Document ID: SEC-2023-0698-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2023-06-30T04:00Z

[Federal Register Volume 88, Number 125 (Friday, June 30, 2023)]
[Notices]
[Pages 42404-42409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13894]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97798; File No. SR-FINRA-2023-009]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend FINRA's Trading Activity Fee

June 26, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 23, 2023, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as ``establishing or changing a 
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\ 
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon receipt of this filing by the Commission. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Section 1(b) of Schedule A to the FINRA 
By-Laws to exempt from the Trading Activity Fee (``TAF'') any 
transaction by a proprietary trading firm that occurs on an exchange of 
which the proprietary trading firm is a member.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    As a general matter, the most significant sources of FINRA's 
funding are three core regulatory fees: the Gross Income Assessment; 
the TAF; and the Personnel Assessment.\5\ These regulatory fees are 
used to substantially fund FINRA's regulatory activities, including 
examinations, financial monitoring, and FINRA's policymaking, 
rulemaking, and enforcement activities.\6\ As discussed in FINRA's 
prior Regulatory Notices, FINRA is proposing an exemption from one of 
FINRA's regulatory fees--the TAF--for transactions by ``proprietary 
trading firms,'' which FINRA understands would include firms currently 
operating in compliance with existing SEA Rule 15b9-1 and that would be 
required to become FINRA members in light of the SEC's proposed 
amendments to SEA Rule 15b9-1, as further discussed below.\7\ In this 
regard, FINRA proposes to define ``proprietary trading firm'' as a 
member that (i) trades exclusively its own capital; (ii) does not have 
``customers,'' which shall include any person, other than a broker or 
dealer, with whom the member engages, or within the past six months has 
engaged, in securities activities; and (iii) conducts all trading 
through the firm's accounts by traders that are owners of, employees 
of, or contractors to the firm, or employees of an affiliate of the 
firm.
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    \5\ See FINRA By-Laws, Schedule A, Section 1.
    \6\ See Securities Exchange Act Release No. 90176 (October 14, 
2020), 85 FR 66592 (October 20, 2020) (Notice of Filing and 
Immediate Effectiveness of File No. SR-FINRA-2020-032).
    \7\ FINRA believes that proprietary trading firms currently 
operating in compliance with existing SEA Rule 15b9-1 that would 
join FINRA due to the SEC's proposed amendments to SEA Rule 15b9-1 
would meet the proposed definition of ``proprietary trading firm'' 
and would qualify for the proposed exemption (assuming no changes to 
their business models that would alter their eligibility), as well 
as current FINRA members that meet the proposed definition. See also 
infra notes 37 and 39.
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    Under the Exchange Act, a registered broker-dealer must become a 
member of a national securities association (currently, FINRA is the 
sole national securities association) unless the broker-dealer effects 
transactions in securities solely on a national securities exchange of 
which it is a member.\8\ SEA Rule 15b9-1 provides an exemption to the 
requirement that a broker-dealer become a member of a national 
securities association if the broker-dealer (i) is a member of a 
national securities exchange, (ii) carries no customer accounts, and 
(iii) 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 (the $1,000 limitation 
is known as the ``de minimis allowance'').\9\ The $1,000 gross income 
limitation does not apply to income derived from transactions for the 
dealer's own account with or through another registered broker or 
dealer. Thus, for example, income derived from over-the-counter trades 
through an alternative trading system does not count toward the $1,000 
threshold. On July 29, 2022, the SEC proposed amendments to SEA Rule 
15b9-1 to narrow the exemption from association membership.\10\
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    \8\ 15 U.S.C. 78o(b)(8).
    \9\ 17 CFR 240.15b9-1.
    \10\ See Securities Exchange Act Release No. 95388 (July 29, 
2022), 87 FR 49930 (August 12, 2022) (``Proposing Release''). The 
SEC previously proposed to amend SEA Rule 15b9-1 in 2015. See 
Securities Exchange Act Release No. 74581 (March 25, 2015), 80 FR 
18036 (April 2, 2015) (File No. S7-05-15) (``2015 Proposal'').
