

emerged, including those that engage in 

so-called high-frequency trading 

strategies. These firms tend to effect 

transactions across the full range of 

exchange and off-exchange markets, 

including alternative trading systems 

(‘‘ATSs’’).17 They also tend to use 

complex electronic trading strategies 

and sophisticated technology to 

generate a large volume of orders and 

transactions throughout the national 

market system.18

Over time, active, cross-market 

proprietary trading firms began relying 

on the Rule 15b9–1 exemption in ways 

that were not envisioned when the Rule 

was adopted or amended.19 As noted 

above, the de minimis allowance of Rule 

15b9–1, and the subsequent exclusion of 

income derived from proprietary 

transactions conducted with or through 

another registered broker-dealer from 

such allowance, were designed to 

permit exchange-based specialists or 

floor brokers to conduct limited 

activities off-exchange. However, 

because the Rule does not explicitly 

limit this exclusion from the de minimis 

allowance to dealer activities ancillary 

to a floor-based business, a brokerdealer, with or without a floor presence, 

may engage in unlimited proprietary 

trading in the off-exchange market 

without becoming a member of an 

Association. Consequently, many of the 

most active, cross-market proprietary 

trading firms have been able to rely on 

the exemption from Association 

membership, despite effecting a 

significant volume of transactions offexchange. 

As a result, an exemption that was 

developed to address limited offexchange activity by exchange-based 

specialists or floor brokers is today 

being used by many broker-dealers 

without a floor-based business, and that 

conduct a substantial percentage of the 

volume of off-exchange trading in the 

U.S. securities markets. Specifically, 

during the fourth quarter of 2014, 

broker-dealers that are not 

Association 20 members (‘‘Non-Member 

Firms’’) accounted for 45% of orders 

sent directly to ATSs, a significant 

category of off-exchange trading 

venue.21 Preliminarily, the Commission 

does not believe the public interest 

finding that originally supported the 

adoption and amendments of Rule 

15b9–1continues to apply today in this 

context. 

Accordingly, the Commission is 

proposing to amend Rule 15b9–1 to 

better align the scope of its exemption, 

in light of today’s market activity, with 

Section 15(b)(8) of the Exchange Act 

and the Commission’s original purpose 

in adopting Rule 15b9–1, which was to 

accommodate broker-dealer activities 

ancillary to a floor-based business while 

preserving the traditional role of the 

exchange as the entity best suited to 

regulate member conduct on the 

exchange.22 A broker-dealer that 


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Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 18039 

Qualifications and Fees Release, supra note 12, at 

11675. 

23See Public Law 75–719, 52 Stat. 1070 (1938) 

(The Maloney Act, which established the concept 

of and framework for Associations, states in its 

preamble that its purpose was to provide for the 

establishment of a mechanism of regulation 

[Associations] among over-the-counter brokers and 

dealers operating in interstate and foreign 

commerce or through the mails, to prevent acts and 

practices inconsistent with just and equitable 

principles of trade, and for other purposes). See also 

infra notes 26, 28–33 and accompanying text 

(describing the early history of the Maloney Act). 

24See, e.g., S. Doc. No. 93–13 at 147 (1973) 

(describing the structure of the self-regulatory 

system in which SROs ‘‘are delegated governmental 

power in order to enforce, at their own initiative, 

compliance by members of the industry with legal 

and ethical standards going beyond the basic 

requirements laid down in the Act.’’). 

25 15 U.S.C. 78q(d); 15 U.S.C. 78s(g). 

26The Maloney Act authorizes an Association to, 

among other things, establish rules designed to 

prevent fraudulent and manipulative acts and 

practices, to promote just and equitable principles 

of trade, to foster cooperation and coordination 

with persons engaged in regulating, clearing, 

settling, processing information with respect to, and 

facilitating transactions in securities, to remove 

impediments to and perfect the mechanism of a free 

and open market and a national market system, and, 

in general, to protect investors and the public 

interest. See 15 U.S.C 78o-3(b)(6). See also First 

Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 692 (3d 

Cir. 1979) (‘‘The purpose of [NASD] is to provide 

self-regulation of the over-the-counter securities 

market.’’); Special Study, supra note 14, at 65 

(describing the NASD as ‘‘the agency with primary 

self-regulatory responsibility for over-the-counter 

markets.’’). 

27As adopted in 1934, Section 15 of the Exchange 

Act read, in relevant part: ‘‘It shall be unlawful, in 

contravention of such rules and regulations as the 

Commission may prescribe as necessary or 

appropriate in the public interest and to insure to 

investors protection comparable to that provided by 

and under authority of this title in the case of 

national securities exchanges, (1) for any broker or 

dealer . . . to make or create, a market, otherwise 

than on a national securities exchange, for both the 

purchase and sale of any security . . . or (2) for any 

broker or dealer to use any facility of any such 

market. Such rules and regulations may provide for 

the regulation of all transactions by brokers and 

dealers on any such market, for the registration with 

the Commission of dealers and/or brokers making 

or creating such a market, and for the registration 

of the securities for which they make or create a 

market and may make special provision with 

respect to securities or specified classes thereof 

listed, or entitled to unlisted trading privileges, 

upon any exchange on the date of the enactment of 

this title, which securities are not registered under 

the provisions of section 12 of this title.’’ Public 

Law 73–291, 48 Stat. 881, 895–96 (1934). 

28 In considering adopting the Maloney Act, the 

House noted that: ‘‘The committee has been 

convinced that effective regulation of the exchanges 

requires as a corollary a measure of control over the 

over-the-counter markets. The problem is clearly 

put in the recent report of the Twentieth Century 

Fund on ‘Stock Market Control’: ‘The benefits that 

would accrue as the result of raising the standards 

of security exchanges might be nullified if the overthe-counter markets were left unregulated and 

uncontrolled. . . . To leave the over-the-counter 

markets out of a regulatory system would be to 

destroy the effects of regulating the organized 

exchanges.’’’ H.R. Doc No. 1383, 73d Cong. 2d Sess. 

at 4 (1934) (quoting report on ‘‘Stock Market 

Control’’ by the Twentieth Century Fund). 

29 Id. 

30See Statement of Senator Francis T. Maloney, 

Hearings before Committee on Banking and 

Currency on S. 3255, 75th Cong., 3d Sess. (1938) 

(noting that the Maloney Act came after ‘‘a longtime effort on the part of the Securities and 

Exchange Commission in rather close cooperation 

with members of the investment banking business 

and over-the-counter dealers and brokers.’’). 

31Public Law 75–719, 52 Stat. 1070 (1938). 

32 15 U.S.C. 78o-3. 

33 Id.; see also S. Rep. No. 75–1455, at 3–4 (1938) 

(‘‘The committee believes that there are two 

alternative programs by which this problem [of 

regulation of the off-exchange market] could be met. 

The first would involve a pronounced expansion of 

the organization of the Securities and Exchange 

Commission; the multiplication of branch offices; a 

large increase in the expenditure of public funds; 

an increase in the problem of avoiding the evils of 

bureaucracy; and a minute, detailed, and rigid 

regulation of business conduct by law. . . . The 

second of these alternative programs, which the 

committee believes distinctly preferable to the first 

. . . is based upon cooperative regulation, in which 

the task will be largely performed by representative 

organizations of investment bankers, dealers, and 

brokers, with the Government exercising 

appropriate supervision in the public interest, and 

exercising supplementary powers of direct 

regulation.’’). See also S. Rep. No. 74–1455, at 2– 

3 (1938) (‘‘It has been deemed advisable to 

authorize the Commission to subject such activities 

[i.e., trading in the over-the-counter markets] to 

regulation similar to that prescribed for transactions 

on organized exchanges. This power is vitally 

necessary to forestall the widespread evasion of 

stock-exchange regulation by the withdrawal of 

securities from listing on exchanges, and by 

transferring trading therein to ‘over-the-counter’ 

markets where manipulative evils could continue to 

flourish, unchecked by any regulatory authority’’) 

(quoting S. Rep. No. 73–792, at 6 (1934)). See also 

supra note 26. 

34See supra note 20. 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. 

35The existing self-regulatory structure in which 

an Association serves as the regulator of the offexchange market and exchanges focus their 

regulatory supervision on their respective markets 

has not been materially altered from a statutory 

perspective since its establishment. See Concept 

Release Concerning Self-Regulation, Exchange Act 

Release No. 50700 (November 18, 2004), 69 FR 

71256, 71258 (December 8, 2004). 

36Section 15(b)(8) as enacted provided that no 

broker or dealer registered under section 15 of this 

title shall, during any period when it is not a 

member of a securities association registered with 

the Commission under section 15A of this title, 

effect any transaction in, or induce the purchase or 

sale of, any security (otherwise than on a national 

securities exchange) unless such broker or dealer 

and all natural persons associated with such broker 

or dealer meet such specified and appropriate 

standards with respect to training, experience, and 

Continued 

conducts off-exchange transactions 

outside the limited scope of Rule 15b9– 

1, as proposed to be amended, would be 

required to become a member of an 

Association. Consequently, such a 

broker-dealer would be subject, with 

respect to its off-exchange transactions, 

to the oversight and rules of an 

Association, the category of SRO 

primarily responsible for regulating 

trading in the off-exchange market in 

accordance with Section 15(b)(8).23

Further, as a result of the proposal, a 

broker-dealer that does not trade offexchange but that trades indirectly on 

multiple exchanges would be required 

in accordance with Section 15(b)(8), to 

become a member of an Association, or 

alternatively, a member of each 

exchange where it effects transactions 

other than transactions to hedge the 

risks of its floor-based activities. 

A. Regulatory History 

The primary purpose of an SRO is to 

regulate its members.24 Although the 

Act provides a limited and targeted 

exception to Association membership 

requirements for broker-dealers, its 

approach to effecting supervision is 

relatively uniform: Broker-dealers must 

be members of the SROs that regulate 

the venues upon which they transact. 

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.25 A 

primary purpose of an Association as an 

SRO, among other things, is to regulate 

the off-exchange market.26 Under the 

Exchange Act, as adopted in 1934, the 

direct regulation of broker-dealer 

activities on national securities 

exchanges was to be conducted by the 

exchanges themselves. As there was no 

SRO for the off-exchange market, 

regulation of the off-exchange market 

was to be the Commission’s 

responsibility.27 Congress recognized 

that the benefits of exchange regulation 

could be undermined in the absence of 

a complementary regulatory framework 

for the off-exchange market 28 and 

provided the Commission the authority 

to adopt rules and regulations 

concerning the off-exchange market to 

achieve investor protections comparable 

to those on exchanges.29 After further 

study,30 however, in 1938 Congress 

imposed a comprehensive regulatory 

framework for the off-exchange market 

through the Maloney Act.31 The 

Maloney Act added Section 15A to the 

Act,32 providing for the creation of 

national securities associations of 

broker-dealers, with powers to adopt 

and enforce rules to regulate the offexchange market.33 This led to the 

creation of NASD, the predecessor of 

FINRA, and the only Association 34

registered to date.35

Section 15(b)(8) of the Act, enacted in 

1964,36 further strengthened regulatory 


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such other qualifications as the Commission finds 

necessary or desirable. See Public Law 88–467, 78 

Stat. 565, 572–73 (1964). 

37 In the Special Study, the Commission 

explained that the controls over entry into the 

securities business were inadequate, allowing entry 

by unqualified persons. Special Study, supra note 

14, at 1, 23 (1963). Congress’ amendments in 1964 

responded to these findings. 

38Under the SECO Program, every associated 

person engaged directly or indirectly in securities 

activities for or on behalf of a non-member brokerdealer, and every associated person who supervised 

others engaged in any securities activities, was 

required to successfully complete either the general 

securities examination prescribed by the 

Commission or an alternative examination deemed 

satisfactory by the Commission. See Qualifications 

and Fees Release, supra note 12, at 11676 (defining 

the term ‘‘nonmember broker or dealer’’ as ‘‘any 

broker or dealer, including a sole proprietor, 

registered under section 15 of the Act, who is not 

a member of a national securities association 

registered with the Commission under section 15A 

of the Act.’’). Any broker-dealer could choose to 

join an Association or be regulated by the 

Commission directly under the SECO Program. 

39 ‘‘Under Rule 15b8–1 (17 CFR 240.15b8–1), any 

broker-dealer who is a member of a national 

securities exchange is exempt from the rule if he 

does not carry customers’ accounts and if his 

annual gross income derived from his over-thecounter business is no more than $1,000. Should a 

broker-dealer’s over-the-counter income exceed 

these limits for an accounting year, such brokerdealer and all persons associated with him become 

subject to the requirements of the rule.’’ Id. at 

11675. 

40See supra note 22. 

41Until 1975, broker-dealers who traded 

exclusively on the floor of a national securities 

exchange were exempt from registration with the 

Commission. The 1975 Amendments required all 

broker-dealers, including exchange specialists and 

floor brokers, to register with the Commission, and 

extended the Commission’s SECO rulemaking 

authority to any exchange member trading on an 

exchange other than an exchange of which it was 

a member. 1975 Amendments, supra note 6, at 121. 

The 1975 Amendments revised Section 15(b) such 

that the substance of then existing Section 15(b)(8) 

was captured in Sections 15(b)(7) through (9). See 

id. at 131. One purpose of the 1975 Amendments 

was to assure that the Commission could regulate 

and recoup the costs of regulating transactions of 

exchange members conducted on exchanges of 

which they were not a member. See 1975 

Amendments, supra note 6, at 125 (amending 

Section 15 of the Exchange Act to provide the 

Commission with authority to ‘‘prescribe reasonable 

fees and charges to defray its costs’’ of regulation). 

42See Adoption of Amendments to SECO Rules, 

supra note 13. See also supra note 22 (noting that 

the over-the-counter business of these brokerdealers may be limited and the income derived 

from these activities is nominal). 

43 ‘‘Any nonmember broker or dealer who is a 

member of a national securities exchange shall be 

exempt from this rule if (1) he carries no accounts 

of customers, and (2) his annual gross income 

derived from purchases and sales of securities 

otherwise than on a national securities exchange of 

which he is a member is an amount no greater than 

$1,000. Provided however, [t]hat gross income 

derived from transactions otherwise than on such 

national securities exchange which are effected for 

his own account with or through another registered 

broker or dealer shall not be subject to such 

limitation.’’ See Adoption of Amendments to SECO 

Rules, supra note 13, at 10601. Thus, broker-dealers 

registering with the Commission as a result of the 

1975 Amendments became subject to the SECO 

rules in 1976, but could remain exempt from such 

rules pursuant to Rule 15b8–1 and its exclusion for 

proprietary trading. 

44The Commission provided the following 

example to describe the application of the exclusion 

for proprietary trading: ‘‘a broker who is acting as 

a floor broker on a particular exchange, and who 

effects transactions for his own account otherwise 

than on that exchange through another brokerdealer who acts as a clearing member for the floor 

broker, would be permitted to effect transactions on 

exchanges of which neither he nor his clearing 

broker are members without becoming subject to 

the SECO rules.’’ Id. In this example, ‘‘[t]he clearing 

broker would, of course, effect transactions on an 

exchange of which he was not a member through 

a member of that exchange.’’ Id. at 10602, n. 8. 

45See supra note 14. 

46At that time, direct oversight of broker-dealers 

by the Commission was conducted through the 

SECO Program. 15 U.S.C. 78o(b)(8), as amended by 

Pub. L. 98–38, 97 Stat. 205, 206 (1983). See also 

H.R. Rep. No. 98–106, at 597 (1983) (citing a 

preference for self-regulation over direct regulation 

by the Commission. Among other benefits of selfregulation, the report noted that NASD had 

available a broader and more effective range of 

disciplinary sanctions to employ against brokerdealers than had the Commission). 

Section 15(b)(8) is virtually the same as it was in 

1983: ‘‘It shall be unlawful for any registered broker 

or dealer to effect any transaction in, or induce or 

attempt to induce the purchase or sale of, any 

security (other than or commercial paper, bankers’ 

acceptances, or commercial bills), unless such 

broker or dealer is a member of a securities 

association registered pursuant to section 15A of 

this title or effects transactions in securities solely 

on a national securities exchange of which it is a 

member.’’ 15 U.S.C. 78o(b)(8). In 1986, Congress 

enacted non-substantive amendments modifying a 

few terms in the statute. Public Law 99–571, 100 

Stat. 3208, 3218 (1986). 15 U.S.C. 78o(b)(8). 

47See supra note 7. 

48See supra note 9. 

49See infra notes 126–130 and accompanying 

text. 

oversight of the off-exchange market by 

prohibiting a broker-dealer from 

effecting any transaction ‘‘otherwise 

than on a national securities exchange’’ 

unless the broker-dealer was either a 

member of an Association, or met the 

Commission’s standards with respect to 

training, experience, and other relevant 

qualifications.37 In 1965, the 

Commission adopted Rule 15b8–1 to 

establish the SECO Program, which 

provided for the direct regulation by the 

Commission of broker-dealers that 

effected transactions off-exchange and 

that chose not to join an Association.38

Rule 15b8–1 provided for an 

exemption from the SECO Program, and 

by extension from Association 

membership, for those broker-dealers 

that: (1) Were members of a national 

securities exchange; (2) did not carry 

customer accounts; and (3) had annual 

gross income derived from off-exchange 

activity that amounted to no greater 

than $1,000.39 This set the basic 

framework for the Rule 15b9–1 

exemption from Association 

membership that exists today. The 

Commission recognized that, at that 

time, exchange-based specialists and 

other floor brokers, which were 

comprehensively regulated by the 

exchange of which they were a member, 

occasionally introduced accounts to 

other members and shared in the 

commission revenues.40 Rule 15b8–1 

permitted these broker-dealers, who 

were not required to register with the 

Commission as broker-dealers at the 

time,41 to receive a portion of the 

commissions paid on occasional offexchange transactions on these 

introduced accounts without becoming 

subject to the SECO rules and brokerdealer registration, so long as the 

income derived from those activities 

was nominal.42

In 1976, the Commission amended 

Rule 15b8–1 to provide that income 

derived from transactions for the 

dealer’s own account effected with or 

through another registered broker-dealer 

would not count towards the $1,000 de 

minimis allowance.43 In adopting this 

amendment to Rule 15b8–1, the 

Commission noted that an exchangebased floor broker could effect 

transactions through another brokerdealer for its own account on an 

exchange of which it was not a member, 

and indicated that such transactions 

ultimately would be effected by a 

member of that exchange.44 At the time 

this provision was adopted, the 

circumstances under which an exchange 

specialist or floor broker would trade 

proprietarily off the exchange were 

quite limited, such as when a regional 

exchange specialist would hedge risk on 

the primary listing market.45

In 1983, Congress amended the Act to 

eliminate the direct oversight of brokerdealers by the Commission.46 Congress 

maintained the exception from 

membership in an Association in 

Section 15(b)(8) of the Act for those 

broker-dealers that effected transactions 

in securities only on an exchange of 

which they were a member. Congress 

also left unchanged the ability of the 

Commission to expand upon the 

statutory exception in Section 15(b)(8) 

through exemptive authority in Section 

15(b)(9) of the Act.47 When the SECO 

rules were abolished in 1983, the 

Commission amended and renumbered 

Rule 15b8–1.48 The substance of newly 

renumbered Rule 15b9–1 remained 

largely the same as Rule 15b8–1, with 

modifications that primarily 

accommodated transactions effected 

through the new Intermarket Trading 

System (‘‘ITS’’) linkage,49 and 

eliminated references to, and 

requirements under, the SECO Program. 

Under the Rule as amended in 1983, 

a broker-dealer was not required to 

become a member of an Association if: 


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50Any broker or dealer required by Section 

15(b)(8) of the Act to become a member of a 

registered national securities association shall be 

exempt from such requirement if it is a member of 

a national securities exchange, carries no customer 

accounts, and 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. 

See 17 CFR 240.15b9–1(a); see also SECO Programs 

Release, supra note 9, at 53690. 

51The gross income limitation contained in 

paragraph (a) of 17 CFR 240.15b9–1, shall not apply 

to income derived from transactions for the dealer’s 

own account with or through another registered 

broker or dealer, or through the Intermarket Trading 

System. See 17 CFR 240.15b9–1(b); SECO Programs 

Release, supra note 9, at 53690. 

52Regulation NMS, Exchange Act Release No. 

51808 (June 9, 2005), 70 FR 37496, 37618 (June 29, 

2005). 

53 15 U.S.C. 78s(g). 

54See 1975 Amendments, Report of the Senate 

Committee on Banking, Housing, and Urban Affairs 

to Accompany S. 249, S. Rep. No. 94–75, 94th 

Cong., 1st Session 32 (1975). 

55 15 U.S.C. 78q(d)(1). 

56 17 CFR 240.17d–1; 17 CFR 240.17d–2. 

57See Exchange Act Release No. 12352 (April 20, 

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

58See Exchange Act Release No. 12935 (October 

28, 1976), 41 FR 49091 (November 8, 1976). 

59Any two or more self-regulatory organizations 

may file with the Commission a plan . . . for 

allocating among the self-regulatory organizations 

the responsibility to receive regulatory reports from 

persons who are members or participants of more 

than one of such self-regulatory organizations to 

examine such persons for compliance, or to enforce 

compliance by such persons, with specified 

provisions of the Securities Exchange Act of 1934, 

the rules and regulations thereunder, and the rules 

of such self-regulatory organizations, or to carry out 

other specified regulatory functions with respect to 

such persons. See 17 CFR 240.17d–2. 

60 Id. 

61 Id. Exchanges also enter into Regulatory 

Services Agreements (‘‘RSAs’’) whereby one SRO 

contractually agrees to perform regulatory services 

for another. See, e.g., FINRA News Release, FINRA 

Signs Regulatory Services Agreement with the 

Chicago Board Options Exchange, Incorporated 

(‘‘CBOE’’) and C2 Options Exchange, Incorporated 

(‘‘C2’’) (December 22, 2014), available at http://

www.finra.org/newsroom/newsreleases/2014/

p602174. However, RSAs do not relieve the 

contracting SRO from regulatory responsibility for 

the performance of any regulatory services allocated 

pursuant to the RSA and are not filed with the 

Commission for approval. 62Section 17(d)(1) of the Act provides that the 

Commission, in allocating authority among SROs 

pursuant to Section 17(d)(1), shall take into 

consideration the regulatory capabilities and 

procedures of the self-regulatory organizations, 

availability of staff, convenience of location, 

unnecessary regulatory duplication, and such other 

factors as the Commission may consider germane to 

the protection of investors, cooperation and 

coordination among self-regulatory organizations, 

and the development of a national market system. 

See 15 U.S.C. 78q(d)(1). 

63See supra note 6; infra note 69. 

64See supra note 31. 

65The Commission staff also conducts risk-based 

examinations of broker-dealers. However, routine 

broker-dealer examinations are conducted by the 

SROs, and the Commission staff oversees the 

examination efforts of the SROs. 

66 15 U.S.C. 78o–3. 

67 Id. 

(1) It was a member of a national 

securities exchange, (2) carried no 

customer accounts, and (3) had annual 

gross income no greater than $1,000 that 

was derived from securities transactions 

effected otherwise than on a national 

securities exchange of which the brokerdealer was a member.50 As under the 

SECO rules, income derived from 

transactions effected for a brokerdealer’s own account with or through 

another broker or dealer was not 

included in the $1,000 de minimis 

allowance.51

Since 1983, Rule 15b9–1 has 

remained unchanged, except for a 

technical amendment in 2005 to update 

cross-references when the Commission 

adopted Regulation NMS.52

B. Regulatory Oversight of Off-Exchange 

Trading Activity 

Section 19(g)(1) of the Act 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.53 Without this relief, the 

statutory obligation of each individual 

SRO would result in duplicative 

examinations and oversight of brokerdealers that are members of more than 

one SRO (‘‘common members’’). Section 

17(d)(1) of the Act is intended, in part, 

to eliminate overlapping examinations 

and regulatory functions.54 With respect 

to a common member, Section 17(d)(1) 

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.55

To implement Section 17(d)(1), the 

Commission adopted two rules: Rule 

17d–1 and Rule 17d–2 under the Act.56

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 the Commission or SRO 

rules.57 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.58

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.59 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. Under paragraph (c) of Rule 17d–2, 

the Commission may declare such a 

plan effective if, after appropriate notice 

and opportunity for comment, it finds 

that the plan is necessary or appropriate 

in the public interest and for the 

protection of investors, to foster 

cooperation and coordination among 

SROs, or to remove impediments to and 

foster the development of a national 

market system and a national clearance 

and settlement system and in 

conformity with the factors set forth in 

Section 17(d) of the Act.60 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.61

The principle underlying the selfregulatory structure in the Exchange Act 

is the concept that the SRO best 

positioned to conduct regulatory 

oversight should assume responsibility 

for that oversight.62 As a general matter, 

the SROs and the Commission have 

used the flexibility provided by Section 

17 to allocate responsibilities in such a 

manner.63 Section 15(b)(8) of the 

Exchange 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. 

Those exempt from Association 

membership pursuant to Rule 15b9–1 

originally were exchange specialists and 

other floor members, and the offexchange activity permitted under Rule 

15b9–1 (including its predecessor rule) 

was intended only to accommodate 

limited activities ancillary to that floorbased business. 

As the sole currently registered 

Association, FINRA is the SRO 

primarily responsible for regulating 

trading in the off-exchange market.64

FINRA also conducts the vast majority 

of broker-dealer examinations,65

mandates broker-dealer disclosures, and 

writes and enforces rules governing 

broker-dealer conduct.66 FINRA 

regulates trading in non-listed equities, 

fixed income, and other traded 

products, and investigates and brings 

enforcement actions against members 

for violations of its rules, the rules of the 

Municipal Securities Rulemaking Board, 

and the Exchange Act and the rules 

thereunder.67 As noted above, the 

regulatory focus of national securities 

exchanges, which are also SROs, has 

been more narrow, with primary 


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68Congress saw the codification of the regulations 

requiring the registration of off-exchange brokerdealers as ‘‘an essential supplement to regulation of 

the exchanges.’’ H.R. Rep. No. 74–2601, at 4 (1936). 

See also supra note 28 and accompanying text. 

69See, e.g., Exchange Act Release No. 63430 

(December 3, 2010), 75 FR 76758 (December 9, 

2010) (order approving Rule 17d–2 plan to allocate 

regulatory responsibility to FINRA for certain 

Regulation NMS rules by 13 exchanges). Generally, 

FINRA is also the DEA for financial responsibility 

rules for exchange members that also are members 

of FINRA. See infra note 164 (discussing DEAs). 

70FINRA operates two Trade Reporting Facilities 

(‘‘TRFs’’), one jointly with NASDAQ and another 

with the NYSE. The TRFs are FINRA facilities for 

FINRA members to report transactions effected 

otherwise than on an exchange. See Exchange Act 

Release No. 54084 (June 30, 2006), 71 FR 38935 

(July 10, 2006) (order approving the NASDAQ TRF); 

Exchange Act Release No. 55325 (February 21, 

2007), 72 FR 8820 (February 27, 2007) (notice of 

filing and immediate effectiveness of a proposed 

rule change to establish the NYSE TRF). In 

addition, FINRA operates the Alternative Display 

Facility (‘‘ADF’’), which is a FINRA facility for 

posting quotes and reporting trades governed by 

FINRA’s trade reporting rules. See Exchange Act 

Release No. 46249 (July 24, 2002), 67 FR 49822 

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

Exchange Act Release No. 71467 (February 3, 2014), 

79 FR 7485 (February 7, 2014) (order approving a 

proposed rule change to update the rules governing 

the ADF). 

71See FINRA Rule 7000 Series—Clearing, 

Transactions and Order Data Requirements, and 

Facility Charges. 

72FINRA operates the OATS system, which is an 

integrated audit trail of order, quote, and trade 

information for all NMS stocks and OTC equity 

securities required to be submitted by FINRA 

members. See e.g., Exchange Act Release No. 54585 

(October 10, 2006), 71 FR 61112 (October 17, 2006) 

(order approving a proposed rule change relating to 

the expansion of OATS reporting requirements to 

OTC equity securities). FINRA uses the OATS audit 

trail system to recreate events in the life cycle of 

orders and more completely monitor the trading 

practices of FINRA member firms. See FINRA.org, 

Order Audit Trail System (OATS), available at 

http://www.finra.org/industry/oats (last visited 

March 19, 2015). 

73See e.g., FINRA Rules 5240 (Anti-Intimidation/ 

Coordination), 5250 (Payments for Market-Making), 

5210.02 (Publication of Transactions and 

Quotations—Self-Trades), and 6140 (Other Trading 

Practices). 

74See FINRA.org, FINRA 2013 Year in Review 

and Annual Financial Report, available at http://

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

p534386.pdf (last visited March 19, 2015). 

75See Part V.B.4 discussing the competitive 

effects of off-exchange market regulation. 

76See Exchange Act Release No. 67457 (July 18, 

2012), 77 FR 45722, 45728–30 (August 1, 2012) 

(discussing the use and limitations of current SRO 

audit trails and noting that ‘‘[m]ost SROs maintain 

their own specific audit trails applicable to their 

members’’ and ‘‘each SRO only has direct access to 

its own audit trails . . .’’). 

77The Commission believes that the majority of 

these firms rely on the Rule 15b9–1 exemption 

rather than the statutory exception from Association 

membership under Section 15(b)(8) of the Act, 15 

U.S.C. 78o(b)(8), because the Rule-based exemption 

is more permissive than the statute, allowing, for 

example, unlimited proprietary trading on an 

exchange of which a broker-dealer is not a member. 

The estimate of 125 firms is based on publicly 

available data reviewed by staff during March of 

2015. See infra note 148. 

78This estimate is based on data from OATS. See 

supra note 21. 

79This information is based on data from OATS. 

In 2013, these Non-Member Firms represented a 

volume-weighted average of approximately 40% of 

orders sent directly to ATSs. Id. 

80For example, based on disclosures on Form BD 

as of March 2015, there were 13 Non-Member Firms 

that are members of only CBOE, an options 

exchange, that do not disclose as part of their 

business activities on Form BD being a ‘‘put and 

call broker or dealer or option writer.’’ Similarly, 

five Non-Member Firms disclose on Form BD that 

they are a ‘‘broker or dealer making inter-dealer 

markets in corporate securities over-the-counter’’ 

and are not members of FINRA. 

responsibility to regulate trading by 

their members on their respective 

exchanges,68 enforce conduct rules (if 

they have not been relieved of that 

responsibility by 17d–2 Agreements), 

and otherwise perform member 

regulation for their members that are not 

also members of FINRA. Most 

exchanges have entered into 17d–2 

Agreements with FINRA that allocate 

regulatory responsibility over common 

members to FINRA for compliance with 

common conduct rules.69

FINRA has developed a transparency 

and regulatory regime for the offexchange market. All off-exchange 

trades are reported to FINRA,70 and as 

a result FINRA has developed a set of 

trade reporting rules to support that 

transparency regime.71 FINRA also has 

developed a regulatory audit trail, 

which provides regulatory data on 

orders, quotes, routes, cancellations, 

and executions.72 FINRA has developed 

rules and guidance tailored to trading 

activity 73 and has developed 

surveillance technology and specialized 

regulatory personnel to provide 

surveillance, supervision, and 

enforcement of activity occurring offexchange.74 Furthermore, FINRA has a 

detailed set of member conduct rules 

that apply to all activities of a firm, 

whether on- or off-exchange.75

As noted, Rule 15b9–1 in its current 

form allows a broker-dealer to engage in 

unlimited proprietary trading in the offexchange market without becoming a 

member of an Association, so long as its 

proprietary trading activity is conducted 

with or through another registered 

broker-dealer (i.e., not with a customer). 

In practice, this allows many crossmarket proprietary trading firms to 

avoid Association membership, despite 

their effecting a significant volume of 

transactions in the off-exchange market. 

Non-Member Firms are not subject to 

oversight by an Association and their 

off-exchange transactions typically are 

not overseen by the exchanges of which 

they may be members. Exchanges 

traditionally have not assumed the role 

of regulating the totality of the trading 

of their member-broker-dealers, and 

exchanges are currently not wellpositioned to assume that role, in light 

of the statutory scheme and, among 

other things, their limited access to 

data 76 and the proper rule set to 

regulate off-exchange trading. 

Exchanges generally do not have a 

detailed set of member conduct rules 

and non-exchange-specific trading rules, 

thus allowing such broker-dealers and 

their personnel to conduct business 

under a less specific regulatory regime 

than FINRA members. In this context 

and consistent with the statutory 

framework that places responsibility for 

off-exchange trading with an 

Association, therefore, the Commission 

preliminarily believes that an 

Association is better suited to regulate 

off-exchange trading. 

The Commission estimates that, 

today, there are approximately 125 

broker-dealers exempt from Association 

membership.77 This group includes 

some of the most active cross-market 

proprietary trading firms, which 

generate a substantial volume of orders 

and transactions in the off-exchange 

market. For example, the Commission 

estimates that orders from Non-Member 

Firms represented a volume-weighted 

average of approximately 32% of all 

orders sent directly to ATSs during 

2012.78 By 2014, these Non-Member 

Firms represented a volume-weighted 

average of approximately 48% of orders 

sent directly to ATSs.79

Accordingly, the Commission believes 

that many of the broker-dealers today 

that rely on the Rule 15b9–1 exemption 

are very different from those for which 

the Rule originally was intended— 

exchange-based specialists and other 

floor members that focused their 

business on a single exchange of which 

they were a member. The presumption 

built into Section 15(b)(8) and further 

extended by Rule 15b9–1, namely that 

the exchange of which the firm is a 

member is in the optimal position to 

provide self-regulatory oversight, does 

not appear to hold for those firms that 

avail themselves of the exemption but 

are engaged in a significant amount of 

off-exchange trading.80 For brokerdealers that conduct business only on 

one exchange, the exchange SRO is 

well-positioned to oversee the activities 

of those broker-dealers and write and 

enforce rules tailored to their business 

model and conduct. For a broker-dealer 

that trades electronically across a range 

of exchange and off-exchange venues, 

however, the individual exchange or 

exchanges of which the broker-dealer 

may be a member are not able to as 

effectively regulate the off-exchange 

activity of the broker-dealer because 

such exchange(s) today has neither the 


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81The Commission notes that, while today an 

exchange may not be able to effectively regulate offexchange activity, it may be able to acquire the 

resources and expertise to do so. 

82See supra note 70. 

83Reports to the TRFs can only be made by 

FINRA members. See FINRA Rules 7210A(k) and 

7210B(i) (defining the term ‘‘Trade Reporting 

Participant’’ or ‘‘Participant’’ as ‘‘any member of 

FINRA in good standing that uses the System’’). 

84When a Non-Member Firm routes an order to 

a FINRA member which then routes the order to an 

exchange or off-exchange for execution, OATS data 

would indicate only that the FINRA member 

received an order from a Non-Member Firm. The 

identity of the Non-Member Firm is often not 

captured because such Non-Member Firms are not 

required to use a unique Market Participant 

Identifier (‘‘MPID’’) or other identifier when routing 

orders to a FINRA member. In some cases, FINRA 

is able to identify the Non-Member Firm that 

participated in a transaction if, for example, it has 

an MPID and provides it to the firm to which it 

routed an order and that firm reports it to FINRA. 

FINRA has solicited comment from its members on 

a proposed FINRA rule change that would require 

FINRA members to identify Non-Member Firms in 

off-exchange transactions reported to OATS. See 

FINRA Regulatory Notice 14–51, Equity Trading 

Initiatives: OATS and ATS Reporting Requirements 

(November 2014), available at https://

www.finra.org/web/groups/industry/@ip/@reg/@

notice/documents/notices/p601681.pdf. This 

proposal has not yet been filed with the 

Commission pursuant to Section 19(b)(1) of the Act. 

15 U.S.C. 78s(b)(1). 

85Non-Member Firms that engage in off-exchange 

transactions are not required to submit audit trail 

data to FINRA. See FINRA Rules 6610 and 

6622(a)(i). The Commission believes that this lack 

of audit trail reporting is problematic because an 

Association has statutory responsibility for 

regulatory oversight of the off-exchange market. 

Although the Commission understands some offexchange trades between Non-Member Firms are 

voluntarily reported by clearing firms, clearing 

firms are not obligated to report such transactions. 

Lack of comprehensive reporting of off-exchange 

transactions to FINRA, among other things, 

undermines FINRA’s ability to effectively surveil 

the off-exchange market. By extension, this also 

undermines the ability of the Commission and 

investors to fully benefit from the self-regulatory 

model envisioned by Congress in the Exchange Act. 

86Rule 613 under the Act requires SROs to jointly 

submit to the Commission a national market system 

plan (‘‘NMS Plan’’) to create, implement, and 

maintain a consolidated order tracking system, or 

consolidated audit trail, with respect to NMS 

securities, that would capture customer and order 

event information for NMS securities, across all 

markets, from the time of order inception through 

routing, cancellation, modification, or execution. 

See Exchange Act Release No. 67457 (July 19, 

2012), 77 FR 45721 (August 1, 2012) (‘‘CAT 

Release’’); 17 CFR 242.613. 

87While some exchanges have rules requiring the 

reporting of certain off-exchange transactions by 

their members, these rules, as they currently exist, 

would not provide the exchanges with the complete 

view of the market that the Commission believes is 

necessary to effectively regulate the off-exchange 

market. For example, NYSE MKT LLC (‘‘NYSE 

MKT’’) Rule 410B—Equities (Reports of Listed 

Securities Transactions Effected Off the Exchange) 

only requires reporting of off-exchange transactions 

in securities listed on NYSE MKT that are not 

reported to the Consolidated Tape. See Exchange 

Act Release No. 58705 (October 1, 2008), 73 FR 

58995 (October 8, 2008) (order approving, among 

other things, NYSE MKT Rule 410B); see also, e.g., 

CBOE Rule 6.49 (Transactions Off the Exchange) 

(requiring that CBOE members executing 

transactions in options listed on the exchange other 

than on CBOE merely keep a record of such 

transaction for a period of one year). 

88The Commission notes that the CAT NMS plan 

would not be implemented for several years. In 

accordance with Rule 613, the SROs would be 

required to report the required data to the central 

repository within one year after effectiveness of the 

NMS plan; broker-dealers, other than small brokerdealers, would be required to report the required 

data to the central repository within two years after 

effectiveness of the NMS plan; and small brokerdealers would be required to report the required 

data within three years after effectiveness of the 

NMS plan. 17 CFR 242.613. 

89See supra notes 28–33 and accompanying text. 

90 15 U.S.C. 78o–3. 

91See FINRA Rule 5000 Series—Securities 

Offerings and Trading Standards and Practices. For 

instance, FINRA has rules prohibiting members 

from coordinating prices and intimidating other 

members. See FINRA Rule 5240(a), providing, 

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.’’ 

The Commission notes that CBOE has stated that it 

views any collusion, intimidation and harassment 

by a CBOE member as ‘‘inconsistent with the just 

and equitable principles of trade.’’ See CBOE 

Regulatory Circular RG97–167 (February 7, 2000) 

and CBOE Rule 4.1. See also supra note 73 and 

accompanying text. 

92See FINRA Rule 2000 Series—Duties and 

Conflicts. 

resources nor the necessary expertise to 

oversee such off-exchange activity.81

The Commission is concerned that the 

reliance on the Rule 15b9–1 exemption 

by cross-market proprietary trading 

firms, given that exchanges focus their 

regulatory oversight on their respective 

exchanges, undermines the effectiveness 

of the regulatory structure of the offexchange market and the equities 

markets more broadly. 

As noted, FINRA currently is the SRO 

to which off-exchange trades are 

reported.82 However, because it does not 

have jurisdiction over Non-Member 

Firms, it is unable to enforce 

compliance with the federal securities 

laws and rules, or apply its own rules, 

to broker-dealers that conduct a 

significant amount of off-exchange 

trading activity, including those that 

engage in so-called high-frequency 

trading strategies. As a result, FINRA’s 

ability to perform comprehensive 

market surveillance, especially for 

violations of Commission rules, as well 

as its ability to understand and 

reconstruct activity in the off-exchange 

market generally, is limited because 

Non-Member Firms are not consistently 

identified in trade reports to the TRFs 83

or the ADF, and their order activity is 

not captured by OATS.84 Accordingly, 

FINRA is unable to monitor the offexchange market activity of NonMember Firms, and detect potentially 

manipulative or other illegal behavior, 

as efficiently or effectively as it can with 

FINRA members.85 Obtaining additional 

data, such as through the Consolidated 

Audit Trail (‘‘CAT’’),86 or the 

assumption of post-trade surveillance 

and investigation by the Non-Member 

Firm’s member exchange, would neither 

confer jurisdiction nor provide needed 

oversight tools to FINRA over NonMember Firms that participate in the 

off-exchange market. No exchange 

currently is positioned to regulate its 

members’ conduct in the off-exchange 

market, as the exchanges generally have 

access only to order and trade data for 

transactions effected on their markets.87

Moreover, even if exchanges were able 

to access the necessary trading data (a 

possibility that would increase with the 

deployment of CAT),88 the Commission 

believes that piecemeal regulation of the 

off-exchange market by multiple SROs 

based on the membership status of the 

participants and a web of regulatory 

allocations among SROs, through the 

use of multiple 17d–2 agreements, is 

significantly less efficient and frustrates 

the structure established by Congress 

that an Association regulate the offexchange market.89 In addition, an 

Association’s regulatory responsibility 

for the off-exchange market includes an 

obligation to monitor those markets for 

operational and regulatory issues, as 

well as issues relating to market 

disruptions.90 The Commission is 

concerned that the inability of an 

Association to reliably identify and 

enforce regulatory compliance by crossmarket proprietary trading firms that are 

Non-Member Firms in the off-exchange 

market, creates a risk to the fair and 

orderly operations of the market. 

Further, because FINRA is unable to 

apply the rules it has developed for the 

off-exchange market to Non-Member 

Firms, its ability to create a consistent 

regulatory framework for the offexchange market is undermined. FINRA 

has sought to establish a robust 

regulatory regime for broker-dealers, 

including broker-dealers conducting 

business in the off-exchange market, 

and has developed a detailed set of rules 

in core areas such as trading practices,91

business conduct,92 financial condition 


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93See FINRA Rule 4000 Series—Financial and 

Operational Rules. See e.g., FINRA Rule 4370(a) 

providing, 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 counter-parties.’’ Although 

NYSE MKT LLC Equities Rule 4370 is similar to 

FINRA Rule 4370(a), for example, a number of other 

exchanges do not have such a rule. 

94See FINRA Rule 3000 Series—Supervision and 

Responsibilities Relating to Associated Persons. 

This rule series generally requires FINRA member 

firms to, among other things, 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. Other 

SROs do not have similar standards for associated 

persons of member broker-dealers. 

95The Commission notes that FINRA may need 

to consider reassessing the structure of its fees, 

including its Trading Activity Fee, in order to 

assure that it is fairly and equitably applied to many 

of the Non-Member Firms that, as a result of the 

amendments to Rule 15b9–1, may join FINRA. 

FINRA 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 

to the By-Laws of the Corporation, Section 1(a), 

available at http://finra.complinet.com/en/display/

display_main.html?rbid=2403&element_id=4694 

(‘‘FINRA Schedule A’’). The TAF is generally 

assessed on FINRA member firms for all equity 

sales transactions that are not performed in a 

broker-dealer’s capacity as a registered exchange 

specialist or market maker. See id. at Section 1(b). 

As discussed above, many of the broker-dealers that 

may be required to join FINRA if the proposed 

amendments are adopted effect transactions in large 

volumes throughout the national market system, 

and often in a capacity other than as a registered 

market-maker. Accordingly, the Commission notes 

that FINRA may need to consider reevaluating the 

structure of the TAF to assure that it appropriately 

takes into account this business model. See also 

infra notes 174–175 and accompanying text for 

further discussion of the TAF. 

96FINRA Schedule A, supra note 95, at Section 

1. 

97FINRA assesses each member a TAF on the sale 

of all covered securities. For the purposes of 

determining the TAF, covered securities include, 

among other things, all exchange-registered 

securities wherever executed and all other equity 

securities traded otherwise than on an exchange. 

FINRA last adjusted the TAF rate for sales of 

covered equity securities effective July 2012. 

FINRA’s regulatory fees also include a Gross 

Income Assessment (‘‘GIA’’) and a Personnel 

Assessment. 

In addition, Section 3 of Schedule A to the 

FINRA By-Laws states that each member will be 

assessed a regulatory transaction fee that is 

determined periodically in accordance with Section 

31 of the Exchange Act. Section 31(c) generally 

requires each national securities association to pay 

the Commission a fee based on the aggregate dollar 

amount of sales of certain securities transacted by 

or through any member of such association 

otherwise than on a national securities exchange. 15 

U.S.C. 78ee(c). The Commission preliminarily 

believes that FINRA’s Section 3 fees will not change 

as a result of the proposed amendments to Rule 

15b9–1. The fees collected by FINRA under Section 

3 are intended to correspond to its obligations to 

the SEC under Section 31(c) of the Act. However, 

if the proposal is adopted, as Non-Member Firms 

become FINRA members, FINRA could seek to 

reallocate Section 3 fees among FINRA members. 

Nonetheless, because the Commission generally 

believes that Section 3 fees are passed through by 

FINRA members to the parties to covered 

transactions, we do not expect the burden of 

Section 3 fees to materially change. 98As is discussed in more detail in the Economic 

Analysis, the Commission preliminarily estimates 

that some firms could be subject to a TAF of up to 

$3.2 million based on their current sales of covered 

securities. See Section V.C.2. 

99The Commission is not currently aware of any 

broker-dealer with such a business model. 

100See supra note 76. 

101The Commission also believes that this would 

be consistent with the statutory framework, which 

subjected broker-dealers that effect transactions on 

an exchange of which they are not a member first 

to Commission, and then to Association, oversight. 

In amending Rule 15b8–1 in 1976 to add the 

exclusion for proprietary trading, the Commission 

also revised the text of Rule 15b8–1 by substituting 

the phrase ‘‘otherwise than on a national securities 

exchange of which he is a member’’ to replace the 

phrase ‘‘otherwise than on a national securities 

exchange.’’ See Adoption of Amendments to SECO 

Rules, supra note 13, at 10600. The Commission 

made this revision ‘‘to conform the scope of the 

SECO rules to the Commission’s authority’’ under 

Section 15(b)(8) and 15(b)(9) (as revised in 1975) to 

subject ‘‘broker-dealers who effect transactions on 

exchanges other than those of which they are 

members to the SECO rules.’’ Id. This change 

reflected the Commission’s understanding that 

broker-dealers effecting transactions on exchanges 

of which they were not a member should be subject 

to the then-existing regulatory framework (i.e., 

either Association membership or direct 

Commission regulation under the SECO program) 

governing off-exchange trading. As noted above, 

Congress amended the Act in 1983 ‘‘to eliminate 

direct regulation of broker-dealers by the 

Commission through the SECO Program and to 

require any broker-dealer engaged in an over-thecounter (‘OTC’) securities business to join a 

registered securities association.’’ See SECO 

Programs Release, supra note 9, at 53688. 

Consistent with the Commission’s rationale in 1976, 

the Commission believes that broker-dealers that 

effect transactions on exchanges of which they are 

not a member should be subject to the current 

regulatory framework governing off-exchange 

trading, namely, membership in an Association. 

and operations,93 and supervision.94

Because Non-Member Firms are not 

subject to these or other FINRA rules, 

they may be subject to a less robust 

regulatory framework than FINRA 

members that themselves trade offexchange. Non-Member Firms also are 

not subject to the costs associated with 

FINRA membership.95

As is discussed in more detail in the 

Economic Analysis, firms that become 

FINRA members would 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.96 FINRA’s 

regulatory fees include a Trading 

Activity Fee (‘‘TAF’’).97

The number of trades subject to the 

TAF in the off-exchange market—and 

thus the aggregate fees collected by 

FINRA for that market segment—would 

not be expected to materially change if 

the proposed amendments are adopted 

because, in general, the TAF currently is 

assessed on the ATSs where NonMember Firms effect off-exchange 

transactions, rather than on the NonMember Firms. However, it is likely that 

certain on-exchange trades by NonMember Firms that currently are not 

covered by the TAF would be 

captured.98 As such, the Commission 

preliminarily believes that FINRA may 

need to consider reevaluating its fee 

structure to ensure that it appropriately 

reflects the activities of, and regulatory 

responsibilities towards, these FINRA 

members, if the proposal is adopted. 

In addition, under the proposal a 

broker-dealer that effects transactions on 

multiple exchanges, and not on ATSs or 

elsewhere in the off-exchange market, 

would need to become a member of an 

Association if it effects transactions 

indirectly on exchanges of which it is 

not a member (i.e., through another 

broker-dealer that is a member of that 

exchange) in accordance with Section 

15(b)(8), unless one of the specified 

exceptions in the proposed amendment 

is available.99 The Commission believes 

that this is consistent with the statutory 

framework and would address an 

activity potentially not subject to 

effective regulatory oversight in today’s 

market. Specifically, if such a brokerdealer were a member of one exchange 

but conducted a significant amount of 

activity indirectly on other exchanges of 

which it was not a member, the 

exchange of which it was a member 

would not be well-positioned to regulate 

the member’s activity on those other 

exchanges. As with the off-exchange 

market, individual exchanges today lack 

access to data,100 the proper rule set and 

the necessary expertise to regulate 

trading on other exchanges. Under these 

circumstances—where the broker-dealer 

would not be conducting ‘‘offexchange’’ activity but would be 

effecting transactions on an exchange of 

which it is not a member, the 

Commission believes that an 

Association is best-positioned to oversee 

this activity.101 As discussed elsewhere 

in this release, FINRA currently 


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102See, e.g., News Release, FINRA, BATS Global 

Markets, FINRA Enter Regulatory Service 

Agreement (February, 6, 2014), available at https:// 

www.finra.org/Newsroom/NewsReleases/2014/

P443474. Such agreements provide detailed data 

that allow FINRA to comprehensively identify the 

market-wide activity of broker-dealers, and to 

surveil behavior for violative activity that might 

otherwise go undetected if surveillance were only 

being conducted on an exchange-specific basis. 

103 In advance of the 1975 Amendments, Congress 

contemplated reforms to the regulatory structure of 

the securities markets in which an Association’s 

role would be expanded, while exchanges would 

focus their regulatory activities on their respective 

markets: ‘‘. . . the time has come to begin planning 

a framework which will guide the development of 

the self-regulatory system in the future. In the 

revised system, a single nationwide entity [an 

Association] would be responsible for regulation of 

the retail end of the securities business, including 

such matters as financial responsibility and selling 

practices, while each exchange would concentrate 

on regulating the use of its own trading facilities 

. . . the regulatory activities of the NASD (the only 

organization presently registered as a national 

securities association) would encompass many of 

the present regulatory activities of the NYSE and 

other exchanges over retail activities of their 

members. This ‘expanded’ NASD would have direct 

responsibility, subject to SEC oversight, for 

enforcing SEC rules and its own rules . . .’’ S. Doc. 

No. 93–13 at 16, 169 (1973). 

104A broker-dealer would not need to become a 

member of an Association if it conducts no activity 

in the off-exchange market and it becomes a 

member of each exchange upon which it effects 

transactions. Although the Commission is not aware 

of such broker-dealer business model existing 

today, if one were to arise, the Commission notes 

that the exchanges upon which such broker-dealer 

directly effects transactions could enter into an RSA 

to ensure effective cross-market supervision of this 

activity. The Commission acknowledges that in the 

future another SRO could assume these 

responsibilities pursuant to 17d–2 Agreements, 

subject to Commission approval, and RSAs. 

105See Concept Release, supra note 16, at 3612. 

106See letters to Elizabeth M. Murphy, Secretary, 

Commission, from Kimberly Unger, Executive 

Director, Security Traders Association of New York, 

Inc., dated April 30, 2010 (‘‘STANY Letter’’); from 

Liam Connell, Chief Executive Officer, Allston 

Trading, LLC, and Richard B. Gorelick, Chief 

Executive Officer, RGM Advisors, LLC, and Adam 

Nunes, President, HRT Financial LLC, Hudson 

River Trading, LLC, and Cameron Smith, General 

Counsel, Quantlab Financial, LLC, dated April 23, 

2010 (‘‘Allston Letter’’); from Donald R. Wilson, Jr., 

DRW Trading Group, dated April 21, 2010 (‘‘DRW 

Letter’’); from Marcia E. Asquith, Senior Vice 

President and Corporate Secretary, Financial 

Industry Regulatory Authority, dated April 23, 2010 

(‘‘FINRA Letter’’); letter to the Commission from 

Berkowitz, Trager & Trager, LLC, dated April 21, 

2010 (‘‘Berkowitz Letter’’); and from Stephen M. 