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    As discussed in the Proposing Release, the securities markets have 
evolved dramatically since the adoption of SEA Rule 15b9-1 and, today, 
the de minimis allowance is relied upon by proprietary trading firms 
that, in some cases, engage in substantial cross-exchange and off-
exchange trading activity, yet they are not subject to FINRA 
oversight.\11\ The SEC therefore proposed to eliminate the de minimis 
allowance and instead provide that a broker-dealer may effect 
transactions otherwise than on a national securities exchange of which 
it is a member in

[[Page 42405]]

only two narrow circumstances: (i) transactions that result solely from 
orders routed by the exchange of which the firm is a member to prevent 
trade-throughs consistent with Rule 611 of Regulation NMS or the 
Options Order Protection and Locked/Cross Market Plan; and (ii) 
transactions that are solely for the purpose of executing the stock leg 
of a stock-option order, subject to specified conditions.\12\
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    \11\ See Proposing Release, supra note 10, 87 FR 49930, 49931.
    \12\ See Proposing Release, supra note 10.
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    The SEC estimates that the proposed amendments to SEA Rule 15b9-1 
would impact approximately 65 broker dealers that are not currently 
FINRA members.\13\ Thus, if adopted, the proposed amendments to SEA 
Rule 15b9-1 would require additional broker-dealers to become a member 
of FINRA (unless they limit their activities to the contours of the 
amended exemption from membership in a national securities 
association), and such member firms would become subject to FINRA 
regulatory fees, among other requirements.
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    \13\ See Proposing Release, supra note 10, 87 FR 49930, 49954.
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    Proprietary trading firms that potentially could become members of 
FINRA have expressed concern about the TAF in particular. FINRA notes 
that there currently are several exemptions from the TAF, including for 
transactions by floor brokers and for market making transactions 
subject to Section 11(a) of the Act.\14\ However, proprietary trading 
firms do not function as floor brokers and may only be registered 
market makers in some, but not all, of the securities that they trade. 
As a result, if the proposed amendments to SEA Rule 15b9-1 are adopted 
by the SEC, those proprietary trading firms that would become FINRA 
members would be subject to the TAF for much of their trading activity, 
including transactions on exchanges of which they are a member. The SEC 
noted specifically when proposing the amendments to SEA Rule 15b9-1 
that FINRA may want to ``evaluate its TAF to ensure that it 
appropriately reflects the activities of, and regulatory 
responsibilities towards, broker-dealer proprietary trading firms that 
would be required to join FINRA if the proposed amendments to [SEA] 
Rule 15b9-1 are adopted.'' \15\ In light of the SEC's proposed 
amendments to SEA Rule 15b9-1, FINRA has considered the application and 
potential impact of the TAF to proprietary trading firms and has 
concluded that it is appropriate to provide an exemption from the TAF 
for all proprietary trading firms for transactions executed on an 
exchange of which the proprietary trading firm is a member.\16\ As 
FINRA regularly evaluates its fees to ensure appropriate funding for 
its regulatory mission, FINRA expects to evaluate the TAF--including 
with respect to proprietary trading firms--more broadly in the future.
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    \14\ FINRA By-Laws, Schedule A, Section 1(b)(2)(F) and (G).
    \15\ See Proposing Release, supra note 10, 87 FR 49930, 49943. 
In the 2015 Proposal, the SEC made a similar comment: ``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-FINRA member firms] that, as a 