Barnes, J.D., Salt Lake City, Utah, received October 

3, 2011 (‘‘Barnes Letter’’). 

107See FINRA Letter, supra note 106, at 4–5; 

Barnes Letter, supra note 106, at 32–33 (suggesting 

that, to level the regulatory playing field, highfrequency trading firms should be required to 

register as broker-dealers with the Commission and 

become members of an SRO such as FINRA or an 

exchange); and STANY Letter, supra note 106, at 14 

(suggesting that the Commission review and 

consider registration requirements of market 

participants that are not required to be registered 

with FINRA and noting that enhanced surveillance 

and enforcement should improve investor 

confidence in the markets). See also letter to the 

Honorable Mary Schapiro, Chairman, Commission, 

from Kimberly Unger, Executive Director, Security 

Traders Association of New York, Inc., dated May 

10, 2010, at 14 (urging the Commission to work 

towards a more harmonized regulatory structure, 

which the commenter believes will put FINRA in 

a better position to address regulatory gaps through 

a holistic, cross-market approach to regulation that 

can detect problematic activity across multiple 

markets and products). 

108See Allston Letter, supra note 106, at 14–15 

(stating that it is inaccurate to say that proprietary 

trading Non-Member Firms are not subject to full 

regulatory oversight and noting that such firms are 

generally members of several exchanges and are 

consequently subject to multiple regulators). 

109See Berkowitz Letter, supra note 106, at 1 

(stating that requiring proprietary trading firms to 

register as broker-dealers and become members of 

FINRA would add significant costs and burdens to 

those firms). 

110See DRW Letter, supra note 106, at 4 (stating 

that FINRA’s focus is on investor protection and not 

proprietary trading, and, therefore, there would be 

no benefit to requiring proprietary trading firms that 

do not undertake a customer business to become 

members of FINRA). 

111See supra note 46. 

112 15 U.S.C. 78a et seq. 

113See supra note 7. 

114See supra notes 50–51. 

115See supra note 51. 

conducts cross-market surveillance and 

is provided exchange audit trail data 

pursuant to existing RSAs and 17d–2 

agreements.102 In contrast, exchanges 

generally do not conduct cross-market 

surveillance and most have allocated 

this responsibility to FINRA. 

Accordingly, the Commission believes 

that, as a practical matter and consistent 

with Section 15(b)(8), FINRA is 

currently in the best position to regulate 

cross-market activity 103 by brokerdealers that effect transactions on 

exchanges other than those of which the 

broker-dealer is a member, even if they 

do not effect transactions in the offexchange market.104

In sum, the Commission is concerned 

that some of the most active crossmarket proprietary trading firms may 

not be subject to effective regulatory 

oversight by an exchange or Association 

with respect to the full range of their 

market activity. Accordingly, the 

Commission is proposing to amend Rule 

15b9–1, as described below, to 

appropriately tailor the exemption from 

Association membership for today’s 

markets. 

II. Discussion of Amendments to Rule 

15b9–1 

A. Prior Comments on Association 

Membership 

In 2010, the Commission issued a 

Concept Release that, among other 

things, solicited comment on whether 

all proprietary trading firms should be 

required to register as broker-dealers 

and become members of FINRA to help 

assure that their operations were subject 

to full regulatory oversight.105 The 

Commission received six comment 

letters that directly addressed the 

question as it relates to FINRA 

membership, including one comment 

letter from FINRA.106 The six comment 

letters offered contrasting views. Three 

commenters expressed their support for 

enhanced oversight of proprietary 

trading firms, including a requirement 

to become members of FINRA, generally 

asserting that because proprietary 

trading firms are not all members of 

FINRA there is a lack of uniform 

regulation among registered brokerdealers.107 Three commenters expressed 

opposition to the idea of requiring 

proprietary trading firms to become 

FINRA members, asserting their belief 

that such firms are already subject to 

full regulatory oversight,108 requiring 

such firms to join FINRA would be 

costly and burdensome,109 and that, 

because proprietary trading firms do not 

have customers, there would be no 

benefit to requiring such firms to 

become members of FINRA.110 The 

Commission has considered these 

comments, and, for the reasons set forth 

throughout this release, is proposing to 

amend Rule 15b9–1 as described herein. 

B. Overview of Amendments 

As noted above, Section 15(b)(8) 111 of 

the Act 112 generally prohibits any 

registered broker or dealer from 

effecting transactions in securities 

unless it (1) is a member of an 

Association or (2) effects transactions in 

securities solely on an exchange of 

which it is a member. Section 

15(b)(9) 113 of the Act provides the 

Commission authority to exempt any 

broker or dealer from the requirements 

of Section 15(b)(8). The Commission 

has, by rule, exercised its exemptive 

authority. Specifically, Rule 15b9–1 114

generally exempts any broker or dealer 

from membership in an Association if it: 

(1) is a member of a national securities 

exchange; (2) carries no customer 

accounts; and (3) has annual gross 

income of no more than $1,000 that is 

derived from purchases or sales of 

securities effected otherwise than on an 

exchange of which it is a member. 

However, income derived from 

transactions for the dealer’s own 

account with or through another 

registered broker or dealer,115 or 

through the ITS, is excluded from such 

de minimis allowance. 

The Commission is proposing to 

eliminate the existing de minimis 

allowance (including the exclusion for 

proprietary trading) and replace it with 

a more targeted exemption from 

Association membership for a brokerdealer that conducts business on a 


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116See supra notes 50–51. 

117See supra note 39 and accompanying text. 

118See, e.g., Special Study, supra note 14, at 98 

(‘‘Trading by NYSE members on the Exchange but 

from off the floor accounts for approximately 5 

percent of total Exchange purchases and sales 

. . .’’). 

119Currently, NYSE Arca Options, NYSE Amex 

Options, NASDAQ OMX Phlx, CBOE, NYSE, and 

NYSE MKT have physical exchange floors. 

120Based on disclosures on Form BD, as of 

February 2015, the Commission understands that 

there are approximately 43 Non-Member Firms that 

are members of one national securities exchange 

and that disclose being engaged in floor activities 

on Form BD. The business model of these firms 

varies widely, and may include market making, 

other proprietary trading and agency business. 

national securities exchange, to the 

extent it effects transactions offexchange for the dealer’s own account 

with or through another registered 

broker-dealer, that are solely for the 

purpose of hedging the risks of its floorbased activities, by reducing or 

otherwise mitigating the risks thereof. 

The proposed amendments also include 

an exemption for a broker-dealer to the 

extent it executes orders that are routed 

by a national securities exchange of 

which it is a member, to prevent tradethroughs on such national securities 

exchange consistent with the provisions 

of Rule 611 of Regulation NMS. 

C. Elimination of the De Minimis 

Allowance 

The Commission proposes to 

eliminate the de minimis allowance in 

its entirety. Specifically, the 

Commission is proposing to delete the 

following language from Rule 15b9–1(a): 

‘‘and (3) has annual gross income 

derived from purchases and sales of 

securities otherwise on a national 

securities exchange of which it is a 

member in an amount no greater than 

$1000.’’ The Commission also is 

proposing to delete paragraphs (b) and 

(c) of the Rule, as they set forth two 

exceptions to the de minimis 

allowance.116 Paragraph (b) provides 

that income derived from (1) 

transactions for the dealer’s own 

account with or through another 

registered broker-dealer, and (2) 

transactions through the ITS, do not 

count toward the $1,000 de minimis 

allowance, and paragraph (c) defines the 

ITS. 

As discussed above, the $1,000 de 

minimis allowance originally was 

intended to permit exchange specialists 

and other floor members to receive a 

nominal amount of commissions on 

occasional off-exchange transactions for 

accounts referred to other members, 

without subjecting them to SECO rules 

and broker-dealer registration and, later, 

Association membership.117 Since the 

de minimis allowance was first adopted 

in 1965, the securities markets have 

undergone a significant transformation. 

At that time, virtually all trading 

activity was conducted manually on the 

floors of national securities 

exchanges.118 Today, however, 

electronic cross-market order routing 

and trading strategies are a significant 

component of the markets, and 

exchange floor-based businesses 

represent only a small fraction of market 

activity. The $1,000 de minimis 

allowance has never been adjusted, and 

the Commission is unaware of any floor 

members today that refer accounts to 

other broker-dealers in exchange for a 

share of the broker’s commission 

revenues. Although the Commission is 

proposing to eliminate the de minimis 

allowance, it is soliciting comment on 

whether the de minimis allowance 

might continue to be appropriate in 

today’s markets. In particular, the 

Commission seeks responses to the 

following questions: 

1. Do exchange floor members 

currently rely on the $1,000 de minimis 

allowance? If so, how? Please describe 

the number and types of floor members 

that rely on the allowance. Please 

provide the nature and extent of 

reliance on the allowance. Also, please 

provide any available data on the 

amount and frequency of commissions 

or referral fees that floor members may 

continue to receive with respect to offexchange transactions. 

2. If the de minimis allowance is 

being used by exchange floor members, 

is it being relied upon for its original 

purposes (i.e., accommodating 

occasional commission splitting or 

referrals by such members)? If not, for 

what purposes are floor members today 

relying on the de minimis allowance? 

3. If exchange floor members 

currently rely on the de minimis 

allowance and the Commission retains 

that allowance, should the $1,000 limit 

be changed? Why or why not? What 

should the limit be? 

4. If the de minimis allowance were 

eliminated, as proposed, would some 

exchange floor members be required to 

become members of an Association? If 

so, how many? Please provide the basis 

of any estimate. What would be the 

effect on those firms? 

5. Do other broker-dealers that are not 

floor members rely on the de minimis 

allowance? If so, for what activities? 

Specifically, do cross-market 

proprietary trading firms, as discussed 

above, rely on the allowance? If so, 

why? Are there other types of 

businesses that use the allowance? If so, 

please describe them. How and why do 

they rely on the allowance? 

6. If the de minimis allowance were 

eliminated, what would be the effect on 

these non-floor-based broker-dealer 

firms? For example, if the allowance 

were eliminated, would there be effects 

on the business of firms that would be 

required to register with an Association, 

and if so what would they be? Would 

business incentives change such that 

firms might adjust their business model 

or their trading volume by leaving the 

off-exchange market, moving 

transactions on-exchange, or leaving the 

markets altogether? Would the effects be 

different on broker-dealers trading 

equities from those trading options? 

D. Floor Member Hedging Exemption 

Although the Commission proposes to 

eliminate the de minimis allowance in 

its entirety, it also proposes to replace 

the allowance with an exemption from 

Association membership for exchange 

member broker-dealers that operate on 

the floor of the exchange, to the extent 

they effect transactions off-exchange 

solely for the purpose of hedging the 

risks of their floor-based activities. The 

Commission proposes the hedging 

exemption be limited to firms that trade 

on the floor of a national securities 

exchange, as the Commission 

understands that currently, brokerdealers that trade exclusively on a single 

exchange do so on a physical exchange 

floor.119 Accordingly, the Commission 

is proposing to add the following 

language to Rule 15b9–1: ‘‘and, (c) 

Effects transactions solely on a national 

securities exchange of which it is a 

member, except that . . . (1) A dealer 

that conducts business on the floor of a 

national securities exchange may effect 

transactions, 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 activities, by 

reducing or otherwise mitigating the 

risks thereof. A dealer seeking to rely on 

this exception shall establish, maintain 

and enforce written policies and 

procedures 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. Such 

dealer shall 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 understands that 

today there are some broker-dealers that 

continue to limit their activities to 

exchange floors, particularly in the 

options markets.120 As discussed above, 


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121For example, a broker-dealer may operate a 

floor-based business on one or more options 

exchanges. As a result of this activity, the brokerdealer may need to mitigate the risk of its options 

positions, resulting from such activity, on other 

options markets or in the equities markets. The 

proposed floor member hedging exemption would 

allow the broker-dealer to enter into transactions on 

other markets solely for the purpose of hedging this 

risk. 

122See supra note 39 and accompanying text. 123 17 CFR 240.17a–4. 

124See 15 U.S.C. 78f(b)(1) which requires that an 

exchange is so organized and has the capacity to be 

able to carry out the purposes of the Exchange Act 

and to comply, and to enforce compliance by its 

members and persons associated with its members, 

with the provisions of the Exchange Act, the rules 

and regulations thereunder, and the rules of the 

exchange. 

at the time Rule 15b9–1 was adopted, 

the circumstances under which an 

exchange specialist or floor broker 

would trade proprietarily off-exchange 

were quite limited, such as where a 

regional exchange specialist would 

hedge risk on the primary listing 

market. The Commission believes that 

those broker-dealers that today continue 

to limit their trading activities to an 

exchange floor may seek to hedge the 

risks of their floor-based activities on 

other markets, both on national 

securities exchanges and offexchange.121 Therefore, the Commission 

proposes to retain a more focused 

exemption from Association 

membership for the type of activity for 

which the Commission believes the 

exclusion for proprietary trading in Rule 

15b9–1 was originally designed.122

The availability of the proposed 

hedging exemption would be limited to 

dealers that conduct business on the 

floor of a national securities exchange 

and are members of that exchange. 

Section 15(b)(8) requires Association 

membership for all registered brokerdealers other than those that effect 

transactions solely on an exchange of 

which they are a member. Brokerdealers that limit their activities in this 

manner generally are specialists or floor 

brokers based on the floor of an 

individual exchange. In exercising its 

exemptive authority when it adopted 

Rule 15b8–1 in 1965, the Commission 

sought to accommodate off-exchange 

activities ancillary to that floor-based 

business. The Commission believes that, 

today, few broker-dealers limit their 

activities to a particular exchange. 

Those broker-dealers that do limit their 

business to an exchange floor, however, 

may continue to seek to hedge the risk 

of their floor-based activities by 

effecting transactions on another 

exchange or in the off-exchange market. 

The Commission preliminarily 

believes that a floor-based dealer 

seeking to rely on the proposed hedging 

exemption in Rule 15b9–1 should be 

required to establish, maintain and 

enforce written policies and procedures 

reasonably designed to ensure and 

demonstrate that its off-exchange 

transactions are solely for the purpose of 

hedging the risks of its floor-based 

activities, by reducing or otherwise 

mitigating the risks thereof. Such 

hedging should reduce or otherwise 

mitigate the risks of the financial 

exposure the dealer incurs as a result of 

its business on the floor of an exchange 

of which it is a member. Because such 

hedging transactions must be solely for 

the purpose of hedging the risks of the 

dealer’s floor-based activities, the 

transactions, of course, should not be for 

the purpose of increasing the aggregate 

risk of the dealer. The Commission 

notes that whether a transaction or 

transactions entered into to reduce or 

otherwise mitigate risk results in a profit 

or loss is not dispositive of whether or 

not such a transaction or transactions 

meets the terms of the proposed floor 

member hedging exemption. A floorbased dealer seeking to rely on the 

proposed hedging exemption would be 

required to 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.123

The Commission preliminarily 

believes that requiring written policies 

and procedures, as described above, 

would facilitate SRO supervision of 

broker-dealers relying on the proposed 

hedging exemption, as it would provide 

an efficient and effective way for 

regulators to assess compliance with the 

proposed exemption. The determination 

of whether an off-exchange transaction 

by a floor-based dealer reduces or 

otherwise mitigates the risk of the 

financial exposure incurred as a result 

of the dealer’s floor-based business may 

vary depending on the nature of the 

business of the floor-based dealer, its 

financial position, and the particular 

transactions effected. Consequently, the 

Commission preliminarily believes that 

requiring floor-based dealers to develop 

written policies and procedures will 

provide sufficient flexibility to 

accommodate the varying business 

models of floor-based dealers and 

appropriate hedging activities. 

The Commission notes, however, that 

such written policies and procedures 

must be reasonably designed to ensure 

and demonstrate that the floor-based 

dealer’s off-exchange hedging 

transactions reduce or otherwise 

mitigate the risks of the financial 

exposure it incurs as a result of its floorbased activity. Accordingly, a dealer 

seeking to rely upon the proposed 

hedging exemption should maintain 

documentation that, in the context of an 

SRO or Commission examination, 

would enable it to show how the 

hedging transactions it effects off the 

exchange reduce or otherwise mitigate 

the risks of its floor-based business. 

The Commission notes that the 

exchange of which the dealer is a floor 

member would be responsible for 

enforcing compliance with the hedging 

exemption, including reviewing the 

adequacy of the dealer’s written policies 

and procedures and whether the 

dealer’s off-exchange transactions 

comply with those written policies and 

procedures, including the requirement 

that the hedging transactions reduce or 

otherwise mitigate the risks of financial 

exposure the dealer incurs as a result of 

its floor-based activity and that the 

policies and procedures are reasonably 

designed to so demonstrate.124

Because the proposed hedging 

exemption is intended to allow a dealer 

to reduce or otherwise mitigate risk 

incurred in connection with its floorbased activities, it would be limited to 

transactions for the dealer’s own 

account. In addition, because the floorbased dealer would not itself be a 

member of the national securities 

exchange on which transactions may be 

effected, or an Association, such 

transactions would need to be 

conducted with or through another 

registered broker-dealer that is a 

member of such other national 

securities exchange or a member of an 

Association (or both). 

Finally, a dealer seeking to rely on the 

proposed hedging exemption would be 

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. Accordingly, a dealer must 

keep the policies and procedures 

relating to its use of the hedging 

exemption as part of its books and 

records while they are in effect, and for 

three years after they are updated. 

The Commission requests comment 

on all aspects of the proposed hedging 

exemption in Rule 15b9–1. In particular, 

the Commission seeks responses to the 

following questions: 

7. To what extent do exchange floor 

members that are Non-Member Firms 

today effect transactions in the offexchange market to hedge the risk of 

their floor-based activities? What is the 

nature and extent of such off-exchange 

market activities? Do these activities 


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18048 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 

125 17 CFR 240.15c3–5. 

tend to focus on particular products? 

The Commission specifically seeks data 

from exchange floor members that 

demonstrates the extent to which they 

trade off the exchange floor and how 

such off-exchange trading relates to 

their floor-based business, including to 

hedge the risks thereof, as such data 

may be particularly helpful in assessing 

a potential floor member hedging 

exemption when the Commission 

considers adoption of the proposed 

amendments. 

8. Is the Commission’s proposed 

description of hedging transactions 

appropriate? Is it sufficiently defined? If 

not, how should it be modified or 

supplemented? Is the phrase ‘‘solely for 

the purpose of hedging the risks of its 

floor-based activities,’’ as used in the 

proposed amendments, sufficiently 

precise that broker-dealers will know 

what activities are allowed under the 

proposed floor member hedging 

exemption from Association 

membership? If not, what should be 

changed or what guidance should be 

provided? 

9. Will broker-dealers seeking to rely 

on the floor member hedging exemption 

be able to evaluate whether, and 

demonstrate that, off-exchange 

transactions are ‘‘solely for the purpose 

of hedging the risks of floor-based 

activities’’? Please provide specific 

examples. What would be the associated 

costs? 

10. Should there be a hedging 

exemption at all? Why or why not? 

11. Should the Commission narrow or 

broaden the proposed floor member 

hedging exemption in any way? If so, 

how and why? 

12. Do exchange floor members that 

are Non-Member Firms effect 

transactions in the off-exchange market, 

or on exchanges of which they are not 

a member, for purposes other than 

hedging the risk of their floor-based 

activities? If so, please describe the 

nature and extent of such activities. 

Should there be an exemption for these 

activities? Why or why not? 

13. Are there non-floor-based 

exchange members that today focus 

their business activities on a single 

exchange? If so, what is the nature of 

their business activity? Should there be 

an exemption for such activities? Why 

or why not? 

14. The proposed floor member 

hedging exemption is limited to 

transactions effected with or through 

another registered broker-dealer. Are 

there circumstances where an exchange 

floor member that is a Non-Member 

Firm, might need to hedge the risk of its 

floor-based activities through a 

transaction with a non-registered 

broker-dealer counterparty? If so, please 

describe the nature and extent of such 

transactions and the particular reason(s) 

that such transactions should be 

covered. 

15. The proposed floor member 

hedging exemption is limited to 

transactions for the dealer’s own 

account. Are there circumstances where 

an exchange floor member that is a NonMember Firm might need to hedge the 

risk of customer activity on the 

exchange, as agent, in the off-exchange 

market or on exchanges of which it is 

not a member? If so, please describe. 

16. Is the proposed policies and 

procedures requirement appropriate for 

the floor member hedging exemption? 

What would be the costs of establishing, 

maintaining and enforcing the policies 

and procedures, and the related recordkeeping requirements? How are such 

costs determined? Please provide 

evidence of the nature, timing, and 

extent of such costs. Would such costs 

deter dealers from relying on the floor 

member hedging exemption? Are there 

more efficient and effective alternatives 

to a policies and procedures approach? 

If so, what are they? Have the 

transactions executed by floor members 

pursuant to the current Rule’s exclusion 

for proprietary trading posed issues of 

regulatory compliance, market 

surveillance, or enforcement? If so, 

please describe in detail. 

17. Will the proposed requirement to 

establish, maintain, and enforce written 

policies and procedures enable floor 

members to efficiently hedge their floorbased activities while effectively 

ensuring the floor member hedging 

exemption is used as intended? Is there 

another approach that would better 

achieve these goals? 

18. Would the proposed floor member 

hedging exemption present compliance 

risks or otherwise raise concerns 

regarding the protection of investors or 

the maintenance of fair, orderly, and 

efficient markets? If so, please describe. 

19. Would current exchange 

surveillance and enforcement 

mechanisms be effective to monitor 

trades that would be executed pursuant 

to the proposed floor member hedging 

exemption? Please explain. 

a. If not, should the Commission 

require additional reporting by 

registered broker-dealers acting as agent 

for dealers relying on the floor member 

hedging exemption? For example, 

should they report to an exchange or an 

Association (i) the identity of the floor 

member effecting the hedging 

transaction; and (ii) the fact that the 

transaction was a hedging transaction? 

Is such a requirement necessary to 

assure the adequacy of market 

surveillance and compliance? Or, 

alternatively, is the registered brokerdealer acting as agent on behalf of the 

dealer subject to sufficient rules and 

regulations (including Rule 15c3–5 

under the Exchange Act,125 known as 

the Commission’s ‘‘Market Access 

Rule’’)? Please explain. 

b. Could a Non-Member Firm execute 

a hedging transaction directly with 

another Non-Member Firm? If so, how 

would the transaction be subject to 

surveillance? How would this activity 

affect the enforcement of the 

exemption? Please explain. 

c. Would exchanges otherwise have 

the ability to assess compliance of 

broker-dealers relying on the Rule? 

20. Should the proposed floor 

member hedging exemption be subject 

to any quantitative or qualitative 

limitations, or to special reporting 

obligations? Please explain. 

21. Should the proposed floor 

member hedging exemption require the 

floor member to retain records 

demonstrating how each off-exchange 

transaction complies with its policies 

and procedures? Why or why not? What 

would be the associated costs, and what 

is the basis for those costs? Would the 

cost associated with recordkeeping on a 

transaction by transaction basis be 

overly burdensome, or unnecessary 

given the Commission’s proposed 

policies and procedures requirement? 

22. Should the Rule contain an antievasion provision to prevent floor 

members from attempting to circumvent 

the limitations in the floor member 

hedging exemption? Is there a better 

method than the proposed policies and 

procedures approach to ensure that floor 

members do not misuse the proposed 

floor member hedging exemption? If so, 

what is it? Alternatively, are the existing 

Commission anti-fraud and antimanipulation rules sufficient to prevent 

misuse of the proposed floor member 

hedging exemption? 

23. Should floor members have to 

make a certification in connection with 

their reliance on the floor member 

hedging exemption? Why or why not? If 

a certification should be required, what 

would be the key elements thereof? How 

frequently should the certification be 

made? Who should make it? What 

qualifications, if any, to such 

certification might be appropriate (e.g., 

reasonable basis to believe, best of my 

knowledge)? Should the certification be 

made in conjunction with an internal 

compliance review? If so, what type of 

internal compliance review should be 

conducted? 


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126The full title of the ITS Plan 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.’’ The ITS 

Plan was initially approved by the Commission in 

1978. Exchange Act Release No. 14661 (April 14, 

1978), 43 FR 17419 (April 24, 1978). All national 

securities exchanges that traded exchange-listed 

stocks and the NASD were participants in the ITS 

Plan. 

127 Id. 

128See 17 CFR 242.600(b)(77) defining a ‘‘tradethrough’’ under Regulation NMS. 

129A ‘‘locked market’’ occurs when a trading 

center displays an order to buy at a price equal to 

an order to sell, or an order to sell at a price equal 

to an order to buy, displayed on another trading 

center. 

130Notice of Filing and Immediate Effectiveness 

of the Twenty Fourth Amendment to the ITS Plan 

Relating to the Elimination of the ITS Plan, 

Exchange Act Release No. 55397 (March 5, 2007), 

72 FR 11066 (March 12, 2007). Today, Regulation 

NMS contains an updated trade-through rule, and 

contemplates the use of private linkages by trading 

centers to route orders to avoid trade-throughs. 17 

CFR 242.610–611. 

131Exchange Act Rule 611 states, in part, that ‘‘a 

trading center shall establish, maintain, and enforce 

written policies and procedures that are reasonably 

designed to prevent trade-throughs on that trading 

center of protected quotations in NMS stocks. . . .’’ 

17 CFR 242.611. 

132 Id. 

24. Are certifications an appropriate 

way to promote compliance with the 

hedging exemption? Do certifications 

bring more accountability, or do they 

create compliance costs and therefore a 

barrier to entry? 

25. Is data currently available that 

could be used by regulators to monitor 

the use of the proposed floor member 

hedging exemption? Are there other 

approaches that would do more to 

enhance regulatory surveillance, protect 

investors, or ensure fair, orderly, and 

efficient markets? 

26. Are there other mechanisms the 

Commission could consider to monitor 

compliance with the floor member 

hedging exemption? If so, please 

explain. 

E. Regulation NMS Routing Exemption 

The Commission proposes to 

eliminate a portion of subparagraphs 

(b)(2) and all of subparagraph (c) from 

Rule 15b9–1, because both contain 

outdated references to the ‘‘Intermarket 

Trading System.’’ 126 ITS was a national 

market system plan (‘‘ITS Plan’’) 

operated by the national securities 

exchanges and NASD that required each 

participant to provide electronic access 

to its displayed best bid and offer to 

other participants and provided an 

electronic mechanism for routing 

orders, called commitments to trade, to 

access those displayed prices.127 This 

permitted ITS Plan members at each 

market to have limited access to the 

other markets for the purpose of 

avoiding trade-throughs 128 and locked 

markets.129 However, the ITS Plan was 

eliminated in 2007, when it was 

superseded by Regulation NMS.130

Accordingly, the Commission is 

proposing to eliminate the following 

language, which creates an additional 

exception to the de minimis allowance, 

from Rule 15b9–1 (b): ‘‘Or (2) through 

the Intermarket Trading System.’’ In 

addition, the Commission is eliminating 

in its entirety subparagraph (c) of the 

Rule, which defines the ITS as follows: 

‘‘(c) For purposes of this section, the 

term Intermarket Trading System shall 

mean the intermarket communications 

linkage operated jointly by certain selfregulatory organizations pursuant to a 

plan filed with, and approved by, the 

Commission pursuant to § 242.608 of 

this chapter.’’ 

Today, Rule 611 of Regulation NMS 

requires trading centers to establish, 

maintain and enforce policies and 

procedures reasonably designed to 

prevent trade-throughs in exchangelisted stocks, subject to certain 

exceptions.131 In general, Rule 611 

protects automated quotes that are the 

best bid or offer of a national securities 

exchange or Association.132 To facilitate 

compliance with Rule 611 of Regulation 

NMS, national securities exchanges 

have developed the capability to route 

orders through broker-dealers (many of 

which are affiliated with the exchanges) 

to other trading centers with protected 

quotations. 

As discussed above, the Commission 

understands that some broker-dealers 

today continue to limit their activities to 

exchange floors, and believes that Rule 

15b9–1 should continue to 

accommodate transactions away from 

the exchange of which they are a 

member that are necessary to comply 

with regulatory requirements. A floorbased member may at times seek to 

effect a transaction on the exchange at 

a price that would trade-through a 

protected quotation on another trading 

center. In such a case, the exchange 

would need to route the member’s 

order, through a routing broker-dealer, 

to that other trading center before it 

could execute any remainder of the 

floor-based member’s order on the 

exchange. Therefore, a broker-dealer 

may be required, as a necessary part of 

its business, to effect transactions 

otherwise than on the exchange of 

which it is a member as a consequence 

of the requirements of Rule 611 of 

Regulation NMS. 

The Commission preliminarily 

believes that transactions effected solely 

to comply with Rule 611 regulatory 

requirements should not require 

membership in an Association by a 

broker-dealer that otherwise limits its 

activities to an exchange of which it is 

a member. Accordingly, the 

Commission proposes to add the 

following language to create a second 

exemption from the requirement under 

proposed Rule 15b9–1(c) that a brokerdealer effect transactions solely on an 

exchange of which it is a member: ‘‘(2) 

a broker or dealer may effect 

transactions off the exchange resulting 

from orders that are routed by a national 

securities exchange of which it is a 

member, to prevent trade-throughs on 

that national securities exchange 

consistent with 17 CFR 242.611.’’ The 

Commission believes that permitting 

such routing only by a national 

securities exchange of which the brokerdealer is a member will provide the 

exchange with visibility into the routing 

of transactions by its members to other 

exchanges, and thus maintain the 

exchange’s ability to effectively oversee 

the entirety of its member’s activity. 

The Commission requests comment 

on all aspects of the proposed 

Regulation NMS routing exemption in 

Rule 15b9–1. In particular, the 

Commission seeks responses to the 

following questions: 

27. Is the proposed routing exemption 

necessary and appropriate? Why or why 

not? 

28. Is the scope of the proposed 

routing exemption sufficient to provide 

for all off-exchange transactions that 

might be effected by floor members as 

a necessary consequence of compliance 

with Rule 611 of Regulation NMS? If 

not, how should it be changed? 

29. Does the proposed routing 

exemption allow transactions beyond 

those necessary to comply with Rule 

611 of Regulation NMS? If so, is that 

appropriate and should it be narrowed 

or broadened? 

30. Are there other off-exchange 

transactions that a floor member might 

need to effect in order to comply with 

regulatory requirements? If so, please 

describe those transactions and the 

relevant regulatory requirements. 

III. Effective Date and Implementation 

The Commission recognizes that firms 

will require time to comply with Rule 

15b9–1 if the amendments are adopted 

in order to become a member of an 

Association, or modify the firm’s 

business practices to conform to the 

requirements of the Rule, as amended. 

As noted previously, FINRA is currently 

the only Association. To become a 

FINRA member, a broker-dealer must 

complete FINRA’s New Member 

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133See How to Become a Member, FINRA, 

http://www.finra.org/Industry/Compliance/

Registration/MemberApplicationProgram/

HowtoBecomeaMember/index.htm (last visited on 

March 9, 2015). 

134See NASD Rule 1010—Membership 

Proceedings, which sets out the substantive 

standards and procedural guidelines for the FINRA 

membership application and registration process. 

135See Section V.C. discussing the costs of 

joining FINRA. 

membership interview.133 The brokerdealer and its associated persons must 

comply with FINRA’s registration and 

qualification requirements.134 The 

amount of time that it takes to become 

a FINRA member would depend on a 

number of factors, including the nature 

of the broker-dealer’s business, the level 

of complexity or uniqueness of the 

firm’s business plan, the number of 

associated persons the firm employs, 

and whether the firm has an affiliate 

that is already a member of FINRA.135

The Commission understands, based on 

conversations with FINRA that, on 

average, the FINRA membership 

application process generally takes 

approximately four months. 

Alternatively, if the proposed 

amendments are adopted, a NonMember Firm not eligible for, or 

choosing not to rely on, an exemption 

may become a member of additional 

exchanges upon which it trades or 

otherwise modify its business model to 

conform with the proposed amendments 

to the Rule. The Non-Member Firm may 

also need to modify its systems or take 

other steps to achieve compliance. 

The Commission preliminarily 

believes that 360 days after publication 

in the Federal Register of any final rules 

that the Commission may adopt should 

provide firms enough time to comply 

with the amended Rule. Therefore, the 

Commission proposes that the 

compliance date for the proposed 

amendments to Rule 15b9–1 would be 

360 days after publication of the final 

rule in the Federal Register. The 

Commission solicits comment on the 

adequacy of this proposed 

implementation timeline. In particular, 

the Commission seeks responses to the 

following questions: 

31. Does 360 days after publication in 

the Federal Register provide firms with 

sufficient time to comply with the 

revised Rule? Would firms be in a 

position to comply with the revised 

Rule earlier than 360 days after 

publication? 

32. How long does the registration 

process with FINRA, should a firm 

decide to register, typically take? Please 

include the estimated time to prepare 

the application as well as the estimated 

time for FINRA to process the 

application. 

33. Do commenters believe that a 

longer or shorter period is appropriate 

to determine whether becoming a 

member of an Association is preferable 

to changing a firm’s business model to 

remain within the exemptions provided 

by the Rule, as amended (i.e., ceasing all 

off-exchange activity and becoming a 

member of each exchange on which the 

firm trades, or limiting the firm’s offexchange activity to comply with the 

floor member hedging exemption and/or 

NMS routing exemption)? 

34. How long does it typically take to 

complete the application process with a 

national securities exchange? Please 

include the estimated time to prepare 

the application as well as the estimated 

time for an exchange to process it. 

35. To the extent a firm intends to rely 

on one or more of the proposed 

exemptions, how long would it take 

such firm to make the required systems 

changes to comply? Are there other 

steps that would need to be taken to 

achieve compliance? If so, what is the 

estimated time to accomplish those 

steps? 

IV. General Request for Comments 

The Commission seeks comment on 

all aspects of the proposed amendments 

to Rule 15b9–1. Commenters should, 

when possible, provide the Commission 

with data to support their views. 

Commenters suggesting alternative 

approaches should provide 

comprehensive proposals, including any 

conditions or limitations that they 

believe should apply, the reasons for 

their suggested approaches, and their 

analysis regarding why their suggested 

approaches would satisfy the objectives 

of the proposed amendments. 

36. The Commission requests 

comment generally on whether 

narrowing or broadening the current 

exemption is appropriate. In particular, 

the Commission seeks comment on 

whether the fact that Non-Member 

Firms currently must use an Association 

member firm to report off-exchange 

trades gives an Association sufficient 

information and jurisdiction to 

effectively regulate the off-exchange 

market. Are there off-exchange 

transactions between two Non-Member 

Firms that occur that are not reported? 

37. The Commission requests 

comment on whether the current 

exemption should be eliminated 

entirely. What would be the benefits or 

drawbacks of doing so? 

38. Other than the proposed hedging 

exemption and Regulation NMS routing 

exemption, are there any other 

exemptions that the Commission should 

consider? 

39. Have transactions effected 

pursuant to the current Rule posed 

compliance issues in the past? If so, 

please describe in detail. 

40. In addition, the Commission is 

interested in data indicating how many 

entities rely either on Rule 15b9–1 in its 

current form, or exclusively on the 

statutory exception in Section 15(b)(8) 

of the Exchange Act. Reliance on Rule 

15b9–1 is currently self-effecting (i.e., 

does not require the reporting of such 

reliance to the Commission or any other 

regulatory authority). In lieu of the 

proposed amendments, should the 

Commission require broker-dealers 

relying on Rule 15b9–1 to report such 

reliance to the Commission or to the 

exchange of which the broker-dealer is 

a member? If so, what form should such 

reporting take and what information 

should be provided to the Commission 

or the exchange of which the brokerdealer is a member? If not, why not and 

what alternative means could be used to 

collect data about reliance on Rule 

15b9–1? 

41. If the Commission were instead to 

eliminate Rule 15b9–1 altogether, how 

many broker-dealers would: (i) Restrict 

their business to only those national 

securities exchanges of which they are 

a member; (ii) become members of other 

national securities exchanges; and/or 

(iii) become members of an Association? 

Would implementation of the proposed 

amendments have an effect on market 

liquidity? If so, please estimate that 

effect. Could broker-dealers that 

currently rely on the Rule respond to its 

elimination in other ways to avoid 

Association membership? If so, please 

explain. 

42. Should the Commission allow 

Non-Member Firms that conduct offexchange trading activity to remain 

exempt from membership in an 

Association? If so, why? Would 

membership by Non-Member Firms in 

multiple exchanges prove an efficient 

and effective substitute for Association 

membership? Should the level of offexchange activity affect the ability of a 

firm to be exempt from Association 

membership? Why or why not? 

43. Should the Commission require 

the exchanges to engage in joint plans 

to ensure that the on-exchange crossmarket activity of their members is 

effectively regulated? How might this 

improve the oversight of on-exchange 

trading activity? What problems or 

inefficiencies would relying on joint 

plans for the regulation of on-exchange 

trading activity by exchanges create? 

44. Is Association membership an 

efficient or effective approach for the 

regulation of firms that trade across 

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136 15 U.S.C. 78c(f). 

137 15 U.S.C. 78w(a)(2). 

138 Id. 

139See Section V.C. for further discussion of the 

difficulties in estimating market quality effects 

likely to result from the proposed amendments. 

140 15 U.S.C. 78c(4)(A). 

141 15 U.S.C. 78c(5)(A). 

142There were approximately 4,209 brokerdealers registered with the Commission as of March 

2015. 

143A firm that wishes to transact business upon 

an exchange without becoming a broker-dealer can 

do so by engaging a broker-dealer to provide market 

access and settlement services. While effecting 

transactions in the off-exchange market does not 

require registering as a broker-dealer, it does require 

obtaining the services of a broker-dealer to handle 

settlement at a minimum. 

144Based on December 2014 FOCUS data. 

145 Id. 

exchange? Are there more effective 

alternatives? 

45. Under the proposed amendments 

to the Rule, a Non-Member Firm that 

conducts no off-exchange trading, but 

trades on an exchange of which it is not 

currently a member, would, in 

accordance with Section 15(b)(8), have 

to either join an Association or become 

a member of each exchange upon which 

it trades. Should the proposed 

amendments be revised to provide an 

exemption from Section 15(b)(8) to 

permit such a Non-Member Firm, with 

no off-exchange trading, to remain 

exempt from membership in an 

Association and continue trading on 

exchanges of which it is not a member, 

so long as certain conditions are met, 

such as the exchange of which it is a 

member entering into appropriate 

contractual arrangements such that the 

exchange is in a position to effectively 

surveil all of the trading activities of 

that firm? 

46. Should the Commission consider 

other changes to Rule 15b9–1? If so, 

why? What specifically should be 

changed and how? 

V. Economic Analysis 

As discussed above, the Commission 

is proposing to amend Rule 15b9–1 to 

better align the scope of its exemption, 

in light of today’s market activity, with 

Section 15(b)(8) of the Exchange Act 

and the Commission’s original purpose 

in adopting Rule 15b9–1. Currently, a 

broker-dealer can engage in unlimited 

proprietary trading in the off-exchange 

market without becoming a member of 

an Association, so long as its proprietary 

trading activity is conducted with or 

through another registered brokerdealer. For a broker-dealer that trades 

electronically across a range of exchange 

and off-exchange venues, however, the 

individual exchanges of which the 

broker-dealer may be a member are not 

well-positioned to oversee the offexchange activity of the broker-dealer, 

as was previously discussed. The 

Commission preliminarily believes that 

this oversight role can best be fulfilled 

by an Association, which is the SRO 

intended and authorized by Congress to 

regulate the trading activity of offexchange market participants, monitor 

their financial and operational 

condition, and enforce their compliance 

with federal securities laws and 

Association rules. 

The 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, and is required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action would promote efficiency, 

competition, and capital formation.136

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.137

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.138

The Commission discusses below a 

number of economic effects that are 

likely to result from the proposed 

amendments. As discussed in detail 

below, many of the effects are difficult 

to quantify with any degree of certainty. 

Although the Commission is providing 

estimates of direct compliance costs 

where possible, the Commission also 

anticipates that broker-dealers affected 

by the proposed amendments, as well as 

competitors of those broker-dealers, may 

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.139

A. Baseline 

1. Regulatory Structure and Activity 

Levels of Non-Member Firms 

The Exchange Act governs the way in 

which the U.S. securities markets and 

its broker-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.’’ 140 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.’’ 141 The 

Commission oversees approximately 

4,209 broker-dealers, of which 

approximately 4,057 are members of 

FINRA, currently the only 

Association.142

Generally, any firm that interacts 

directly with a securities exchange must 

register with the Commission as a 

broker-dealer to gain direct access to the 

exchange. Consequently, there is 

diversity in the size and business 

activities of broker-dealers.143 Carrying 

broker-dealers hold customer funds and 

securities; some of these are also 

clearing broker-dealers that handle the 

clearance and settlement aspects of 

customer trades, including recordkeeping activities and preparing trade 

confirmations.144 However, during the 

fourth quarter of 2014, only 284 of the 

4,184 registered broker-dealers were 

classified as carrying or clearing brokerdealers. Thus, the majority of brokerdealers 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 an exchange floor 

broker; and the provision of liquidity to 

securities markets, which includes, but 

is not limited to, the activities of 

registered market makers. 

Broker-dealers are diverse in size as 

well as scope of activity. Most brokerdealers are small, with 67% of brokerdealers employing 10 or fewer registered 

individuals and only 4% of brokerdealers employing over 151 registered 

individuals.145 Although the majority of 

broker-dealers are small, there are a few 

very large broker-dealers as well. 

Further, while there are many registered 

broker-dealers, a small minority of 

broker-dealers controls the majority of 

broker-dealer capital and has the ability 

to affect the allocation of capital to 

liquidity provision. As of December 31, 

2014, the majority of broker-dealers 

each had total capital of less than 

$500,000, while the ten largest brokerdealers in terms of capital accounted for 

more than 53% of total broker-dealer 


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18052 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 

146 Id. 

147See supra note 77. Historically, these floor 

brokers had only incidental trading on exchanges of 

which they were not members, and limited offexchange trading activity. The background and 

history of Rule 15b9–1 are discussed in Section I. 

148See Form BD data for Non-Member Firms 

during March of 2015. Of the 125 Non-Member 

Firms, 77 Non-Member Firms disclose engaging in 

floor activities on a national securities exchange; 76 

firms disclose acting as a put and call broker or 

dealer or option writer; and 89 firms disclose 

trading securities for their own account. Other 

businesses cited by multiple Non-Member Firms 

include: National securities exchange commission 

business other than floor activities (6); making 

inter-dealer markets in corporate securities offexchange (5); selling corporate debt securities (2); 

dealing in government securities (4); and other 

business (18). 

Currently, a Non-Member Firm that is a member 

of a single exchange but is not engaged in floorbroker activity may engage in trading upon other 

exchanges using access provided by a broker-dealer 

that is an exchange member of the destination 

exchange. These single-exchange member NonMember Firms may also engage in off-exchange 

trading with or without the intermediation of a 

Member Firm. Under the proposed amendments, 

both of these activities would be disallowed except 

as outlined in the Floor Member Hedging 

Exemption (see Section II.D.) and the Regulation 

NMS Routing Exemption (see Section II.E.). 

149Most off-exchange interactions involve a 

Member Firm at some point in the order audit trail 

for routing, and therefore produce OATS data, 

although identification of the firm that submits the 

order is not required by OATS. Interactions 

between Non-Member Firms without the 

involvement of a Member Firm are possible and 

would not generate audit trail data, but the 

Commission believes these interactions are 

infrequent for two reasons. First, all ATSs are 

operated by Member Firms, so all orders submitted 

to ATSs are reported to OATS. Second, although 

two Non-Member Firms could theoretically interact 

on a Non-Member Firm operated single dealer 

platform, the Commission is unaware of any single 

dealer platform that is operated by a Non-Member 

Firm. Such a platform would be visible in OATS 

data as a routing and execution destination if it 

were accessed by Member Firms. Although it is 

possible that a Non-Member Firm could approach 

another Non-Member Firm directly to negotiate a 

transaction outside of an automated venue, the 

Commission believes large Non-Member Firms 

transact with each other almost exclusively through 

ATSs and do not seek each other out as trading 

partners. Further information about off-exchange 

trading outside of ATSs is provided by Tuttle, 

Laura, 2014, Over-the-Counter Trading: Description 

of Non-ATS OTC Trading in National Market 

System Stocks, available at http://www.sec.gov/

dera/staff-papers/white-papers/otc-trading-whitepaper-03-2014.pdf. 

150 Data provided by FINRA. This does not 

include activity submitted by firms not registered 

as broker-dealers, including data on buy-side 

activity because the data was screened to include 

only Non-Member Firms. 

151See supra note 84. 

152 Data provided by FINRA. This does not 

include activity submitted by firms not registered 

as broker-dealers, including data on buy-side 

activity. In the fourth quarter of 2014, 

approximately 46.42% of ATS orders from NonMember Firms included an exchange-issued 

identifier that allows identification of the NonMember Firm submitting an order. The set of ATS 

clients that are not FINRA members also includes 

substantial buy-side activity, but this analysis is 

limited to firms that are also registered brokerdealers: The 125 Non-Member Firms. 

Although the analysis here focuses on ATS 

activity, Non-Member Firms interact with Member 

Firms outside of ATSs as well, primarily on singledealer platforms. Across all off-exchange 

executions, in the fourth quarter of 2014, 3.26% of 

share volume (10.56% of dollar volume) was 

attributable to the trading of Non-Member Firms. 

153Although these 14 Non-Member Firms connect 

to ATSs directly without the assistance of another 

broker-dealer, the ATSs are operated by Member 

Firms and these orders are therefore permitted 

under the current rule. 

The Commission believes that these 14 NonMember Firms represent a subset of the largest NonMember Firms that actively trade across multiple 

exchanges and off-exchange and thus may not be 

representative of the broader set of 125 NonMember Firms. As such, estimates of these 14 firms’ 

ATS activity levels and the regulatory fees that the 

activity would generate exceed those expected from 

typical Non-Member Firms. 

154Non-Member Firms submitted 32.9 billion of 

the 66.8 billion ATS orders during the fourth 

quarter of 2014. ATSs reported Non-Member MPIDs 

for 15.3 billion of these Non-Member Firm orders. 

The Non-Member Firm most frequently identified 

as the source of ATS orders submitted 4.9 billion 

ATS orders (7.30% of all orders and 39.20% of all 

Non-Member Firm ATS orders for which a NonMember Firm MPID is reported). With the 

assumption that this firm also submitted 39.20% of 

the Non-Member Firm ATS orders to ATSs that do 

not report Non-Member Firm MPIDs, this firm 

would account for 19.31% of all ATS orders. 

ATSs generally provide the exchange-issued 

MPIDs of Non-Member Firms submitting orders 

either for all orders or for none of the orders 

received directly from Non-Member Firms. For 

purposes of our analysis, we assume that the 

proportion of orders submitted by individual NonMember Firms to ATSs that report identifiers is 

equal to that proportion for ATSs that do not report 

Non-Member Firm MPIDs. It is possible that some 

Non-Member Firms transact only in ATSs that do 

not report these identifiers to FINRA; if that is true, 

our estimate of the activity level of the 14 identified 

Non-Member Firms would be upwardly biased 

because we would attribute the ATS volume of the 

unidentified Non-Member Firms to those that have 

been identified. Furthermore, our estimate that 14 

Non-Member Firms connect to ATSs directly would 

be downward biased. It is also possible that the 

proportions of orders attributable to individual 

Non-Member Firms are materially different on 

ATSs that do not report Non-Member Firm 

identifiers, although any error introduced by this 

would likely not be directional. Additionally, some 

Non-Member Firms may submit orders to Member 

Firms that are then routed to ATSs or elsewhere offexchange. Such activity would cause us to 

underestimate the activity of these 14 Non-Member 

Firms within ATSs, although such activity would 

still be counted at the aggregate Non-Member Firm 

level. 

155Tuttle, Laura, October 2013, Alternative 

Trading Systems: Description of ATS Trading in 

National Market System Stocks, available at 

http://www.sec.gov/marketstructure/research/

capital, with each disclosing more than 

$10 billion in total capital.146

As of March 2015, 125 of the 

approximately 4,209 registered brokerdealers were not members of FINRA, 

currently the only Association. The 

Commission believes the majority of 

Non-Member Firms rely on the Rule’s 

exemption from Association 

membership.147 Because of the 

exclusion for proprietary trading, a 

broker-dealer that does not carry 

customer accounts is not required to 

join an Association, even when that 

broker-dealer has substantial offexchange trading activity. 

Non-Member Firms are diverse in 

their types and activities. Of the 125 

Non-Member Firms, 77 disclose 

engaging in floor activities on a national 

securities exchange, as reported on 

Form BD.148

There is significant diversity in the 

business models of Non-Member Firms. 

Some Non-Member Firms may limit 

their trading to a single exchange, while 

others trade on multiple venues 

possibly including off-exchange venues 

like ATSs. Some firms are significant 

contributors to both off-exchange and 

exchange volume. Because any offexchange activity that involves a FINRA 

member firm (‘‘Member Firm’’) 

generates certain audit trail data, FINRA 

and the Commission are able to quantify 

the aggregate off-exchange activity of 

Non-Member Firms.149 During the 

fourth quarter of 2014, there were 104.5 

billion orders reported in the offexchange market. Of these 104.5 billion 

orders, 36.9 billion (35.31%) were 

received from Non-Member Firms.150

Non-Member Firms submitted 44.99% 

of all orders within ATSs in the fourth 

quarter of 2014. 

Although the Commission can 

observe the aggregate off-exchange 

trading of Non-Member Firms, it is 

unable to quantify the off-exchange 

trading of all Non-Member Firms on an 

individual basis because Member Firms 

currently are not required to report the 

identifiers of Non-Member Firms with 

whom they transact to OATS.151

However, some Member Firms 

voluntarily report the exchange-issued 

identifiers of the Non-Member Firms 

with which they interact.152 Using this 

data, the Commission can estimate the 

ATS activity level of the 14 NonMember Firms that connected to ATSs 

directly without the intermediation of 

another broker-dealer during the fourth 

quarter of 2014.153 Based on this data, 

at least 19.31% of all ATS orders is 

attributable to the Non-Member Firm 

that was the most active in ATS orders 

during the review period.154 The least 

active of the 14 identifiable NonMember Firms has almost no order 

activity. In total, five of the 14 NonMember Firms are each responsible for 

1% or more of all orders sent directly 

to an ATS for the review period. 

The business of providing liquidity 

off-exchange is competitive. Offexchange equity trading occurs across 

many trading venues. In May 2012, 44 

ATSs actively traded NMS stocks, 

comprising 12.12% of NMS share 

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(revised March 2014). 

156Transaction volume off-exchange outside of 

ATSs includes internalization, in which a brokerdealer fills orders from its own inventory without 

interacting directly with an exchange. Tuttle, Laura, 

March 2014, OTC Trading: Description of Non-ATS 

OTC Trading in National Market System Stocks, 

available at http://www.sec.gov/dera/staff-papers/

white-papers/otc-trading-white-paper-03-2014.pdf. 

157OATS data suggests that Non-Member Firms 

do not supply off-exchange liquidity to Member 

Firms outside of ATSs and the Commission believes 

that Non-Member Firms rarely transact with each 

other outside of ATSs. See supra note 149. 

158See Section V.D.3 for discussion of SRO crossmonitoring capabilities. 

159The estimates include only Non-Member 

Firms that connect directly to at least one ATS that 

reports Non-Member Firm MPIDs in OATS. 

Consequently, some Non-Member Firms are not 

included in these estimates. Therefore, the 

estimates underestimate the importance of NonMember Firms to exchange-based activity in 

aggregate. 

160 Data from off-exchange markets and exchanges 

is matched on a firm-name basis in this analysis. 

It is possible that one firm that cannot be identified 

in the exchange data is present under a name that 

is not readily linked to the firm name cited in the 

off-exchange data. 

161 Data for Nasdaq-OMX is not broken down by 

exchange, but is instead aggregated at the holding 

company level. Exchange-level data was provided 

by BATS and NYSE. 

162 Data from Center in Research in Security 

Prices (CRSP). 

163See Section I.B. discussing the requirement for 

SROs to examine for and enforce compliance with 

the Exchange Act, and the rules and regulations 

thereunder. 