result of the amendments to [SEA] Rule 15b9-1, may join FINRA.'' See 
2015 Proposal, supra note 10, 80 FR 18036, 18044 n.95.
    \16\ FINRA notes that, in addition to any other applicable FINRA 
fees, proprietary trading firms would incur a TAF obligation on 
transactions executed otherwise than on an exchange and on 
transactions executed on an exchange of which the firm is not a 
member. These transactions would be subject to the TAF under the 
existing fee structure and at existing rates.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA will announce the implementation date of the 
proposed rule change in a Regulatory Notice. The implementation date 
will be no earlier than the date of adoption of the Commission's 
amendments to SEA Rule 15b9-1 eliminating the de minimis allowance and 
no later than the effective date of any such amendments.\17\
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    \17\ See supra note 10.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\18\ which requires, among 
other things, that FINRA rules provide for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that FINRA operates or 
controls. FINRA believes that the proposed TAF exemption will result in 
an equitable allocation of fees to proprietary trading firms in accord 
with their activities and the regulatory resources to oversee them with 
respect to their trading activity on an exchange of which they are a 
member.
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    \18\ 15 U.S.C. 78o-3(b)(5).
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    FINRA believes it is reasonable to propose this amendment in view 
of the fact that regulatory costs for firms that do not have customers 
are expected to be less than the cost to oversee the activity of firms 
with customers. FINRA also believes that it is appropriate to proceed 
with an exemption for proprietary trading firms with respect to their 
transactions on an exchange of which they are a member because FINRA 
anticipates that regulatory costs largely will relate to overseeing 
such firms' activity over the counter or across exchanges.
    Under the proposal, proprietary trading firms (as defined in the 
proposed rule) that are current FINRA members would experience a 
reduction in their TAF assessments to the extent they conduct non-
market making transactions executed on exchanges of which they are 
members. Proprietary trading firms that become FINRA members would 
incur a smaller TAF assessment than they otherwise would pay absent the 
proposal. Finally, FINRA believes that the proposal is reasonable in 
that the proposed exemption is clear, simple, and cost effective for 
firms to implement.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Assessment
1. Regulatory Need
    As discussed above, the SEC is proposing to amend SEA Rule 15b9-1 
to narrow the scope of the exemption from FINRA membership. The 
proposed amendments to SEA Rule 15b9-1, if adopted, would generally 
require proprietary trading firms to become FINRA members if they 
engage in trading otherwise than on exchanges of which they are 
members.\19\
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    \19\ See supra notes 10-12 and accompanying text.
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2. Economic Baseline
    The economic baseline for FINRA's proposed rule change consists of 
the regulatory framework under the SEC's proposed amendments to SEA 
Rule 15b9-1, if adopted, as well as FINRA's current TAF. In the 
Proposing Release, the SEC notes that, under the amended rule, a non-
FINRA member firm that trades equities, options or fixed income 
securities off-exchange, or on exchanges of which it is not a member, 
can comply in four ways. One option is to join FINRA. The other options 
are to cease any off-exchange trading and either trade solely upon the 
exchanges of which the firm is already a member, or join additional 
exchanges, or cease trading securities altogether.\20\ The discussion 
below briefly considers the benefits, costs and other economic impacts 
of the SEC proposed amendments to SEA Rule 15b9-1, as discussed by the 
SEC, to facilitate the

[[Page 42406]]

consideration of the economic impacts of FINRA's proposed rule change 
to the TAF.
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    \20\ See Proposing Release, supra note 10, 87 FR 49930, 49958.
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    FINRA expects that some firms that are not currently FINRA members 
will apply for FINRA membership due to the SEC's modifications to SEA 
Rule 15b9-1, if adopted. These firms would maintain the ability to 
effect securities transactions on the same on and off exchange venues 
on which they currently effect such transactions. These firms would 
incur the one-time and ongoing costs of FINRA membership, including the 
TAF and other regulatory fees. The TAF would increase these firms' 
variable costs to trade, and the SEC notes that this may lead certain 
firms to reduce their trading both on-exchange and off-exchange.\21\ 
These firms may, however, mitigate some of the disincentive that comes 
from being liable for the TAF for trading on exchanges by registering 
as market makers.\22\ Membership by these firms in FINRA would provide 
more stable and uniform FINRA surveillance of off-exchange and cross-
exchange trading activity than currently occurs.\23\
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    \21\ See Proposing Release, supra note 10, 87 FR 49930, 49958-
60, 49965.