164A DEA is an SRO assigned by the SEC that has 

certain specific supervisory responsibility for a 

broker-dealer. The DEA usually performs financial 

and operations examination activities on behalf of 

all SROs of which the broker-dealer is a member, 

although SROs may also allocate other regulatory 

responsibilities under Rule 17d–2. See supra note 

69. These examinations, however, do not generally 

extend to compliance with trading rules imposed by 

other SROs; nor do they facilitate surveillance for 

activity across market centers. DEAs therefore 

cannot substitute for the surveillance of crossmarket and off-exchange trading provided by an 

Association. 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 whom FINRA does act as DEA. 

Under the proposed amendments, Non-Member 

Firms that join FINRA may or may not be assigned 

to FINRA for DEA supervision. A firm with a 

specialized business model focusing on a single 

exchange with floor activity may be able to 

continue trading off-exchange under the proposed 

floor member hedging exemption without joining 

FINRA. 

165Comprehensive reporting requirements for all 

Member Firms that trade off-exchange give FINRA 

information on market activity levels and market 

conditions off-exchange. Because most off-exchange 

venues do not disseminate information on the 

liquidity available in their systems, comprehensive 

information from all participants is necessary for 

FINRA to analyze and surveil the off-exchange 

market. See infra note 204 for a discussion of the 

off-exchange trading environment; see also Section 

I.B. for a discussion of the differing scope of 

exchange SRO and Association rule sets. 

dealers transacted a further 18.75% of 

NMS share volume off-exchange 

without the involvement of an ATS.156

Although many market participants 

provide liquidity within this market, 

Non-Member Firms are particularly 

active within ATSs, as discussed above. 

Although Non-Member Firms may trade 

in the Non-ATS segment of the offexchange market, the Commission 

preliminarily believes they rarely act as 

liquidity suppliers outside of ATSs.157

While some Non-Member Firms trade 

actively off-exchange, some of these 

firms also supply and demand liquidity 

actively on multiple exchanges.158 The 

Commission is able to identify the 

activity of 13 of the 14 Non-Member 

Firms identified as connecting directly 

with ATSs on exchanges operated by 

BATS, NASDAQ–OMX, and NYSE 

during May of 2014. The data show that 

these Non-Member Firms contribute 

substantially to exchange volume.159 On 

these exchanges, during May 2014, 

these 13 large Non-Member Firms that 

connect directly to ATSs participate in 

at least 17.25% of all exchange trading 

volume. The highest Non-Member Firm 

participation rate in the data is on 

BATS–Y, where 27.31% of trade volume 

involves Non-Member Firms that also 

connect directly to ATSs. The lowest 

participation rate is on NYSE, where 

5.54% of trading involves Non-Member 

Firms that connect directly with ATSs. 

One of the Non-Member Firms that 

connects directly with ATSs cannot be 

identified in exchange data.160 The 13 

Non-Member Firms that are observed 

trading on exchanges tend to trade 

across the majority of exchanges 

represented in the exchange data 

sample.161

The market for liquidity provision on 

equity exchanges is also competitive. 

For example, Nasdaq-listed equities, for 

which the Commission has relevant 

data,162 each had 13 to 80 market 

makers registered to provide liquidity 

on Nasdaq as of December 2014. The 

median Nasdaq-listed equity had 36 

registered market makers, and 95% of 

securities had 20 or more registered 

market makers. Because Nasdaq is not 

the only exchange trading its listed 

equities, these statistics underrepresent 

the number of firms in the market that 

provide liquidity in Nasdaq-listed 

equities. Although the Commission does 

not have readily available data to count 

the number of market makers in equities 

listed on other exchanges, the 

Commission preliminarily believes that 

the figures for Nasdaq-listed equities 

illustrate the magnitude of market 

makers in equities more generally. 

Additionally, the Commission notes that 

while the number of market makers 

represents the number of firms in the 

business of providing liquidity, it does 

not necessarily indicate whether each 

market maker is an active competitor. 

However, the Commission believes that 

many market makers actively compete 

to provide liquidity. The Commission 

currently lacks data to quantify the 

liquidity provision activity attributable 

to Non-Member Firms. 

2. Current Market Oversight 

The surveillance and regulation of 

each broker-dealer is dependent upon 

its individual SRO membership status. 

Each SRO that operates an exchange has 

responsibility for overseeing trading that 

occurs on the exchange it operates. 

Because of this, SROs that operate an 

exchange possess expertise in 

supervising members who specialize in 

trading the products and order types 

that may be unique or specialized 

within the exchange. This expertise 

complements the expertise of an 

Association in supervising crossexchange and off-exchange trading 

activity.163 Exchanges generally have 

not monitored trading that their 

members conduct on other venues. 

Approximately 68 Non-Member Firm 

broker-dealers are members of a single 

exchange that supervises their activity 

overall. Exchanges regulate trading by 

broker-dealers on their exchange and 

generally may focus examinations on 

the financial and operational 

requirements associated with their 

membership. These requirements share 

many commonalities across SROs, such 

as net capital requirements and books 

and records requirements. Because 

many broker-dealers are members of 

multiple SROs with similar 

requirements, one SRO is appointed as 

the broker-dealer’s DEA.164

All registered broker-dealers are 

required to join an Association unless 

they comply with Section 15(b)(8) of the 

Act or Rule 15b9–1. The vast majority 

of broker-dealers join an Association 

and, since there is currently a single 

Association, with the exception of NonMember Firms, broker-dealers are 

subject to relatively uniform regulatory 

requirements and levels of surveillance 

and supervision. The supervision by 

FINRA, which is currently the only 

Association, is more robust than that of 

individual exchange SROs because its 

rule set addresses its need to supervise 

a market that is fragmented across many 

trading venues and more opaque than 

exchange trading.165 Specifically, 

FINRA’s rule set has provisions related 

to business conduct, financial condition 


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166See supra notes 91–94 and accompanying text. 

167See Section I.A. for further discussion of the 

role of Associations in market oversight. 

168See Section I.B. for further discussion of the 

responsibilities of an Association. 

169See supra note 76. 

170 If the Commission approves the NMS Plan 

submitted by the SROs to create, implement, and 

maintain a CAT, the CAT would be able to provide 

the SROs and the Commission with such data on 

Non-Member Firms. See Exchange Act Release No. 

67457 (July 19, 2012), 77 FR 45721 (August 1, 

2012). 

171See generally FINRA Rule 7400 Series—Order 

Audit Trail System. 

172FINRA has RSAs with all exchanges operated 

by Intercontinental Exchange, Nasdaq-OMX, and 

BATS. Together, these exchanges accounted for 

99.6% of exchange-based share volume in Tape A, 

B, and C securities during October 2014, based on 

data available on the BATS Web site. See http://

www.batstrading.com/market_data/market_

volume_history/ (last visited March 9, 2015). 

173FINRA has proposed amendments to its rules 

pertaining to identification of Non-Member Firms 

in OATS data. See supra note 84. 

174TAF incurred for off-exchange activity for 

Non-Member firms would be unavoidable as the fee 

is currently structured. FINRA assesses it directly 

on FINRA members. TAF is discussed further in 

Section V.C.2.b. 

175Schedule A of the FINRA By-Laws outlines 

which transactions are subject to the TAF. 

Generally, equity sales both on and off-exchange are 

subject to the TAF unless the member is acting in 

the capacity of a specialist or market maker on the 

exchange where the transaction was effected. 

176See supra note 95. Under the current TAF 

schedule, Member Firms may realize some cost 

savings because they would no longer be assessed 

TAF when they buy shares from a Non-Member 

Firm off-exchange. This is discussed further in 

Section V.B.3. 

177 15 U.S.C. 78ee. 

and operation, and supervision that may 

differ materially from exchange SRO 

rule sets.166

The existing Association, FINRA, 

serves crucial functions in the current 

regulatory structure.167 FINRA has 

primary responsibility for overseeing 

off-exchange trading.168 Furthermore, 

FINRA provides cross-market trading 

supervision of broker-dealers that the 

exchanges currently are not wellpositioned to provide in light of the 

statutory framework that places 

responsibility for off-exchange trading 

with an Association. Exchanges 

generally do not have a detailed set of 

member conduct rules and nonexchange-specific trading rules and 

have limited access to data,169 thus 

allowing such broker-dealers and their 

personnel to conduct business under a 

less specific regulatory regime than 

FINRA members. On the other hand, 

FINRA has sought to establish a robust 

regulatory regime for broker-dealers, 

including broker-dealers conducting 

business in the off-exchange market, 

and developed surveillance technology 

and specialized regulatory personnel to 

provide surveillance, supervision, and 

enforcement of activity occurring offexchange. Consequently, the current 

regulatory structure achieves crossmarket and off-exchange supervision 

through the surveillance actions of 

FINRA and its examination of its 

members. 

Currently, Non-Member Firms 

transact heavily in the course of normal 

business activities within venues 

regulated by SROs of which they are not 

members. This is very different from 

when Rule 15b9–1 was first adopted. 

The Act provides for regulation of 

exchange trading by the exchanges 

themselves; it further provides for 

supervision of off-exchange trading by 

an Association. Although the Act 

provides a limited and targeted 

exception to Association membership 

requirements for broker-dealers, its 

approach to effecting supervision is 

relatively uniform: Broker-dealers must 

be members of the SROs that regulate 

the venues upon which they transact. 

For each trading venue, whether an 

exchange or the off-exchange market as 

a whole, the responsible SRO (an 

exchange SRO or FINRA) is obligated 

and empowered to fulfill its regulatory 

responsibilities through its authority to 

adopt rules, surveil the markets, 

examine its members’ activities and 

bring enforcement actions when 

necessary. To the extent that the current 

regulatory structure undermines this 

functional approach, the ability of SROs 

to fulfill their responsibilities to protect 

investors and promote fair and orderly 

markets may be compromised. 

Comprehensive supervision of crossmarket and off-exchange activity 

requires data on off-exchange activity, 

but this data for Non-Member Firms is 

often not readily available to 

regulators.170 FINRA’s rules require that 

nearly all Member Firms report order 

audit trail data daily.171 This data 

records the origination, receipt, 

execution, routing, modification or 

cancellation of every order a Member 

Firm handles, with limited exceptions 

for certain activities including marketmaking. Additionally, FINRA currently 

has RSAs with most exchanges 172 that 

provide FINRA with detailed data that 

often allow FINRA to comprehensively 

identify the market-wide activity of 

broker-dealers, and to surveil behavior 

for violative activity that might 

otherwise go undetected on an 

exchange-specific surveillance basis. 

However, a significant amount of 

activity remains missing from FINRA’s 

existing audit trail data (OATS) because 

it does not include the orders that 

otherwise would be reported by NonMember Firms if they were members, 

and does not identify executions as 

those of a broker-dealer. Non-Member 

Firm activity that involves a Member 

Firm (such as an ATS order or an order 

routed through a Member Firm) does 

appear in OATS, although the identity 

of the Non-Member Firm sending the 

order is not required to be reported.173

Furthermore, some off-exchange activity 

that does not involve a Member Firm 

(and thus creates no OATS data record) 

may be entirely unsurveiled by FINRA 

and possibly not subject to rules that 

were intended to universally govern offexchange activity. In particular, an offexchange trade between two NonMember Firms is not subject to FINRA’s 

audit trail and trade reporting rules. 

Because Non-Member Firms are not 

required to join an Association, they are 

not required to pay the costs of 

Association membership, which could 

be significant, especially for NonMember Firms with substantial trading 

activity. FINRA members currently pay 

a TAF for all equity sales transactions 

that are not performed in the firm’s 

capacity as a registered specialist or 

market maker upon an exchange. The 

Commission estimates that the annual 

TAF associated with ATS trading for 

some Non-Member Firms would be as 

high as $3.2 million per year.174

Additionally, a substantial portion of 

Non-Member Firms’ exchange-based 

activity may be subject to TAF as 

well.175 These estimates of TAF have 

substantial uncertainty. As discussed 

previously, the Commission believes 

that FINRA may need to consider 

revising its fee structure to reflect the 

business model of these firms and this 

may significantly affect their potential 

FINRA fee burden.176

Furthermore, FINRA currently cannot 

assess Non-Member Firms Section 3 fees 

for off-exchange trading. The Section 3 

fee is the second of two primary FINRA 

fees (the other being TAF) that are 

assessed upon each off-exchange sale by 

or through a FINRA member. Under 

Section 31 of the Act,177 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 offexchange trade, when possible. When 

the sell side of an off-exchange 

transaction is a Non-Member Firm and 

the seller engages the services of a 


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178The seller’s clearing broker may pass that fee 

on to the Non-Member Firm. 

179See supra notes 91–94 and accompanying text. 

180See Section V.C.1. 

181Changes to the exclusion for proprietary 

trading are discussed in Section II.C. Changes to the 

proposed floor member hedging exemption are 

discussed in Section II.D. 

182 15 U.S.C. 78o(b)(8). 

183Firms that do not connect directly may trade 

on ATSs through a Member Firm at much lower 

activity levels. For firms with very limited offexchange activity, ceasing off-exchange activity is 

likely to be less costly than joining an Association. 

The costs of joining FINRA are discussed in detail 

in Section V.C.2; for firms with very limited offexchange activity, it is unlikely that the profits 

generated from this activity would offset FINRA 

membership costs. However, for firms that generate 

profits from off-exchange activities that exceed 

FINRA membership costs, it may be less costly for 

these firms to join FINRA than to cease their offexchange activity. Firms with very low ATS activity 

are unlikely to directly connect to an ATS, instead 

accessing ATSs through a Member Firm. 

The Commission is unaware of any Non-Member 

Firms operating single dealer platforms upon which 

such firms could provide liquidity to orders routed 

by Member Firms outside of an ATS. 

184As previously noted, FINRA may need to 

consider reevaluating the structure of the TAF to 

assure that it appropriately takes into account the 

business model of certain Non-Member Firms that 

may join FINRA as a result of the proposed 

amendments. See supra note 95. The Commission’s 

analysis of TAF is based on current 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. Firms will also face additional 

fixed costs both to establish and maintain 

Association membership; those costs are discussed 

in Section V.C.2. 

clearing broker that is a Member Firm, 

FINRA can assess the Section 3 fee 

against the Member Firm clearing 

broker.178 When the seller is a NonMember Firm that self-clears, FINRA 

has no authority to assess the Section 3 

fee against the seller. In such case, 

FINRA will seek to assess the fee against 

the buyer, if the buyer includes a 

Member Firm counterparty or a Member 

Firm acting as clearing broker for a NonMember Firm buy side counterparty. 

Given that any firm that carries 

customer accounts is required to be a 

member of an Association, firms that 

represent the trading of the investing 

public may bear the fees that would be 

otherwise assigned to Non-Member 

Firms trading proprietarily in the offexchange market. These costs may be 

passed on to the investing public in 

whole or in part. Regardless of who 

ultimately bears the Section 3 fees, these 

Non-Member Firms may face lower offexchange trading costs than Member 

Firms due to the allocation of these fees. 

B. Broad Economic Considerations, 

Including Effects on Efficiency, 

Competition and Capital Formation 

As discussed above, the Commission 

is proposing amendments to Rule 15b9– 

1 to address the off-exchange trading 

activity that may not currently be 

subject to effective regulatory oversight 

that has developed with the advent of 

cross-market proprietary trading. In 

addition to the specific, individual 

benefits and costs discussed below, the 

Commission expects the proposed 

amendments to have several broad 

economic effects, including effects on 

efficiency, competition, and capital 

formation. These effects are described in 

this section. 

1. Effects on Regulatory Supervision 

Non-Member Firms are significant 

contributors to off-exchange order and 

trade activity, yet are not under the 

jurisdiction of an Association that 

supervises off-exchange trading activity. 

The Commission preliminarily believes 

the current exemption of Non-Member 

Firms from Association membership 

undermines the effectiveness of 

regulatory supervision. For example, 

reliance by Non-Member Firms on the 

Rule 15b9–1 exemption leaves FINRA 

charged with responsibility for the offexchange market without jurisdiction 

over broker-dealers that conduct a 

substantial amount of off-exchange 

trading activity. It also undermines the 

ability of an Association to apply a 

consistent set of conduct, supervisory, 

and other rules to off-exchange market 

participants, and to effectively surveil 

the trading activity of broker-dealers 

with a significant presence in the offexchange market.179

As discussed further below, the 

Commission believes the proposed 

amendments will have a beneficial 

effect on the efficiency of regulation of 

the equity markets.180 In particular, 

some broker-dealers are currently 

overseen by individual exchanges, 

which are not well-positioned to 

oversee the off-exchange and crossmarket activity of the broker-dealer. 

Under the proposal, these broker-dealers 

would be supervised by an Association 

that has this expertise. This 

improvement in regulatory oversight of 

the off-exchange market should achieve 

more uniform and effective regulatory 

supervision of off-exchange and crossexchange trading practices by brokerdealers. 

The Commission is aware that some 

of the 125 Non-Member Firms trade 

primarily on a single exchange in a 

floor-based capacity. For these firms, 

especially those with specialized 

business models that operate primarily 

on one exchange, their current exchange 

(not an Association) may be best 

equipped to provide efficient 

supervision. The Commission believes 

that many of these firms will not need 

to join an Association to comply with 

the proposed amendments. 

2. Firm Response and Effect on Market 

Activity 

Although Non-Member Firms could 

seek to comply with the proposed 

amendments in multiple ways, each 

route could involve changes to firms’ 

business models. Some Non-Member 

Firms limit their trading to exchanges of 

which they are members, and the 

Commission believes they do not trade 

off-exchange other than to hedge 

positions gained through floor broker 

activity. These firms will remain exempt 

from the requirement to become a 

member of an Association, if they 

comply with the Rule as proposed to be 

amended.181 Other firms will no longer 

be exempt, and will need to take action 

to comply with the amended rule. 

Under the revised Rule, a Non-Member 

Firm that trades off-exchange, or upon 

exchanges of which it is not a member, 

can comply in four ways. The first 

option would be to join an Association. 

This option does not require the NonMember Firm to restrict its current 

trading practices beyond those 

necessary to comply with the rules of 

FINRA. The second option would be to 

join all exchanges upon which the NonMember Firm wishes to trade, and to 

cease any off-exchange trading, other 

than off-exchange trading consistent 

with the floor-broker hedging 

exemption. Third, a Non-Member Firm 

could comply by trading solely upon 

those exchanges of which it is already 

a member, consistent with the statutory 

exception in Section 15(b)(8).182 Finally, 

a Non-Member Firm could cease trading 

equity securities. 

The changes Non-Member Firms 

make to their business model in order 

to comply with the amendments may 

affect competition in the market for offexchange liquidity provision. In 

particular, Non-Member Firms may be 

less willing to compete to provide 

liquidity off-exchange, decreasing offexchange liquidity. For example, NonMember Firms may choose to cease 

their off-exchange activity rather than 

join an Association—although it seems 

likely that firms that trade heavily in the 

off-exchange market may find it less 

costly to join an Association.183 In 

addition, Non-Member Firms that 

choose to join an Association may 

reduce their off-exchange trading 

because joining an Association would 

increase variable costs to trade in the 

off-exchange market, as these trades will 

incur TAF and possibly additional 

Section 3 fees.184 An increase in cost 


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185Non-Member Firms are likely to also reduce 

their off-exchange trading outside of ATSs, such as 

on single-dealer platforms. However, Non-Member 

Firms can only take (not make) liquidity on these 

platforms. It is possible that additional off-exchange 

liquidity may be available outside of ATSs as a 

result of the proposed amendments to Rule 15b9– 

1 due to a reduction in Non-Member Firm trading 

on single dealer platforms. 

186 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. See 

e.g., Mittal, Hitesh, Are You Playing in a Toxic Dark 

Pool? A Guide to Preventing Information Leakage, 

2008 ITG white paper, available at http://

www.itg.com/news_events/papers/ITGResearch_

Toxic_Dark_Pool_070208.pdf, and Dark Pools and 

Toxicity Assessment, 2014, EY White Paper, 

available at http://www.ey.com/Publication/

vwLUAssets/Dark_pools_and_toxicity_assessment/

$FILE/Dark%20pools%20and%20

toxicity%20assessment_FINAL_LR.pdf. Other 

industry participants describe a more benign role 

for automated trading firms as liquidity providers 

in ATSs. See High-Speed Traders Go Dark, 2012, 

Markets Media Commentary, available at http://

marketsmedia.com/high-speed-traders-go-dark/. 

187There is some evidence that proprietary 

electronic trading firms are net takers 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 Carrion, Al, 

2013, ‘‘Very fast money: High-frequency trading on 

the NASDAQ,’’ Journal of Financial Markets 16, 

680–711. Al Carrion currently serves as an 

Economic Fellow within the Division of Economic 

and Risk Analysis. Another study finds that 

electronic trading firms act as net liquidity 

suppliers during periods of extreme price 

movements. See Brogaard, Moyaert, Riordan, 

Shkilko and Sokolov, 2015, ‘‘High Frequency 

Trading and Extreme Price Movements,’’ working 

paper. 

188Currently, a Non-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 proposed elimination of the exclusion for 

proprietary trading, this activity would not be 

consistent with the proposed amendments, unless 

the floor member hedging exemption or Regulation 

NMS routing exemption applies. 

189These firms could unwind positions on other 

exchanges, but the cost to do so may be higher than 

if all liquidity, including off-exchange liquidity, 

were available. 

190 It is possible Non-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. 

191There is likely to be a corresponding 

underinvestment of capital somewhere else. 

192The Commission has considered whether it is 

possible to model this response using current data 

to estimate these effects. Even if CAT data were 

available today, the Commission believes it would 

not have sufficient information for this estimation 

because information on the daily and perhaps intraday change in committed capital levels is not 

available. Although the Commission has quarterly 

data on the net capital of broker-dealers, brokerdealers do not commit all of this capital to liquidity 

provision in equity markets. Furthermore, on a 

would reduce the profitability of offexchange trading and thus potentially 

reduce off-exchange trading. 

The removal of this liquidity could 

either improve or degrade execution 

quality on ATSs.185 To the extent that 

institutional investors transacting in 

ATSs are seeking institutional investor 

counterparties that are not proprietary 

trading firms for their transactions, the 

removal of Non-Member Firm liquidity 

may be seen by some institutional 

investors as improving liquidity quality 

within ATSs.186 It is also possible that 

reducing the activity of Non-Member 

Firms within ATSs may result in more 

ATS liquidity, if Non-Member Firms are 

acting as net takers of liquidity within 

these systems.187 Regardless, liquidity 

levels in ATSs may change. In addition, 

these firms may reduce their offexchange trading outside of ATSs such 

as on single-dealer platforms. It is 

possible that this will result in a transfer 

of volume from off-exchange venues to 

exchanges, but it is also possible that 

overall market trading volume will 

diminish if decreased volume from offexchange trading does not migrate to 

exchanges. 

Changes in business models for NonMember Firms may affect market quality 

on exchanges as well. In addition to 

trading extensively in the off-exchange 

market, many Non-Member Firms are 

among the most active participants on 

exchanges. Business model changes by 

these firms may lead to less exchange 

liquidity for several reasons. First, NonMember Firms that choose not to join an 

Association would no longer be able to 

rely on the rule and trade indirectly on 

exchanges of which they are not 

members.188 Second, Non-Member 

Firms that do not join an Association 

would no longer be able to access offexchange liquidity to unwind positions 

acquired on exchanges, except as 

outlined in the floor member hedging 

exemption. This may reduce their 

willingness to provide liquidity upon 

exchanges.189 Third, Non-Member 

Firms that choose to join an Association 

may be subject to additional variable 

costs (primarily regulatory fees) on their 

exchange-based trading as well as on 

their off-exchange trading.190 These 

firms may respond by trading less 

actively on exchanges. Finally, NonMember Firms may choose to cease 

trading equity securities 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. 

The Commission preliminarily 

believes that the proposed amendments 

are not likely to have an economically 

meaningful effect on direct capital 

formation (the assignment of financial 

resources to meet the funding 

requirements of a profitable capital 

project, in this case, the provision of 

liquidity to financial markets). However, 

the Commission believes that the 

changes in allocation of regulatory fees 

and more efficient supervision within 

the off-exchange market may result in 

improved efficiency of capital allocation 

by the financial industry. Currently, 

Non-Member Firms face lower 

regulatory costs and a lower degree of 

regulatory scrutiny of their off-exchange 

trading activity than Member Firms. 

While the Commission believes that this 

imposes certain costs on other market 

intermediaries and the investors they 

represent, there is another externality as 

well: Over-commitment of liquidity 

both to exchanges and the off-exchange 

market.191 This over-commitment is 

likely to have some positive effects on 

capital markets, 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 offexchange trades are typically priced 

with reference to quoted exchange 

prices. Adoption of the proposed 

amendments may reduce the capital 

commitment of Non-Member Firms to 

equity market liquidity provision. It is 

possible that in response current 

Member Firms may choose to commit 

additional capital to liquidity provision 

when the trading environment has more 

uniform regulatory requirements. These 

reallocations of capital may improve or 

degrade levels of liquidity, spreads and 

volatility measures on exchanges and 

within the off-exchange market. 

The magnitude of these competitive 

effects is impossible for the Commission 

to determine at this time for a number 

of reasons. First, these effects involve 

strategic decisions by Non-Member 

Firms that the Commission cannot 

predict, and a competitive response that 

the Commission lacks information to 

anticipate. Second, even if the 

Commission could predict the likely 

changes in capital commitment by 

market participants, the Commission 

lacks information on how capital 

commitment by financial firms maps 

into market quality measures such as 

spreads, levels of liquidity, and 

execution costs.192 Due to the 


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daily or more frequent basis, a liquidity provider 

may choose to fully or partially withdraw from the 

market for any reason. 

193This 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 

exists at the best price. 

194Participation rates of Non-Member Firms in 

exchange trading are discussed more fully in 

Section V.A.1. 

195See 15 U.S.C. 78o–3. 196See 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 ‘‘(3) . . . 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.’’ 

197See 15 U.S.C. 78o–3(b)(11). 

198See 15 U.S.C. 78o–3(b)(2). 

complexity of the economic relationship 

between capital commitment and 

market quality measures, and 

inadequate information on individual 

firm’s strategies, cost structures and 

likely competitive responses, the 

Commission cannot estimate the likely 

magnitude of these effects. 

3. Competition To Provide Liquidity Is 

Distorted by Regulatory Costs Borne by 

Only a Subset of Competitors, Member 

Firms 

Currently, Member Firms bear a 

number of costs not borne by NonMember Firms including a number of 

regulatory fees and indirect costs that 

are assessed or imposed upon Member 

Firms. These costs 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 potentially could be assigned to 

Non-Member Firms selling securities 

off-exchange. There are indirect costs of 

disparate regulatory regimes as well. For 

example, Member Firms bear costs of 

interacting with regulators to 

accommodate supervision, and must 

comply with the rules of an Association 

as well as rules adopted by the 

Commission. This inequality in 

regulatory requirements may distort 

competitive forces in the market and 

these potential distortions may be 

mitigated by the proposed amendments 

to Rule 15b9–1, to the extent that NonMember Firms join an Association and 

subject themselves to comparable fees 

and regulatory costs imposed on all 

other Member Firms. 

The existing differential regulatory 

burden of Member Firms and NonMember Firms may have consequences 

with respect to market quality both for 

exchange-based and off-exchange 

trading. For example, because NonMember Firms, ceteris paribus, 

currently face lower variable costs of 

trading compared to Member Firms, 

Non-Member Firms may be able to 

provide liquidity at a lower cost than 

Member Firms. Because a low-cost 

competitor may be able to quote at a 

price superior to that of his competitors, 

investors may incur lower transaction 

costs than if Non-Member Firms faced 

the same costs as 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-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 will execute at an 

inferior price.193 If depth at 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 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. Because the Commission 

does not have access to consolidated 

audit trail data, the Commission lacks 

data to quantify the percent of inside 

depth provided by Non-Member Firms 

and the frequency with which only 

Non-Member Firms are quoting the best 

price on an exchange. However, the 

high participation rate of Non-Member 

Firms in exchange trading suggests they 

provide a significant fraction of 

exchange liquidity.194

4. Competitive Effects on Off-Exchange 

Market Regulation 

Currently, FINRA is the only 

Association. It is possible, however, for 

new Associations to enter the regulatory 

oversight market and compete with 

FINRA. The proposed amendments to 

Rule 15b9–1 may create incentives for a 

new Association (or Associations) to 

form. The large Non-Member Firms 

have commonalities in business models, 

for example, they typically do not carry 

customer accounts. They may consider 

joining an Association concurrently. 

Because these firms collectively conduct 

a significant portion of off-exchange 

volume, the creation of an Association 

tailored to these firms may be 

economically viable. 

To be registered as an Association, in 

addition to requirements that parallel 

the requirements to be a national 

securities exchange, an 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.195 Additionally, for example, the 

Association must permit any registered 

broker-dealer that meets the 

Association’s qualification standards to 

become a member,196 and it 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.197 The 

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.198

The ability to form an Association is 

characterized by barriers to entry. A 

new 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 may also incur substantial 

costs, including personnel, training, 

travel, and other costs to provide for an 

effective surveillance and supervision of 

the off-exchange market. Indeed, as 

previously discussed, the only existing 

Association, FINRA, has resources and 

demonstrated expertise that enable it to 

surveil and supervise the off-exchange 

market. Duplication of that 

infrastructure could be costly for a new 

Association. 

The proposed amendments may alter 

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. If 

adopted, the amendments would bring 

nearly all off-exchange trading under 

the jurisdiction of an Association, 

including the trading of firms that 

currently are not members of an 

Association (Non-Member Firms). If 

these firms join the only existing 

Association, FINRA, an Association 

newly formed after this point may have 

increased difficulty attracting the 

members needed to support the high 


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199Some limitations on Association membership 

or operations would require exemptive relief for the 

Association to register with the Commission. 

200See Section 19(g) and Section 19(h) of the 

Exchange Act. 

201Non-Member Firms that provide liquidity on 

multiple exchanges and trade heavily off-exchange 

are unlikely to be small in terms of net capital, and 

are not low trading volume firms by definition. 

However, as discussed in Section V.A.1, many NonMember Firms are small in terms of net capital and 

may be members of a single exchange. Such firms 

are more likely to have a floor-brokerage business 

model, or have limited exposure to off-exchange 

markets. Such firms would 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 floor member 

hedging exemption to continue their limited offexchange trading related to floor brokerage 

activities. 

202The diversity of Non-Member Firms is 

discussed in Section V.A.1. 203See Section I. 

fixed-costs associated with forming an 

Association because every broker-dealer 

that participates in the off-exchange 

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 proposal results in more 

firms becoming members of the existing 

Association, a new Association could 

face increased difficulties attracting 

members in the future. 

The proposed amendments do, 

however, temporarily lower the barriers 

to entry for a competing Association. If 

these amendments are adopted, a 

number of firms with similar business 

models and substantial off-exchange 

volume could contemplate Association 

membership concurrently. This may 

provide the incentive to create and 

tailor a new Association to specific 

business models of these firms. 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 may lower the costs of 

forming an Association and alter the 

barriers to entry.199

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 would have 

incentives to reduce fees to attract 

members. This could result in cost 

savings to broker-dealers. Second, a new 

Association could innovate to develop 

different surveillance and supervision 

methods that could be more efficient 

than FINRA’s methods. 

Competition among Associations 

could also entail substantial costs. If a 

new Association were to form, the 

necessary regulatory infrastructure 

including Information Technology 

(‘‘IT’’) systems and personnel would 

need to be duplicated in the new 

Association. If the market for 

Associations is characterized by 

economies of scale, aggregate costs for 

the same level of regulation would be 

higher in a market with two 

Associations than in a market with a 

single Association. These additional 

costs would ultimately be borne by 

Associations’ broker-dealer members. 

Second, Associations might compete on 

the basis of providing ‘‘light touch’’ 

regulation, in essence surveiling 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.’’ 200

C. Consideration of Costs and Benefits 

This section discusses costs and 

benefits of the proposed amendments. 

While the Commission has attempted, 

where possible, to provide estimated 

quantifiable ranges, both costs and 

benefits are difficult to quantify for this 

proposal for a number of reasons. First, 

market participants are heterogeneous 

in their type, existing exchange 

memberships, and activity level in the 

off-exchange market. Consequently, 

compliance costs will vary across firms 

in a number of dimensions. Second, 

estimating costs is complicated by the 

fact that Non-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 upon adoption 

of the proposed amendments, but the 

Commission lacks data to identify those 

firms with certainty.201 At the other end 

of the spectrum, the minority of NonMember Firms that are large and 

contribute significantly to both 

exchange and off-exchange trading are 

unlikely to remain exempt.202 For the 14 

large firms that connect directly to 

ATSs, the Commission believes that all 

will lose their exempt status, but cannot 

predict how those firms will seek to 

comply with the proposed amendments. 

The Commission is unable to more 

precisely quantify the number of NonMember Firms that will lose their 

exemption from Association 

membership upon adoption of the 

proposed amendments because it is 

unable to estimate the level of offexchange trading for the majority of the 

125 Non-Member Firms. OATS 

reporting rules do not require Member 

Firms to disclose the identities of 

broker-dealers that submit orders to a 

Member Firm, making it infeasible to 

more precisely estimate non-ATS offexchange trading for Non-Member 

Firms. 

Quantifying costs is further 

complicated because Non-Member 

Firms do not report order audit trail 

data. It is difficult to measure the 

trading of individual firms, although 

their activity as a group is observable 

within audit trail data. Consequently, 

the Commission can measure the 

approximate overall contribution of 

Non-Member Firms to off-exchange 

volume, but cannot fully partition that 

volume across Non-Member Firms. 

Some firms with substantial offexchange trading activity may choose to 

change their business models rather 

than join an Association. If such firms 

ceased off-exchange activity, they would 

remain outside the supervision of an 

Association, and their decision to 

change business models may affect 

market quality both on and offexchange. The Commission does not 

have ready access to statistics on the 

liquidity provision of Non-Member 

Firms on and off exchanges. As such, 

the Commission cannot quantify the 

potential changes in transaction costs, 

even under broad assumptions about 

how Non-Member Firms will change 

their business models. This is discussed 

further in Section V.B.2. 

The overall benefits of the proposed 

amendments relate to more 

comprehensive and uniform 

surveillance of off-exchange activity by 

the regulator best positioned to oversee 

such activity. The benefits the 

Commission anticipates from the 

amendments are largely qualitative and 

by their nature difficult to measure. 

1. Benefits 

As discussed above,203 some of the 

firms using the existing Rule 15b9–1 

exemption are significant participants in 

overall off-exchange market volume. 

Thus, a substantial share of off-exchange 

volume is conducted outside of the 

regulatory jurisdiction of an Association 

that has primary responsibility for 

overseeing off-exchange activity. 


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204The off-exchange market is diverse and less 

transparent than exchanges. An exchange typically 

has a single matching engine for a given security 

and a limited number of order types that interact 

to create transactions while disseminating quote 

information publicly. The off-exchange market 

encompasses over 40 ATS matching engines while 

more than half of off-exchange volume occurs 

outside of ATSs with transactions reported by more 

than 200 market participants. Only a few of these 

ATS venues disseminate quote information. 

Surveillance and oversight of the off-exchange 

market requires proprietary data from thousands of 

market participants, and regulatory personnel with 

knowledge of the institutional detail of the 

workings of dozens of trading venues. At present, 

only FINRA possesses those resources. Further 

detail on off-exchange market trading is provided 

by Tuttle, Laura, 2014, Over-the-Counter Trading: 

Description of Non-ATS OTC Trading in National 

Market System Stocks, available at http://

www.sec.gov/dera/staff-papers/white-papers/otctrading-white-paper-03-2014.pdf. 

205See supra Section I.B. 

206See CAT Release, supra note 86. 

207See supra note 170. 

208See Section V.B.3. 

209The largest contributor to the estimate of 

implementation and ongoing costs is the cost of 

OATS reporting. Estimates for OATS reporting costs 

are taken from the CAT NMS Plan and relate to 

implementing CAT reporting, which is expected to 

be more complex and have more stringent 

requirements related to technology, such as more 

stringent clock synchronization, than OATS 

reporting requires. Consequently, the Commission 

believes these likely are overestimates of actual 

costs firms will face to implement OATS reporting. 

See infra note 221 for further information on CAT 

NMS Plan cost estimates. Each of the 14 firms is 

assumed to have implementation costs of 

$3,160,000 to initiate OATS reporting, $82,500 in 

legal consulting costs, and an application fee 

ranging from $7,500 to $12,500 depending on the 

number of registered persons. The Commission 

derived these estimates from the CAT NMS Plan. 

See infra note 221 and accompanying text for 

qualifiers on these estimates. 

210Medians are used where possible. For OATSrelated costs, median values are zero, so averages 

are used. This data is discussed further in note 219, 

infra. Cost estimates are reported as ranges for legal 

consulting and compliance work; for these 

estimates, the midpoint is used. 

211TAF is underestimated because it accounts for 

only ATS volume. See infra note 231 and 

accompanying text. This TAF cost also represents 

a transfer from current Non-Member Firms to 

Continued 

Association membership would 

supplement the oversight of the 

exchanges, which typically do not 

examine the off-exchange activity of 

their members. This would further assist 

the Commission in obtaining a more 

complete picture of the activity that 

occurs on ATSs and elsewhere in the 

off-exchange market by entities that are 

not currently members of an 

Association. Investors and 

intermediaries benefit when a 

specialized expert regulates and 

oversees the off-exchange market.204

Investors participating in the offexchange market currently do not fully 

realize the benefits of such expertise 

and regulatory oversight. 

As discussed above,205 the 

Commission preliminarily believes the 

inclusion of more Non-Member Firms in 

an Association would improve such 

Association’s ability to supervise crossexchange trading activity. This would 

enhance regulators’ ability and— 

through the information FINRA shares 

with the Commission—the 

Commission’s ability to effectively 

oversee regulation of trading on 

multiple markets and of financial 

products. 

The Commission also preliminarily 

believes that the proposed amendments 

to Rule 15b9–1 would improve 

supervision of Non-Member Firms. 

FINRA, currently the only Association, 

has substantial experience and expertise 

from overseeing a large number of 

broker-dealers. This makes FINRA’s 

potential regulation of Non-Member 

Firms with off-exchange or cross-market 

trading activity particularly efficient. 

The Commission preliminarily 

believes that this proposal provides 

significant benefits even in the event 

that the Commission approves the CAT 

NMS Plan.206 The CAT eventually may 

address the regulatory audit trail data 

deficiencies discussed previously,207

but the CAT will not address FINRA’s 

lack of jurisdiction over Non-Member 

Firms participating in the off-exchange 

markets, which FINRA is charged with 

overseeing, and the need for that 

enhanced oversight. 

While current members of an 

Association would not be directly 

affected by this rule, they would benefit 

by having a more level playing field in 

terms of their regulatory requirements 

relative to Non-Member Firms. 

Currently, competition in liquidity 

provision in equity markets is distorted 

by inequalities in regulatory 

requirements.208 With more uniform 

regulatory requirements and oversight, 

firms may compete more equitably to 

supply liquidity both on exchanges and 

off-exchange. 

2. Costs 

The proposed amendments, by 

narrowing the existing exemption, 

would result in broker-dealers that no 

longer qualify for the exemption having 

to comply with Section 15(b)(8) by 

either limiting their trading to 

exchanges of which they are members or 

joining an Association. Under the 

proposed amendments, therefore, NonMember Firms that choose to continue 

any off-exchange activity will be faced 

with choices that would involve 

corresponding costs. For example, NonMember Firms may incur costs related 

to membership in an Association or 

costs necessitated by additional 

exchange memberships. Additionally, 

some Non-Member Firms may incur the 

costs of losing the benefits of trading in 

the off-exchange market if they decide 

not to join an Association. 

Most of the costs incurred in joining 

an Association and maintaining 

membership therein are dependent on 

firm characteristics and activity level. 

Furthermore, the Commission believes 

that some Non-Member Firms may 

comply by ceasing their off-exchange 

trading activity, avoiding many of these 

costs but forgoing the opportunity to 

trade profitably in some venues. With 

certain assumptions, the Commission 

has attempted to estimate direct 

compliance costs that a Non-Member 

Firm is likely to face to comply with the 

proposed amendments. The estimate 

applies to the 14 Non-Member Firms 

that connect directly to ATSs; smaller 

firms that choose to join an Association 

should face lower costs because they 

have less revenue and trading volume 

that would be subject to GIA, TAF and 

Section 3 fees. The 14 Non-Member 

Firms that connect directly to ATSs, 

assuming that trading volumes and 

gross income levels remain unchanged, 

would face implementation costs of 

approximately $3.3 million per firm, 

with ongoing annual costs ranging from 

about $2.3 million to $23 million 

depending on the firms’ off-exchange 

trading volume.209 Cost estimates (one 

time and annual) are broken down in 

the following tables and are discussed 

in detail below: 

TABLE 1—MEDIAN OR AVERAGE FIRM

IMPLEMENTATION COSTS

Cost Median 

or average 210

Application to join FINRA ..... $7,500 

Implement OATS reporting ... 3,160,000 

Legal consulting .................... 82,500 

Total ............................... 3,250,000 

TABLE 2—MEDIAN OR AVERAGE FIRM

ONGOING ANNUAL COSTS 211

Cost Median 

or average 

OATS reporting ..................... $2,280,300 

Gross Income Assessment .. 113,000 

Trading Activity Fee .............. 40,000 

Personnel Assessment ......... 0 

Section 3 fee ........................ 212,000 

Compliance work .................. 60,000 

Total ............................... 2,705,300 

If all 14 of those Non-Member Firms 

that connect directly to ATSs were to 


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current Member Firms. 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. 

212See supra note 209 and infra note 221 related 

to OATS reporting costs derived from the CAT NMS 

Plan. The total cost calculation assumes range 

midpoint costs for FINRA application, legal 

consulting, and compliance work, as well as 

maximum costs for implementation of OATS 

reporting. GIA, TAF, and Section 3 fees are 

calculated using firm share and dollar volume 

activity estimates from FINRA data discussed 

further in Section V.A.1. 

213The data provided to the Commission by 

FINRA describes the aggregate ATS activity level of 

all 125 Non-Member firms. Further firm-level data 

for the 14 firms that directly connect to ATSs can 

be inferred using exchange MPIDs that are reported 

by some ATSs. Because these 14 direct-connecting 

firms account for the majority of Non-Member Firm 

ATS activity, the Commission believes that the 111 

remaining firms have much lower ATS (and 

presumably other off-exchange) activity levels. 

Since transacted volume is the primary driver of the 

variation in costs across firms that join FINRA, the 

Commission believes that the remaining 111 firms 

will face far lower costs if they choose to join 

FINRA. 

214The Commission recognizes that Non-Member 

Firms would incur compliance costs on an initial 

and ongoing basis to comply with the proposed 

amendments. See Section V.C.2.a. The Commission 

does not aggregate these costs across all NonMember Firms because the Commission does not 

have necessary information about the majority of 

the Non-Member Firms and expects that costs 

would vary widely across firms. Where possible, 

however, the Commission has provided estimates 

based on a subset of large firms on which the 

Commission has sufficient information. The 

Commission expects that smaller firms likely will 

face lower costs. 

215See FINRA By-Laws, Schedule A, Section 4. 

216 Id. 

217Based on current FOCUS data, the 

Commission believes no Non-Member Firm has 

more than 100 registered representatives. 

218See FINRA Rule 7400 Series—Order Audit 

Trail System. 

219Pursuant to Rule 613 under the Exchange Act, 

the SROs have submitted a plan to eliminate 

existing rules and systems that will be rendered 

duplicative by the CAT. 17 CFR 242.613(a)(1)(ix). 

To the extent that OATS is rendered duplicative by 

CAT, the CAT NMS Plan proposes its elimination, 

and the Commission approves the CAT NMS Plan, 

the OATS system may eventually be eliminated. If 

this occurs, the costs of OATS reporting to NonMember Firms may cease, but may be supplanted 

by other costs related to order and transaction 

reporting requirements under the CAT NMS Plan. 

220The CAT NMS Plan proposal discusses OATS 

reporting requirement. These requirements include 

having revenue of less than two million dollars. The 

Commission believes that large Non-Member Firms 

would not qualify for OATS reporting exemptions, 

were the Commission to approve the CAT NMS 

Plan as submitted on February 27, 2015. See CAT 

NMS Plan, available at http://catnmsplan.com/

web/groups/catnms/@catnms/documents/

appsupportdocs/p602500.pdf. 

221Costs estimates are the sum of hardware/

software costs, full time employee costs, and third 

party/outsourcing costs for firms that do not 

currently report to OATS. Within these firms, 

median implementation and annual ongoing costs 

were estimated at zero. The CAT NMS plan 

discusses interpretation of the zero medians, saying 

‘‘It is the participants’ understanding that this is 

likely due to current operational practices among 

broker-dealers that do not differentiate between 

technology and headcount costs that support 

business functionality and regulatory reporting.’’ 

Consequently, the Commission believes these 

estimates do not reflect the opportunity costs 

associated with assigning employees to regulatory 

reporting tasks instead of other tasks they could be 

performing. See the amended CAT NMS Plan, 

available at http://catnmsplan.com/web/groups/

catnms/@catnms/documents/appsupportdocs/

p602500.pdf. 

join FINRA, the aggregate cost of the 

proposal for these firms would be $42.5 

million in implementation costs and 

ongoing aggregate annual costs of $85.2 

million, with the majority of the costs 

related to implementing OATS 

reporting.212 While the Commission is 

unable to aggregate the costs of the 

proposal for the remaining 111 firms, 

the Commission believes that the 

aggregate costs for the subset of 14 

represent the majority of the aggregate 

costs, even assuming that all 125 firms 

will join FINRA.213

a. Costs of Joining an Association 214

Based on discussions with FINRA, 

currently the only Association, and 

industry participants, the Commission 

preliminarily believes that the direct 

compliance costs on Non-Member Firms 

of joining FINRA are composed of the 

FINRA membership application fees, 

costs associated with adapting IT 

infrastructure for regulatory data 

reporting requirements, and any legal or 

consulting costs necessary for 

effectively completing the application to 

be 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 

$55,000.215 The initial membership fee 

for FINRA is $7,500 for firms with ten 

or fewer representatives registered with 

FINRA and $12,500 for firms with 

eleven to one hundred representatives 

registered with FINRA.216 Based on its 

knowledge of the size and business 

models of Non-Member Firms, the 

Commission preliminarily believes that 

most Non-Member Firms would not 

incur FINRA application fees exceeding 

$12,500.217

Because most FINRA members have 

OATS reporting obligations, NonMember Firms that choose to join 

FINRA will incur costs related to 

initiating and maintaining data 

reporting.218 Costs to initiate and 

maintain OATS reporting 219 will vary 

widely among firms, depending on 

many factors including current IT 

infrastructure, complexity, and 

affiliation with a firm that already 

reports OATS data. While we are unable 

to quantify these costs precisely, one 

point of reference for the possible costs 

associated with OATS reporting 

obligations is the CAT NMS Plan, that 

provides estimates of these costs for 

reporting CAT data. There are 

limitations, however, to those estimates 

in this context in that CAT is an order 

audit system that will be significantly 

more complex and larger in scope than 

OATS.220 Because the projected scope 

of CAT exceeds substantially the scope 

of OATS reporting, and implementation 

of CAT reporting is expected to include 

technical requirements such as more 

stringent clock synchronization 

requirements than OATS, the 

Commission believes these estimates 

provide (at best) an upper-bound for 

OATS reporting costs. Furthermore, 

Non-Member Firms that are members of 

NASDAQ or NYSE are already required 

to produce OATS data and report it to 

FINRA upon request. Consequently, 

implementation costs likely overstate 

the costs these firms would face in 

initiating OATS reporting because the 

Non-Member Firms may have already 

established some of the necessary 

infrastructure. In addition, the 

Commission recognizes that the CAT 

NMS Plan estimates are based on 

voluntary survey responses by a small 

number of broker-dealers. Finally, the 

CAT NMS Plan has not yet been 

published for comment. Nevertheless, 

the Commission believes that those 

estimates give a sense of the potential 

magnitude of initiating OATS reporting. 

The CAT NMS Plan details cost 

estimates for two types of brokerdealers. The first type already reports 

OATS data; the second type does not. 

The Commission focuses on costs for 

large firms that do not currently report 

OATS data. In these estimates, the 

average large firm estimated CAT 

implementation costs are approximately 

$3,160,000; average implementation 

costs for a small firm are estimated at 

approximately $131,200. The average 

large firm estimated annual CAT 

reporting costs are $3,160,000 annually; 

average small firm reporting costs are 

$121,200.221 As discussed previously, 

these are, at best, upper-bounds on 

OATS reporting costs because of 

differences in complexity and technical 

requirements for OATS and CAT 

reporting. 

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 


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222There are additional fees associated with 

maintaining an Association membership. There is 

an annual Personnel Assessment fee ranging from 

$130 to $150 per employee that applies to 

principals or representatives in the FINRA 

member’s organization. See FINRA By-Laws, 

Schedule A, Section 1(e). Based on 2014 FOCUS 

reports, the number of registered representatives of 

Non-Member Firms that connect directly to ATSs 

ranges from 0–91, with an average of 18 and a 

median of 0. The Commission estimates that the 

average Non-Member Firm would incur a Personnel 

Assessment fee of no more than $2,520, and the 

median Non-Member Firm would incur a Personnel 

Assessment fee of $0. The Commission further 

estimates that the maximum Personnel Assessment 

fee that one of these Non-Member Firms would 

incur would be $11,830. There are also additional 

continuing education and testing requirements 

which will impose costs upon firms joining an 

Association. Additionally, there are de minimis fees 

(branch registration fee and system processing fee, 

among others). See FINRA By-Laws, Schedule A. 

223 Id. For example, FINRA imposes a Gross 

Income Assessment as follows: (1) $1,200 on a 

Member Firm’s annual gross revenue up to $1 

million; (2) a charge of 0.1215% on a Member 

Firm’s annual gross revenue between $1 million 

and $25 million; (3) a charge of 0.2599% 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. Id. 

224See FINRA By-Laws, Schedule A, Section 2. 

See also FOCUS Report Form X–17A–5, Part II and 

IIA. 

225Based on 2012–2014 FOCUS data. 

226 ($1,200 for the first $1 million of revenue) + 

(0.1215% × annual revenue greater than $1 million 

up to $25 million) + (0.2599% × annual revenue 

greater than $25 million up to $50 million) + 

(0.0518% of annual revenue greater than $50 

million up top $100 million) + (0.0365% of annual 

revenue greater than $100 million to $5 billion). As 

discussed previously, Non-Member Firms vary in 

size. GIA for large firms used in these calculations 

(the 14 that connect directly to ATSs), is anticipated 

to be far larger than for the 111 remaining NonMember Firms. See FINRA By-Laws, Schedule A, 

Section 1(c). 

227See FINRA By-Laws, Schedule A, Section 1(b). 

228See supra notes 95 and 184. 

229Some Non-Member Firms may trade on ATSs 

indirectly using the services of a Member Firm. The 

Commission cannot identify the magnitude of these 

firms’ trading on an individual basis because NonMember Firms are not required to be identified in 

Member Firms’ OATS data. The Commission thus 

cannot estimate the TAF that these firms would 

incur as FINRA members. 

230These 14 firms do not represent typical NonMember Firms: they represent the largest of the 

Non-Member Firms in terms of trading volume. 

Consequently, the median TAF discussed here far 

exceeds what the majority of Non-Member Firms 

would pay if they were to join FINRA. 

231Estimated TAF does not include any TAF 

related to firm’s exchange-based trading activity, or 

off-exchange activity that occurs outside of an ATS. 

If a firm’s activity on an exchange is related to 

normal market making operations, the activity does 

not incur TAF. The Commission is unable to 

estimate the proportion of these firms’ exchange 

trading that would incur TAF because the 

Commission does not have information on what 

proportion of Non-Member Firm exchange activity 

would qualify for exemption from TAF fees under 

FINRA By-Laws. Because other elements of the TAF 

are not included in this calculation, it 

underestimates the actual TAF that firms would 

incur if they joined FINRA. The magnitude of the 

underestimation may be significant, but firms that 

join FINRA may be able to reduce their TAF cost 

by registering as Market Makers upon additional 

exchanges. (TAF is not assessed for certain trades 

related to registered market-making. See FINRA By 

Laws, Schedule A, Section (1)(b)(2)(F).) Estimates of 

TAF are based on the percentage of ATS orders 

received by Member Firms that operate an ATS and 

report the exchange-issued MPIDs of Non-Member 

Firms that place orders within that system. The 

calculation assumes that these proportions are 

representative of the trading of Non-Member Firms 

on all ATSs, and that the orders placed by these 

firms are equally likely to be executed within ATSs. 

It also assumes that half of all executed volume is 

sell volume, which incurs a TAF. The estimated 

TAF is equal to estimated sell volume × $0.000119. 

The $0 minimum is associated with a firm that has 

almost no ATS volume. 

be a member of FINRA. Some firms may 

choose to perform this legal work 

internally while others may use outside 

counsel for the initial membership 

application. In making this choice, NonMember 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. 

Based on conversations with industry 

participants that assist with FINRA 

membership, for Non-Member Firms 

that choose to employ outside counsel 

to assist with their FINRA membership 

application, the cost of such counseling 

ranges from approximately $40,000 to 

$125,000. Factors affecting the specific 

costs 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. 

b. Costs of Maintaining an Association 

Membership 

With respect to ongoing costs, the 

Commission preliminarily believes that 

the 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 membership related fees 

associated with FINRA membership 

include the annual gross income 

assessment; the annual personnel 

assessment; and the TAF and Section 3 

fees, among others. The more significant 

fees are discussed below.222

The annual Gross Income Assessment 

generally requires members to pay a 

percentage of the Member Firm’s total 

annual revenue based on a graduated 

scale.223 The magnitude of the annual 

Gross Income Assessment is based on 

the total annual revenue, excluding 

commodities income, reported by the 

Member Firm on its FOCUS Form Part 

II or IIA.224 Based on FOCUS Form data 

from Non-Member Firms in 2014, the 

Commission has determined that the 

average annual total revenue of NonMember Firms, excluding commodities 

income, is approximately $93 million, 

with a median of $86 million.225 For the 

14 large firms that connect directly to 

ATSs, FINRA’s graduated Gross Income 

Assessment scale results in an average 

Gross Income Assessment for these NonMember Firms of $91,784 and a median 

Gross Income Assessment of 

$113,824.226

The magnitude of the TAF depends 

on the transaction volume of a FINRA 

member that is covered by TAF as 

described in the FINRA Bylaws.227 The 

Commission notes that FINRA may need 

to consider reevaluating the structure of 

the TAF to assure that it appropriately 

takes into account the business models 

of Non-Member Firms that may join 

FINRA as a result of the proposed 

amendments.228 Although the 

Commission lacks the data to 

comprehensively estimate TAF that 

Non-Member Firms are likely to incur, 

data on ATS trading during the fourth 

quarter of 2014 provided by FINRA 

allows the Commission to estimate the 

fees associated with ATS activity for 

Non-Member Firms that connect 

directly to an ATS.229 The Commission 

has identified 14 Non-Member Firms 

that traded on ATSs directly without the 

intermediation of a Member Firm during 

the fourth quarter of 2014.230 The 

Commission estimates that trading 

activity fees incurred by these 14 large 

Non-Member Firms due to their ATS 

activity would range from $0 to 

approximately $3.2 million annually, 

with a median incurred TAF of around 

$40,000.231 The Commission believes 

that TAF for Non-Member Firms not 

among the 14 identified will be far 

lower because the median Non-Member 

Firm has far lower trading volume than 

the typical firm of the 14 identified in 

the data. 

Some off-exchange trading that NonMember Firms engage in currently may 

no longer be profitable when TAF is 

incurred. Consequently, Non-Member 

Firms may reduce their trading both on 

exchanges and off-exchange after joining 

an Association. 

In addition to TAF, Non-Member 

Firms that choose to join FINRA may 

incur additional Section 3 fees. Using 

data on ATS trading during the fourth 

quarter of 2014 provided by FINRA, the 

Commission estimates that Section 3 

fees incurred by the 14 large NonMember Firms due to their off-exchange 


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232These estimates do not include fees related to 

off-exchange trading outside of an ATS; the 

Commission is unable to estimate the magnitude of 

such fees that Non-Member Firms would incur if 

they were to continue trading off-exchange upon 

adoption of these amendments because in the 

absence of a consolidated audit trail, the 

Commission lacks data on Non-Member Firm offexchange activity outside of ATSs. 

233Section 3 fees are estimated using NonMember Firm off-exchange dollar volume reported 

by FINRA. Half of volume is assumed to be sell 

volume that would be subject to Section 3 fees. 

Aggregate estimated sell volume is estimated across 

firms by assuming that all non-member orders are 

equally likely to generate executions. For example, 

assume firm ABC submitted 10% of all off-exchange 

orders submitted by Non-Member Firms. Section 3 

Fee obligation is calculated as: Non-Member Firm 

Dollar Volume × 1⁄2 × 10% × $18.40/$1,000,000. 

234For firms that choose to do this work in-house, 

the Commission preliminarily believes that the 

costs of ongoing compliance may be less than 

$96,000. This figure assumes Non-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. 

235However, Non-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-Member Firms may 

pay to their current DEA. 

236For a broker-dealer to possibly be exempt from 

the requirement to be an Association member 

currently or under the proposed amendments, the 

broker-dealer must be a member of at least one 

exchange. 

237Form U4 is the Uniform Application for 

Securities Industry Registration or Transfer. 

Representatives of broker-dealers, investment 

advisers, or issuers of securities use Form U4 to 

become registered in the appropriate jurisdictions 

and/or with SROs. The Commission understands 

that all SROs currently use Form U4. See, e.g., 

BATS Rule 2.5.01(c), ISE Rule 304(b), Phlx Rule 

600(b). 

trading would range from $0 to 

approximately $16.9 million dollars 

annually, with a median incurred 

Section 3 fee 232 of $212,000.233 As 

discussed in Section V.A.2 above, some 

of these fees may already be paid by 

Non-Member Firms that engage the 

services of a Member Firm clearing 

broker. However, FINRA lacks the 

authority to assess Section 3 fees against 

Non-Member Firms that self-clear, in 

which case FINRA may assess the fee to 

the Member Firm counterparty to the 

transaction. While these fees will 

represent a cost to Non-Member Firms, 

the cost will 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-Member 

Firm. 

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-Member Firms 

may choose to conduct ongoing 

compliance activities other than 

regulatory data reporting work (such as 

core accounting functions, updating 

policies and procedures, and updating 

forms filed with regulators) in-house 

while others may seek to outsource this 

work. The Commission estimates, based 

on discussions with industry 

participants, that the ongoing 

compliance cost for firms that outsource 

this work will range from $24,000 to 

$96,000 per year.234 In the case of some 

Non-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. 

In addition to the cost estimates 

discussed above, the Commission 

recognizes that both Non-Member Firms 

and SROs will incur other direct and 

indirect costs because of the increased 

regulatory requirements of the proposed 

amendments. Specifically, there will be 

compliance costs associated with 

regulation by FINRA.235 Generally, the 

SROs that supervise Non-Member Firms 

are unable to provide the level of 

supervision of cross-market and offexchange activity that FINRA provides 

to its Member Firms. Consequently, 

firms that join an Association will face 

costs associated with greater regulatory 

scrutiny, including the costs of 

comprehensive examinations of activity 

that was previously subject to less 

regulatory review. To the extent that 

this activity is permissible under 

Association rules, additional costs will 

be limited to those activities that are 

required to accommodate normal 

supervision and examination by an 

Association. To the extent that their 

activity does not already do so, firms 

will face additional costs related to 

bringing activity into compliance with 

Association rules. For the reasons 

discussed above, the Commission is not 

able to estimate these costs, although 

the Commission believes they will vary 

among Non-Member Firms. 

c. Costs of Joining Additional Exchanges 

Under the Rule as Proposed To Be 

Amended 

Non-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 some excluded activity 

previously discussed, some NonMember Firms may choose to join 

additional exchanges to be excluded 

from the requirement to become a 

member of an Association. 

Alternatively, these firms may 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. Consequently, the 

Commission preliminarily believes that 

the compliance burden on Non-Member 

Firms for joining an additional exchange 

is likely to be significantly less than that 

of joining FINRA as those Non-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. 

In addition to the legal burden, NonMember Firms joining additional 

exchanges as a result of the proposed 

amendments would incur membership 

and related fees. To the extent that NonMember Firms choose to become 

members of additional exchanges, the 

fees associated with such memberships 

would vary depending on the type of 

access sought and the exchanges of 

which Non-Member Firms choose to 

become members. 

The Commission also believes that the 

exchange membership fees that would 

apply to Non-Member Firms joining 

such exchanges would be those fees that 

apply to either introducing brokerdealers or proprietary trading firms. 

This assumption is consistent with the 

fact that any broker-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 Non-Member Firms. 

Furthermore, because all NonMember Firms are members of at least 

one exchange,236 they would have 

already completed a Form U4, to 

register associated persons.237 Although 

FINRA’s rules regarding registration of 

associated persons tend to be more 

specific than exchange SRO rules 

regarding associated persons, the 

Commission believes Non-Member 

Firms will not need to register 

additional associated persons because 

the exchange SRO rules are already 

comprehensive in this regard. The 

Commission understands that all 

exchanges can access the Form U4 

filings within the CRD which is 

maintained by FINRA. 

In order to obtain estimates of the cost 

of joining additional exchanges, the 

Commission reviewed the membership 


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238The BATS Exchanges do not assess any initial 

fees. See BATS BYX Exchange Fee Schedule, 

available at http://www.batstrading.com/support/

fee_schedule/byx/ (last visited February 18, 2015) 

(omitting any mention of an initial membership 

fee); BATS BZX Exchange Fee Schedule, available 

at http://www.batstrading.com/support/fee_

schedule/bzx/ (last visited February 18, 2015) 

(same); BATS EDGA Exchange Fee Schedule, 

available at http://www.batstrading.com/support/

fee_schedule/edga/ (last visited February 18, 2015) 

(same); BATS EDGX Exchange Fee Schedule, 

available at http://www.batstrading.com/support/

fee_schedule/edgx/ (last visited February 18, 2015) 

(same). 

Other exchanges do have initial application fees. 

See, e.g., ISE Fee Schedule at 19, available at http:// 

www.ise.com/assets/documents/OptionsExchange/

legal/fee/ISE_fee_schedule.pdf (last visited 

February 18, 2015) (assessing a one-time 

application fee of $3,500 for an ‘‘Electronic Access 

Member’’); application for NYSE and NYSE MKT 

Equity Membership for Non-FINRA Members at 2, 

available at http://usequities.nyx.com/sites/

usequities.nyx.com/files/nyse__mkt_equity_

membership_application_for_non-finra_

members.pdf (last visited February 18, 2015) 

(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 

February 18, 2015) (discussing the NASDAQ 

Application Fee of $2,000); CBOE Fee Schedule at 

10, available at http://www.cboe.com/publish/

feeschedule/CBOEFeeSchedule.pdf (last visited 

February 18, 2015) (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. See also CBOE TPH Organization 

Application Timeline and Needs List, available at 

https://www.cboe.org/publish/TPHForms/TPH

OrganizationApplicationTimelineandNeeds.pdf 

(last visited February 18, 2015). 

239See, e.g., BATS BYX Exchange Fee Schedule, 

available at http://www.batstrading.com/support/

fee_schedule/byx/ (last visited February 18, 2015) 

(noting an annual membership fee of $2,500); BATS 

EDGA Exchange Fee Schedule, http://www.

batstrading.com/support/fee_schedule/edga/ (last 

visited February 18, 2015) (same); CHX Fee 

Schedule at 3, available at http://www.chx.com/_

literature_119763/CHX_Fee_Schedule (last visited 

February 18, 2015) (assessing an annual 

membership fee of $7,200); MIAX Fee Schedule at 

9, available at http://www.miaxoptions.com/sites/

default/files/MIAX_Options_Fee_Schedule_

02012015.pdf (last visited February 18, 2015) 

(assessing a monthly trading permit fee for an 

‘‘Electronic Exchange Member’’ of $1,500). 

240This figure is based on the following: 

(Compliance Manager at 10 hours) + (Compliance 

Attorney at 5 hours) + (Director of Compliance at 

1 hour) = 16 burden hours per dealer. See infra note 

271. 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 

broker-dealers, such as Regulation SHO. However, 

the Commission preliminarily believes that the 

policies and procedures under the proposed floor 

member hedging exemption will be substantially 

less burdensome than those required by the 

Amendments to Regulation SHO because those 

policies and procedures require certain technology 

and real-time monitoring components. In contrast, 

the policies and procedures under the proposed 

amendments to Rule 15b9–1 do not involve a realtime monitoring or technology component. See 

infra note 273. 

241See Section VI.D. 

242For firms that perform this work internally, 

the initial cost estimate assumes 4 hours of work 

performed by a Compliance Manager at an hourly 

rate of $283 and 12 hours performed by Compliance 

Attorneys at an hourly rate of $334. The annual cost 

estimate assumes 48 hours of work by Compliance 

Clerks at an hourly rate of $64, 32 hours by 

Compliance Attorneys, and 16 hours by Compliance 

Managers. 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 work-year and 

multiplied by 5.35 to account for bonuses, firm size, 

employee benefits and overhead. 

related fee structures of all eighteen 

national securities exchanges. In 

assuming that the potential burden of 

joining additional exchanges would 

likely be less than that of joining 

FINRA, the Commission assumes that 

the costs imposed on Non-Member 

Firms by the proposed amendments 

would be membership fees, not costs 

relating to trading, such as trading 

permit fees and connectivity. The 

Commission recognizes that 

membership in an exchange, alone, 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 Commission believes that the fees 

associated with trading on an exchange 

are not the result of the proposed 

amendments because, under the 

proposed amendments, a Non-Member 

Firm could continue to trade through 

another broker-dealer on an exchange as 

long as that Non-Member Firm is a 

member of every exchange on which it 

trades or is a member of FINRA. In other 

words, the proposed amendments 

themselves do not impose the cost of 

connectivity and related fees, but only 

the costs associated with membership 

on exchanges on which Non-Member 

Firms will trade. To the extent, 

therefore, that Non-Member Firms 

continue to trade through other brokerdealers in a manner consistent with how 

they currently operate, the proposed 

amendments impose only the costs 

associated with membership. 

The Commission also recognizes that 

connectivity fees to additional 

exchanges can range from the very 

low—approximately $500 a month for a 

workstation at NASDAQ—to upwards of 

$100,000 monthly, depending on factors 

such as latency, distance, bandwidth, 

and co-location, among others. Again, 

however, these costs are not a result of 

the proposed amendments because the 

proposed amendments do not impose 

any connectivity requirements. They 

simply impose membership 

requirements to facilitate regulatory 

supervision. 

To arrive at preliminary estimates of 

the cost of joining additional exchanges, 

the Commission aggregated any 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, the Commission 

obtained a preliminary range for both 

the initial fee and the annual fee across 

exchanges. 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 $5,000.238

Regarding monthly or annual 

membership fees, most exchanges’ 

ongoing monthly or annual membership 

fees generally range from $1,500 to 

$7,200.239 Again, these ongoing 

exchange membership costs are 

generally lower than the annual costs 

estimated for being a member of FINRA. 

d. Policies and Procedures Related to 

the Hedging Exemption 

Non-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 

hedging exemption. To do so, the 

proposal would require Non-Member 

Firms to establish, maintain and enforce 

policies and procedures as discussed 

above. The Commission estimates that 

firms will incur a burden of 16 hours in 

initially preparing these policies and 

procedures.240 Furthermore, the burden 

of maintaining and enforcing such 

policies and procedures, including a 

review of such policies at least 

annually, would be approximately 96 

hours.241 The Commission estimates an 

initial implementation cost of 

approximately $5,000 and an annual 

ongoing cost of approximately $18,000 

for Non-Member Firms that wish to 

utilize the hedging exemption and 

perform this work internally; for firms 

that outsource this work, costs are likely 

to be higher.242 For firms that choose to 

join FINRA, the hedging exemption is 

not relevant. They will not incur these 

costs. 

e. Indirect Costs 

In addition to possibly incurring costs 

related to joining exchanges, NonMember Firms that choose not to join an 

Association will lose the benefits of 

trading in the off-exchange market, 

unless they meet the exemption for 

hedging. As mentioned above, NonMember Firms are significant 

participants in ATS activity. Much of 

this trading is attributed to 14 NonMember Firms, and the activity level 

across those firms varies widely. 

Assuming that order volume is 

proportional to trade volume, the 


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243The composition of the list of Non-Member 

Firms that are identified in ATS trading data 

changes across time periods. It is possible that the 

number of Non-Member Firms trading directly on 

ATSs is higher than estimated here. Additional 

Non-Member Firms may access ATSs through 

Member Firms, which would also exclude them 

from this analysis. 

To address data limitation, the Commission 

assumes that ATS orders from each of the 14 NonMember Firms observable in the data are equally 

likely to be executed. 

244The exemption related to routing to comply 

with Regulation NMS is discussed in Section II.E. 

245Firms 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 provisions to prevent tradethroughs) routed using technology inferior to the 

technology of their firm of choice. 

246The floor member hedging exemption is 

discussed more fully in Section II.D. 

247See Section V.C.2.d. 

248See supra notes 82–95 and accompanying text. 

249See supra note 75 and accompanying text. 

250See supra notes 82–95 and accompanying text. 

Commission estimates that the smallest 

of the 14 firms executed 11 shares on 

ATSs during the fourth quarter of 

2014.243 The largest firm executed 13.3 

billion shares. The median firm in the 

group of 14 large Non-Member Firms is 

estimated to have executed 167.6 

million shares. Although these share 

volumes are large, the Commission does 

not have adequate data on these firms to 

estimate the proportion of their trading 

activity and revenues that occurs on 

exchanges versus off-exchange. The 

Commission cannot judge the likelihood 

of these firms choosing to cease offexchange activity rather than joining an 

Association. 

Finally, those firms that choose not to 

join an Association would be limited in 

their ability to route their own 

transactions in a manner so as to 

comply with the requirements of 

Regulation NMS.244 Their transactions 

would have to be routed through a 

broker-dealer of an exchange of which 

they are a member, or routed by a 

broker-dealer only to those exchanges of 

which they are members. The routing of 

orders of Non-Member Firms that do not 

join an Association will be determined 

by the routing broker-dealer of the 

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 to that exchange 

to the Non-Member Firm.245

D. Alternatives 

1. Elimination of the Floor Member 

Hedging Exemption 

Although the proposed amendments 

would eliminate the exclusion for 

proprietary trading activity for brokerdealers wishing to continue availing 

themselves of the exemption from 

Association membership under Rule 

15b9–1, it would maintain a limited 

exception for hedging of floor-based 

activity.246 Currently, Non-Member 

Firms are able to hedge their floor-based 

activity through the exclusion for 

proprietary trading in Rule 15b9–1. The 

Commission does not have data to 

estimate the number of Non-Member 

Firms that use the proprietary trading 

exemption in this manner, or the dollarvalue of trading that they hedge through 

the exemption. 

One alternative considered by the 

Commission was the elimination of the 

hedging exemption entirely. Elimination 

of the floor member hedging exemption 

would require any firm that wished to 

hedge through off-exchange transactions 

to join an Association or become a 

member of each exchange on which it 

trades and cease off-exchange trading. 

This would improve the Association’s 

ability to monitor cross-market hedging 

activity that was conducted offexchange. The Commission recognizes, 

however, that there may be challenges 

for the Commission, firms, and 

exchanges in proving compliance with 

the exemption. For example, some 

broker-dealers may label activity as 

hedging activity that is not covered by 

the exemption. A firm could establish a 

limited floor-based business and then 

inadvertently or deliberately claim the 

hedging exemption covers significant 

trading off-exchange (and trading on 

exchange of which the firm is not a 

member) that did not reduce or 

otherwise mitigate the risk of its floorbased activity. Further, firms that wish 

to avail themselves of the hedging 

exemption will incur costs to establish, 

maintain and enforce written policies 

and procedures related to its use.247

Without the hedging exemption, firms 

would not incur these costs, but would 

incur other costs. In particular, without 

a hedging exemption, floor brokers on 

some exchanges might find that hedging 

positions obtained through their normal 

activity limited to the floor of a single 

exchange is less cost-effective. For 

example, a floor broker on an options 

exchange is currently exempt from 

FINRA membership if he trades offexchange under the exclusion for 

proprietary trading. After entering an 

options position, the floor broker can 

enter an offsetting equity position by 

trading on an exchange of which he is 

not a member (through a member 

broker-dealer) or in the off-exchange 

market. Under the proposed 

amendments without the hedging 

exemption, the floor broker would not 

be able to make such a hedging 

transaction without joining at least one 

additional SRO (FINRA or another 

exchange where he could transact in 

equities). If participants have less 

opportunity to hedge their positions, 

they may be less willing to provide 

liquidity in their capacity as floor 

brokers. Therefore, the Commission is 

proposing a narrow hedging exemption 

that covers only the activity it intends 

to exclude. 

2. Improve Off-Exchange Supervision 

Through Action of Other SROs With or 

Without CAT 

The Commission also considered 

whether an alternative approach to 

achieving the objectives of the proposed 

amendments would be to address the 

limitations in regulatory oversight of offexchange activity of Non-Member Firms 

through exchanges that act as their 

DEAs or all exchanges of which they are 

members. The Commission 

preliminarily believes either of these 

alternatives would frustrate the 

regulatory structure established by 

Congress and would be inefficient. As 

discussed in detail above, exchanges 

traditionally have not assumed the role 

of regulating the totality of the trading 

of their member-broker-dealers, and 

exchanges are currently not wellpositioned to assume that role, in light 

of the statutory framework and, among 

other things, their limited access to data 

and the lack of a proper rule set to 

regulate off-exchange trading.248

Exchanges generally do not have as 

detailed a set of member conduct rules 

and do not have non-exchange-specific 

trading rules, thus allowing such brokerdealers and their personnel to conduct 

business under a less specific regulatory 

regime than FINRA members.249 As 

discussed above, in this context and 

consistent with the statutory framework, 

the Commission preliminarily believes 

that an Association is better suited to 

regulate off-exchange trading.250

With respect to having Non-Member 

Firms’ DEAs assume the regulatory 

oversight responsibilities, the 

Commission could require the NonMember Firm’s DEA to oversee the offexchange activity of the firm. This 

alternative may offer some benefit in 

terms of providing efficient supervision. 

Non-Member Firms’ DEAs may have 

specialized knowledge of Non-Member 

Firms’ businesses and operations that 

would facilitate efficient supervision of 


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251See Allston Letter, supra note 106. 

252See supra note 164. 

253See supra note 68–69 and accompanying text. 

254 Id. 

255 15 U.S.C. 78q(d). 

256See supra note 84. 

257The proposed amendments provide limited 

exemptions for hedging of floor-based activity and 

order routing to satisfy certain provisions of 

Regulation NMS. 

258 In order to trade on exchanges of which it is 

not a member, the firm would have to trade with 

or through another broker-dealer that is a member 

of that exchange. 

their off-exchange activity.251 Similarly, 

requiring all SROs to supervise the offexchange activity of their members 

might bring certain benefits. First, there 

might be innovation in surveillance 

methodology because exchange SROs 

could need new surveillance systems 

and procedures tailored to current 

market structure and practice. Second, 

this could foster competition among 

SROs to provide regulatory services, 

which could lower costs to members. 

However, with respect to DEAs, the 

supervision of trading activity is outside 

the scope of typical DEA oversight 

responsibilities 252 and the Commission 

believes most exchanges contract with 

FINRA to perform these examinations. 

Consequently, if exchange SROs were 

expected to supervise the off-exchange 

activities of firms assigned to them for 

DEA examinations, the exchanges 

would need to acquire the resources to 

provide this supervision. 

Requiring all SROs to supervise their 

members’ off-exchange trading would 

also entail substantial costs and create 

inefficiencies. As discussed previously, 

exchange SROs have not generally 

supervised their members’ activity 

outside of the markets they operate.253

As discussed above, FINRA has invested 

in the technological infrastructure, 

cooperative agreements with other 

SROs, and specialized regulatory 

personnel to provide surveillance and 

supervision of activity in off-exchange 

markets.254 If each of the exchanges 

were required to supervise the offexchange activities of some or all of 

their members, the exchanges each 

would need to invest in similar 

regulatory infrastructure. This 

investment would be costly to the 

exchanges; presumably these costs 

would be passed on to exchange 

members and ultimately the investing 

public through higher trading costs. In 

addition, assigning regulatory 

responsibility to an exchange SRO, 

which may in turn contract with FINRA 

to provide those services, would be 

costly and inefficient. Further, 

notwithstanding the potential benefits 

to innovation, the duplication in 

regulatory oversight would also be 

duplication in regulatory resources as 

multiple SROs would surveil the offexchange trading of some firms. This 

approach also could be inconsistent 

with the allocation of regulatory 

responsibilities contemplated by 

Section 17(d) of the Exchange Act.255

Furthermore, FINRA has adopted 

rules that govern off-exchange trading, 

recognizing the complexity and opacity 

of the off-exchange marketplace. If 

exchanges were required to supervise 

the off-exchange activity of their 

members, exchanges would need to 

adopt rules that were tailored to the 

institutional detail of the off-exchange 

market. This could result in offexchange trading rules that varied 

depending on the exchange membership 

status of individual participants, 

resulting in inconsistent rules governing 

the same off-exchange trading activity. 

Finally, the Commission has also 

considered whether the possibility that 

the exchanges could obtain additional 

data through the CAT, or through a 

FINRA rule change if implemented,256

affects the Commission’s preliminary 

belief that an Association is better 

suited to regulate off-exchange trading. 

Although there may thereby be 

additional data, these changes would 

not address the underlying statutory 

scheme and resource issues that make 

FINRA well-positioned to regulate offexchange trading. 

3. Exchange Membership Alternative 

The proposed amendments would, 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.257 Further, under the proposed 

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.258 The 

Commission has also considered 

requiring broker-dealers to become a 

member of every exchange on which 

they trade and to become a member of 

an Association in order to trade offexchange (‘‘Exchange Membership 

Alternative’’). In other words, under this 

alternative, becoming a member of an 

Association would not alone allow firms 

to trade on exchanges of which they are 

not members (as would be permitted 

under the proposed amendments). 

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-Member Firm 

trades off-exchange is present when a 

Member or Non-Member Firm trades on 

an exchange of which it is not a member 

(through a member of that exchange). 

The Commission preliminarily believes 

that the proposed 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 

proposed amendments for several 

reasons. First, while exchanges lack the 

data, surveillance technology and 

specialized regulatory personnel to 

surveil their members’ trading offexchange, 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 can already surveil the activity 

of a Member Firm trading on an 

exchange of which it is not a member. 

In addition, while exchanges do not 

have a specialized rule set to govern 

their members’ activity in the offexchange market, FINRA’s rules are 

consistent with requiring Member Firms 

to adhere to the trading rules of 

exchanges on which they 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, requiring 

that the Member Firm also become a 

member of that exchange would not 

prevent FINRA from exercising 

jurisdiction over the matter. 

The Commission notes that the 

Exchange Membership Alternative 

might require firms to become members 

of more SROs than required under the 

proposed amendments, which would 

impose additional costs. In particular, 

some Non-Member Firms that would 

become Member Firms under the 

Proposal would also need to become 

members of additional exchanges or 

cease trading on these exchanges. In 

addition, some current Member Firms 

would also need to become members of 

additional exchanges. 

4. 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-Member Firm is a 

member. The Commission also 

considered retaining the $1,000 de 

minimis allowance, but removing the 

exception for proprietary trading 

conducted with or through another 

registered broker-dealer. As discussed 


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259See Section II.C. 

260 Id. 

261See supra note 27 and accompanying text 

262See supra notes 31–33 and accompanying text. 

263As previously noted, broker-dealers that 

traded exclusively on the floor of an exchange were 

exempt from broker-dealer registration with the 

Commission until the 1975 Amendments, which 

extended the Commission’s SECO rulemaking 

authority to any exchange member trading on an 

exchange other than an exchange of which it was 

a member. See supra note 41 and accompanying 

text. Broker-dealers registering with the 

Commission as a result of the 1975 Amendments 

became subject to the SECO rules in 1976, but could 

remain exempt from such rules pursuant to Rule 

15b8–1. See supra note 43 and accompanying text. 

264Because many broker-dealers chose to become 

members of NASD rather than participating in the 

SECO Program, only 12 percent of all active 

Commission-registered broker-dealers effecting 

transactions off-exchange were SECO broker-dealers 

by May 1982. House Comm. on Energy and 

Commerce, ‘‘Authorization of Appropriations for 

the Securities and Exchange Commission,’’ H.R. 

Rep. No. 98–106, at 597 (1983). 

265Pub. L. 98–38, 97 Stat. 205 (1983). 

266See supra note 31 and accompanying text. 

267The report accompanying the amendments 

made to the Act in 1983 cited a preference for selfregulation over direct regulation by the 

Commission. See supra note 46 and accompanying 

text. 

above,259 the Commission believes that 

the magnitude of the de minimis 

allowance is no longer economically 

meaningful. Furthermore, the 

Commission believes that the 

commission sharing arrangements 

discussed previously 260 are rarely if 

ever used. However, the Commission 

believes that floor members on some 

exchanges may rely upon the exception 

for proprietary trading conducted with 

or through another registered brokerdealer to hedge risks associated with 

floor-based activities. Consequently, the 

proposed amendments include a 

hedging exemption for floor-based 

activity but no longer include a de 

minimis dollar amount associated with 

transactions that do not fall under the 

limited hedging exemption. 

5. The Commission Assumes Regulatory 

Oversight Role for Non-Member Firms 

The Commission considered 

assuming the role of providing direct 

primary regulatory oversight for NonMember Firms. We do not believe, 

however, that this is a reasonably 

available alternative because of the 

judgments reflected in Congress’s 

determinations over time about where to 

locate that oversight function and our 

own understanding of the entity best 

suited to that role. As discussed in 

detail above, the Exchange Act, as 

originally adopted in 1934, left 

regulation of the off-exchange market to 

the Commission.261 In 1938, Congress 

provided for the creation of 

Associations,262 and from 1965 until 

1983, broker-dealers engaged in offexchange trading could become 

members of NASD or opt to be regulated 

directly by the Commission under the 

SECO program.263 In 1983, the 

Commission recommended that 

Congress eliminate the SECO program 

because, among other things, only a 

limited number of broker-dealers chose 

to be regulated under the SECO 

program 264 and maintaining the 

program disproportionately affected the 

Commission’s resources. Congress then 

amended the Act to eliminate the SECO 

program,265 which had the effect of 

making the regulation of off-exchange 

trading under the Exchange Act the 

responsibility of an Association.266

Consistent with this, in this rulemaking 

the Commission is proposing to modify 

the Rule 15b9–1 exemption so that, with 

limited exceptions, the off-exchange 

transactions of broker-dealers will be 

subject to the oversight and rules of an 

Association, the SRO primarily 

responsible for regulating trading in the 

off-exchange market. As discussed 

throughout, we believe an Association is 

best positioned to regulate that trading. 

Based on the foregoing, including the 

Congress’s determination to eliminate 

the SECO Program,267 the Commission 

does not view assumption of direct 

responsibility for off-exchange brokerdealer oversight by the Commission as 

a reasonably available alternative. 

E. Request for Comment on Economic 

Analysis 

The Commission has identified above 

economic effects associated with the 

proposal and requests comment on all 

aspects of its preliminary economic 

analysis. The Commission encourages 

commenters to identify, discuss, 

analyze, and supply relevant data, 

information, or statistics regarding any 

such economic effects. In particular, the 

Commission seeks comment on the 

following: 

47. Do commenters agree with the 

Commission’s analysis of the potential 

economic effects of the proposed 

amendments? Why or why not? 

48. Do commenters agree with the 

Commission’s assessment of the 

baseline for the economic effects? 

49. Is the supervision and 

surveillance of Non-Member Firms with 

substantial cross-market or off-exchange 

trading sufficient under current rules? 

Why or why not? 

50. How would further changes to the 

scope of existing Regulatory Services 

Agreements between SROs affect 

regulators’ ability to effectively surveil 

cross-market and off-exchange trading? 

51. Do commenters believe that there 

are additional categories of benefits or 

costs that could be quantified or 

otherwise monetized? If so, please 

identify these categories and, if possible, 

provide specific estimates or data. 

52. Are there any additional benefits 

that may arise from the proposed 

amendments? Or are there benefits 

described above that would not likely 

result from the proposed amendments? 

If so, please explain these benefits or 

lack of benefits in detail. 

53. Are there any additional costs that 

may arise from the proposed 

amendments? Are there methods by 

which the Commission could reduce the 

costs imposed by the proposed 

amendments enabling effective 

regulatory oversight of Non-Member 

Firms? Please explain. Are there any 

other potential consequences of the 

proposed amendments? Or are there 

costs described above that would not 

likely result from the proposed 

amendments? If so, please explain these 

costs or lack of costs in detail. 

54. Does the release appropriately 

describe the potential effects of the 

proposed amendments on the 

promotion of efficiency, competition, 

and capital formation? Why or why not? 

If possible, commenters should provide 

analysis and empirical data to support 

their views on the competitive or 

anticompetitive effects, as well as the 

efficiency and capital formation effects, 

of the proposed amendments. 

55. Are there alternative mechanisms 

for achieving the Commission’s goal of 

improving regulatory oversight while 

promoting competition and capital 

formation? 

56. To the extent that there are 

reasonable alternatives to the proposed 

amendments, what are the potential 

costs and benefits of those reasonable 

alternatives relative to the proposed 

amendments? What are the potential 

effects on the promotion of efficiency, 

competition, and capital formation of 

those reasonable alternatives? 

57. Would the cost of FINRA or 

exchange membership cause some NonMember Firms to alter their activities in 

any way? If so, how would Non-Member 

Firms alter their business? How would 

these changes affect competition and 

market efficiency? How would these 

changes affect market quality? 

58. Would the proposed amendments 

cause Non-Member Firms to exit the 

marketplace? If so, how many NonMember Firms would elect to restrict 

their operations rather that become 

members of FINRA or one or more 

exchanges? How would these changes 

affect competition and market 

efficiency? How would these changes 


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268 44 U.S.C. 3501 et seq. 

269A broker-dealer would have to meet the 

threshold requirements of proposed Rule 15b9–1. 

Specifically, such broker-dealer would have to: 

(1) Be a member of a national securities exchange; 

(2) carry no customer accounts; and (3) effect 

transactions in securities solely on a national 

securities exchange of which it is a member, except 

for transactions complying with the floor member 

hedging exemption or the Regulation NMS routing 

exemption. 

affect market quality? What would be 

the effect on liquidity of Non-Members 

Firms exiting the marketplace? 

59. Are there costs related to FINRA 

membership for Non-Member Firms that 

the Commission has not considered? 

What are these costs? Please be specific. 

60. For Non-Member Firms, how 

much will the cost of FINRA 

membership vary? Will the cost of 

FINRA membership cause some firms to 

change the scope of their business? If so, 

in what manner? 

61. Do commenters agree with the 

assumptions underlying the 

Commission’s estimates of the range for 

membership costs for exchanges? 

62. Do commenters agree with the 

Commission’s preliminarily belief that 

the TAF collected by FINRA would not 

be expected to materially change if the 

proposed amendments were adopted? 

What would the effect of the proposed 

amendments be on the TAF assessed to 

current FINRA members? What would 

the effect of the proposed amendments 

be on the TAF assessed to Non-Member 

Firms that choose to become FINRA 

members? 

63. Has the Commission properly 

accounted for the compliance cost 

burden required to achieve the access to 

exchanges necessary to comply with the 

proposed amendments? Would any 

costs beyond basic membership be the 

direct result of the proposed 

amendments? 

64. If Non-Member Firms were to 

elect to join additional exchanges rather 

than becoming members of FINRA, how 

many exchanges would they expect to 

join? 

65. Is the Commission correct in 

assuming that the cost of membership is 

the relevant compliance cost burden 

and that connectivity or trading related 

costs are optional for most to all of the 

exchanges? Are there any exchanges on 

which connectivity or trading rights 

costs are mandatory even if a brokerdealer trades through another member 

broker-dealer that is paying the 

connectivity or trading rights costs? 

66. Are the Commission’s 

assumptions on the manner in which 

Section 3 fees are allocated in offexchange transactions with NonMember Firms correct? Are there 

mechanisms in place already that result 

in these fees being passed on to NonMember Firms that transact in ATSs, or 

elsewhere in the off-exchange market? 

67. Would a Non-Member Firm elect 

to become a member of one or more 

exchanges rather than become a member 

of FINRA? If so, please discuss in detail 

why a Non-Member Firm would make 

such an election. Which exchanges, in 

particular, are Non-Member Firms likely 

to join, if they join additional 

exchanges, as a result of the proposed 

amendments? How would these changes 

affect competition and market 

efficiency? How would these changes 

affect market quality? 

68. Has the Commission articulated 

all reasonable alternatives for the 

proposed rule? If not, please provide 

additional alternatives and how their 

costs and benefits would compare to the 

proposed rule. For the alternatives 

described above, has the Commission 

accurately described the costs and 

benefits? If not, please provide more 

accurate costs and benefits, including 

any data or statistics that support those 

costs and benefits. 

69. One alternative discussed is to 

effect improved off-exchange 

supervision through the action of 

exchanges. Is this alternative practical? 

What resources would exchanges have 

to acquire to provide efficient and 

effective supervision of their members’ 

off-exchange trading activity? 

70. What effects could the proposed 

amendments have on FINRA’s oversight 

of the off-exchange market? How could 

FINRA’s revenues and cost of regulation 

be affected? What changes should 

FINRA consider implementing should 

the Commission approve the proposed 

amendments to Rule 15b9–1? Please be 

specific. 

71. Would the proposed amendments 

create a barrier to entry for new 

prospective Associations? Would there 

be benefits to competition among 

Associations? 

VI. Paperwork Reduction Act 

Certain provisions of these proposed 

amendments to Rule 15b9–1 contain 

‘‘collection of information 

requirements’’ within the meaning of 

the Paperwork Reduction Act of 1995 

(‘‘PRA’’).268 As discussed in Part II.D, 

the proposed amendments to Rule 

15b9–1 would require dealers relying on 

the floor member hedging exemption 

under Rule 15b9–1 to establish, 

maintain, and enforce certain written 

policies and procedures. Compliance 

with these collections of information 

requirements would be mandatory for 

firms relying on the rule. The 

Commission is submitting these 

collections of information to the Office 

of Management and Budget (‘‘OMB’’) for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. The title of 

new collection of information is ‘‘Rule 

15b9–1 Floor Member Hedging 

Exemption.’’ 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 control number. 

A. Summary of Collection of 

Information 

The proposed amendments to Rule 

15b9–1 would include a collection of 

information within the meaning of the 

PRA for broker-dealers relying on the 

floor member hedging exemption under 

the proposed Rule. The floor member 

hedging exemption under the proposed 

amendments to Rule 15b9–1 would 

permit a qualifying dealer 269 that 

conducts business on the floor of a 

national securities exchange to effect 

transactions for its own account with or 

through another registered broker or 

dealer that are solely for the purpose of 

hedging the risks of its floor-based 

activities, by reducing or otherwise 

mitigating the risks thereof. Brokerdealers relying on the floor member 

hedging exemption must establish, 

maintain, and enforce written policies 

and procedures 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. In 

addition, such dealers would be 

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 Rule 15b9–1 would be used by 

the Commission and SROs to 

understand how dealers relying on the 

floor member hedging exemption 

evaluate whether their off-exchange 

transactions are conducted solely for the 

purpose of hedging risks incurred from 

the dealer’s floor-based business and 

that such dealers are complying with 

the requirements of Rule 15b9–1. These 

policies and procedures will be used 

generally by the Commission as part of 

its ongoing efforts to monitor and 

enforce compliance with the federal 

securities laws, including Section 

15(b)(8) and Rule 15b9–1 thereunder. In 

addition, SROs may use the information 

to monitor and enforce compliance by 


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18068 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 

270Of the approximately 4,209 total registered 

broker-dealers as of March 2015, 182 broker-dealers 

in total disclose being an exchange member engaged 

in floor activities on Form BD (note: The 182 

broker-dealers includes the 77 broker-dealers 

engaged in floor activities that are not members of 

an Association). The Commission preliminarily 

believes that broker-dealers engaged in floor 

activities that are currently members of an 

Association are unlikely to withdraw from 

Association membership and begin relying on the 

floor member hedging exemption because such 

broker-dealers have already elected to join an 

Association and reliance on the floor member 

hedging exemption would limit their permissible 

off-exchange activity solely to hedging risks 

incurred as a result of their floor-based business. 

271This figure is based on the following: 

(Compliance Manager at 10 hours) + (Compliance 

Attorney at 5 hours) + (Director of Compliance at 

1 hour) = 16 burden hours per dealer. 

272This figure is based on the following: 

(Compliance Manager at 60 hours) + (Compliance 

Attorney at 24 hours) + (Director of Compliance at 

12 hours) = 96 burden hours per dealer. 

273This figure is based on the following: ((16 

burden hours per dealer) + (96 burden hours per 

dealer)) × (100 dealers) = 11,200 burden hours 

during the first year. In estimating these burden 

hours, the Commission examined the estimated 

burdens imposed by other rules applicable to 

broker-dealers. For example, amendments to 

Regulation SHO adopted in 2010 required brokerdealers to establish, maintain, and enforce written 

policies and procedures relating to Rule 201(c) and 

Rule 201(d)(6) to ensure short-sale orders are, 

among other things, properly marked, are submitted 

at the proper price, or are properly off-set (in the 

case of Rule 201(d)(6). See Exchange Act Release 

No. 61595 (February 26, 2010) 75 FR 11232, 11286 

(March 10, 2010) (‘‘Amendments to Regulation 

SHO’’). The policies and procedures relating to Rule 

201(c) and Rule 201(d)(6) required under the 

Amendments to Regulation SHO estimated an 

average initial one-time burden of 160 burden hours 

per broker-dealer and ongoing compliance cost of 

60 hours annually to ensure the policies and 

procedures are up-to-date and remain in 

compliance as well as an additional 336 hours 

annual to monitor, surveil, and enforce trading in 

compliance with Rule 201. Id. The Commission 

preliminarily believes that the policies and 

procedures under the proposed floor member 

hedging exemption will be substantially less 

burdensome than those required by the 

Amendments to Regulation SHO because those 

policies and procedures require certain technology 

and real-time monitoring components. For example, 

under the Amendments to Regulation SHO 

described above, broker-dealers’ policies and 

procedures must be reasonably designed to enable 

a broker-dealer to monitor, on a real-time basis, the 

national best bid so as to determine the price at 

which a broker-dealer may submit a short sale order 

to a trading center in compliance with Rule 201(c), 

and off-setting transactions under the riskless 

principal provision under Rule 201(d)(6) must be 

allocated to a riskless principal or customer account 

within 60 seconds of execution. Id. at 11284. In 

contrast, the policies and procedures under the 

proposed amendments to Rule 15b9–1 do not 

involve a real-time monitoring or technology 

component. 

274This figure is based on the following: (96 

burden hours per dealer) × (100 dealers) = 9,600 

ongoing, annualized aggregate burden hours. 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 Exchange Act Release No. 74244 (February 11, 

2015) 80 FR 14564, 14683 (March 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 Commission 

preliminarily believes that the initial and ongoing 

burden hours under the proposed floor member 

hedging exemption will be substantially less than 

for registered security-based swap dealers under 

Regulation SBSR, because the policies and 

procedures under Regulation SBSR require 

programing certain systems for transaction 

reporting and performing testing of such systems. 

Id. In contrast, the proposed floor member hedging 

exemption would not necessarily require 

programming or testing of certain systems and is a 

much more discrete set of policies and procedures 

as compared to the more comprehensive policies 

and procedures required by Regulation SBSR, 

which cover, among other things, the full scope of 

reporting security-based swap transactions by 

registered security-based swap dealers and others. 

275See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x 

(governing the public availability of information 

obtained by the Commission). 

276 17 CFR 240.17a–4. Registered brokers and 

dealers are already subject to existing recordkeeping 

and retention requirements under Rule 17a–4. 

However, proposed Rule 15b9–1 contains a 

requirement that a dealer relying on the floor 

member hedging exemption preserve a copy of its 

their members with applicable SRO 

rules and the federal securities laws. 

C. Respondents 

The Commission estimates that up to 

100 dealers may rely on the floor 

member hedging exemption contained 

in Rule 15b9–1. The Commission notes 

that, based on publicly available 

information reviewed in the first quarter 

of 2015, there are currently 125 brokerdealers registered with the Commission 

that are not members of an Association. 

Of those 125 broker-dealers, 77 brokerdealers currently disclose being an 

exchange member engaged in floor 

activities on Form BD.270 The 

Commission believes that while not all 

of these dealers will choose to avail 

themselves of the floor member hedging 

exemption contained in Rule 15b9–1 

because the exemption restricts offexchange transactions solely to those 

that hedge risks incurred as a result of 

their floor-based activity, some firms not 

included in this number may decide to 

avail themselves of the floor member 

hedging exemption. The Commission 

preliminarily believes, however, that 

more of these firms are likely to want 

the ability to engage in off-exchange 

transactions other than those that hedge 

the risk of their floor-based activity, and 

may, accordingly, choose to join an 

Association as a result of the proposed 

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 dealer to 

establish written policies and 

procedures as required under Rule 

15b9–1 would be approximately 16 

hours.271 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 

Commission notes that the policies and 

procedures required by the proposed 

Rule are limited to hedging transactions 

that reduce or otherwise mitigate the 

risks of the financial exposure the dealer 

incurs as a result of its floor-based 

activity. In addition, the Commission 

estimates the annual burden of 

maintaining and enforcing such policies 

and procedures, including a review of 

such policies at least annually, would 

be approximately 96 hours for each 

dealer.272 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 off-exchange hedging 

transactions as they relate to the brokerdealer’s floor-based activities and 

maintaining copies of the policies and 

procedures for the period of time 

required by the proposed rule. 

The Commission estimates that the 

initial burden associated with Rule 

15b9–1 would be 112 hours per dealer, 

which corresponds to an initial 

aggregate burden of 11,200 hours.273

The Commission estimates that the 

ongoing annualized burden associated 

with Rule 15b9–1 would be 96 hours 

per dealer, which corresponds to an 

ongoing annualized aggregate burden of 

9,600 hours.274

E. Collection of Information Is 

Mandatory 

All of the collection of information 

discussed above would be 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.275

G. Retention Period for Recordkeeping 

Requirements 

Dealers seeking to take advantage of 

the proposed hedging exemption would 

be required to preserve a copy of their 

policies and procedures in a manner 

consistent with Rule 17a–4 276 until 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 18069 

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 Rule 15b9–1. 

277 5 U.S.C. 603. 

278 5 U.S.C. 603(a). 

279 5 U.S.C. 605(b). 

280Although 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 proposed rulemaking, are set forth 

in Rule 0–10 under the Exchange Act, 17 CFR 

240.0–10. See Exchange Act Release No. 18451 

(January 28, 1982), 47 FR 5215 (February 4, 1982) 

(File No. AS–305). 

281 17 CFR 240.17a–5(d). 

282See 17 CFR 240.0–10(c). 

283See 17 CFR 240.0–10(e). 

284Firms often disclose multiple activities, so the 

number of disclosed activities in this discussion 

exceeds the number of firms. 

285Hedging activity is proprietary trading 

activity. 

three years after the date the policies 

and procedures are replaced with 

updated policies and procedures. 

H. Request for Comments 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the Commission solicits comment to: 

72. Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of our 

functions, including whether the 

information shall have practical utility; 

73. Evaluate the accuracy of our 

estimate of the burden of the proposed 

collection of information; 

74. Determine whether there are ways 

to enhance the quality, utility, and 

clarity of the information to be 

collected; and 

75. Evaluate whether there are ways 

to minimize the burden of collection of 

information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology. 

Persons submitting comments on the 

collection of information requirements 

should direct them to the Office of 

Management and Budget, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should also 

send a copy of their comments to Brent 

J. Fields, Secretary, Securities and 

Exchange Commission, 100 F Street NE., 

Washington, DC 20549–1090, with 

reference to File Number [ ]. Requests 

for materials submitted to OMB by the 

Commission with regard to this 

collection of information should be in 

writing, with reference to File Number 

[ ] and be submitted to the Securities 

and Exchange Commission, Office of 

FOIA/PA Services, 100 F Street NE., 

Washington, DC 20549–2736. As OMB 

is required to make a decision 

concerning the collections of 

information between 30 and 60 days 

after publication, a comment to OMB is 

best assured of having its full effect if 

OMB receives it within 30 days of 

publication. 

VII. Consideration of Impact on 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996,277 the Commission requests 

comment on the potential effect of the 

proposed amendments to Rule 15b9–1 

on the United States economy on an 

annual basis. The Commission also 

requests comment on any potential 

increases in costs or prices for 

consumers or individual industries, and 

any potential effect on competition, 

investment, or innovation. Commenters 

are requested to provide empirical data 

and other factual support for their views 

to the extent possible. 

VIII. Regulatory Flexibility Act 

Certification 

Section 3(a) of the Regulatory 

Flexibility Act of 1980 278 (‘‘RFA’’) 

requires the Commission to undertake 

an initial regulatory flexibility analysis 

of the impact of the proposed rule 

amendments on small entities unless 

the Commission certifies that the rule, if 

adopted, would not have a significant 

economic impact on a substantial 

number of small entities.279 For 

purposes of Commission rulemaking in 

connection with the RFA,280 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 

Rule 17a-5(d) under the Exchange 

Act,281 or, if not required to file such 

statements, a broker-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 is not affiliated with any 

person (other than a natural person) that 

is not a small business or small 

organization.282 With regard to 

exchanges, a small entity is an exchange 

that has been exempt from the reporting 

requirements of Rule 601 under 

Regulation NMS, and is not affiliated 

with any person (other than a natural 

person) that is not a small business or 

small organization.283

The Commission examined recent 

FOCUS data for the 125 Non-Member 

Firms and concluded that at most 11 of 

the affected entities have net capital of 

$500,000 or less, and some of those 

might not be small entities because they 

might be affiliates of larger 

organizations. 

Although the Commission lacks the 

data to quantify these firms’ offexchange activity, it does have FOCUS 

information on the firms’ disclosed 

activities. Based on this disclosure, the 

Commission believes that many of these 

firms may be able to trade off-exchange 

under the proposed floor member 

hedging exemption for a number of 

reasons. First, a number of firms 

disclose floor-based activity that may 

allow them to trade off-exchange under 

the floor member hedging exemption: 

five report writing options and six 

disclose floor activity.284 Second, one 

discloses only trading in government 

debt securities, so is unlikely to be 

affected by the proposed amendments. 

Finally, only two of the eleven firms 

disclose proprietary trading activity. 

These firms would be affected only by 

the elimination of the de minimis 

allowance, unless the firms can rely on 

the floor member hedging exemption for 

such activity.285 Therefore, the 

Commission certifies that the proposed 

amendments to Rule 15b9–1 would not, 

if adopted, have a significant economic 

impact on a substantial number of small 

entities. 

76. We encourage written comments 

regarding this certification. We solicit 

comment as to whether the proposed 

amendments could have impacts on 

small entities that have not been 

considered. We request that commenters 

describe the nature of any impacts on 

small entities and provide empirical 

data to support the extent of such effect. 

Such comments will be placed in the 

same public file as comments on the 

proposed amendments to Rule 15b9–1. 

Persons wishing to submit written 

comments should refer to the 

instructions for submitting comments in 

the front of this release. 

IX. Statutory Authority—Text of the 

Proposed Amendments 

Pursuant to the Exchange Act, 15 

U.S.C. 78a et seq., and particularly 

Sections 3, 15(b)(9), 15A, 17, 19, 23, and 

36 thereof, the Commission is proposing 

amendments to Title 17, Chapter II of 

the Code of Federal Regulations as 

follows. 

List of Subjects in 17 CFR Part 240 

Brokers, Dealers, Registration, 

Securities. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
18070 Federal Register / Vol. 80, No. 63 / Thursday, April 2, 2015 / Proposed Rules 

For the reasons set out in the 

preamble, title 17, chapter II of the Code 

of Federal Regulations is proposed to be 

amended 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, 78k, 78k–1, 78l, 78m, 

78n, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 

78s, 78u–5, 78w, 78x, 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), 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 dealer that conducts business on 

the floor of a national securities 

exchange may effect transactions off the 

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 floorbased activities, by reducing or 

otherwise mitigating the risks thereof. A 

dealer seeking to rely on this exception 

shall establish, maintain and enforce 

written policies and procedures 

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. Such dealer 

shall 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; and 

(2) A broker or dealer may effect 

transactions off the exchange resulting 

from orders that are routed by a national 

securities exchange of which it is a 

member, to prevent trade-throughs on 

that national securities exchange 

consistent with 17 CFR 242.611. 

By the Commission. 

Dated: March 25, 2015. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2015–07293 Filed 4–1–15; 8:45 am] 

BILLING CODE 8011–01–P 


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