    \22\ See Proposing Release, supra note 10, 87 FR 49930, 49960, 
49965.
    \23\ See Proposing Release, supra note 10, 87 FR 49930, 49962.
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    Other non-FINRA member firms may choose to cease their off-exchange 
activity rather than join FINRA. Some of these firms may adjust their 
business models to trade solely upon the exchanges of which they are 
already a member or join additional exchanges upon which they wish to 
trade. However, since these firms may currently trade on exchanges of 
which they are not members, they may also cease trading on some of 
those exchanges.\24\
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    \24\ See Proposing Release, supra note 10, 87 FR 49930, 49967.
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    The SEC also discusses how the changes non-FINRA member firms make 
to their business models to comply with the proposed amendments to SEA 
Rule 15b9-1 may affect other activities, including competition in the 
equity and U.S. Treasury securities markets, particularly for off-
exchange liquidity provision.\25\ As discussed above, non-FINRA member 
firms that join FINRA may reduce trading off-exchange and those that do 
not join FINRA will cease trading off-exchange, with similar impacts on 
their provision of off-exchange liquidity. Non-FINRA member firms may 
also reduce trading and liquidity provision on exchanges, whether or 
not they join FINRA.\26\ A loss in liquidity provision may impose costs 
on investors in the form of higher trading costs than they would 
otherwise realize.\27\ However, current member firms may increase their 
activity and offset some of these impacts, both on and off-
exchange.\28\ The ultimate impact on liquidity, execution quality and 
trading volume for particular assets and trading venues is generally 
not determinate. Regarding the overall provision of liquidity to 
financial markets, however, the SEC argues that the effect of the 
proposed rule is not likely to be significant.\29\
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    \25\ See Proposing Release, supra note 10, 87 FR 49930, 49958.
    \26\ See Proposing Release, supra note 10, 87 FR 49930, 49959-
60.
    \27\ See Proposing Release, supra note 10, 87 FR 49930, 49959. 
The SEC also states that the removal of liquidity from the market 
could either improve or degrade execution quality on off-exchange 
markets and reduced liquidity on exchanges can result in higher 
spreads and increased liquidity. Id. at 49960.
    \28\ See Proposing Release, supra note 10, 87 FR 49930, 49960.
    \29\ See supra note 28.
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    Current FINRA members, including proprietary trading firms, would 
not be directly affected by the SEC proposal.\30\ However, to the 
extent that member firms currently compete with non-member firms that 
must become FINRA members or change their historical trading activities 
to avoid FINRA membership, the current members may benefit from having 
more uniform regulatory requirements among similarly situated 
competitors.
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    \30\ See Proposing Release, supra note 10, 87 FR 49930, 49963.
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    The SEC has estimated that there are approximately 65 broker-
dealers registered with the Commission and exchange members that are 
not FINRA members. Each of these non-FINRA member firms will assess the 
costs and benefits of the options permitted by the amendments the SEC 
may make to SEA Rule 15b9-1. FINRA cannot determine the number of firms 
that may choose to become FINRA members or the likelihood or magnitude 
of any anticipated changes in trading behavior because of the proposed 
SEC rule amendments.\31\
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    \31\ FINRA notes that the SEC Proposal also discusses 
difficulties related to predicting changes in trading behavior and 
associated competitive impacts. See Proposing Release, supra note 
10, 87 FR 49930, 49960.
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    FINRA estimates that approximately 66 member firms derive all or 
most of their revenue from proprietary trading, although not all of 
these firms would meet the proposed definition of ``proprietary trading 
firm'' based on their current business models.\32\ FINRA understands 
that, of the 66 firms that clear their own trades, the TAF accounts for 
over 85% of the regulatory fees paid by these firms (GIA, PA and TAF). 
However, most of the 66 firms do not clear their own trades and so do 
not pay TAF directly to FINRA.\33\ Whether these firms conduct trades 
subject to TAF and whether they reimburse their clearing firm for the 
TAF, is not known to FINRA. Overall, between 2015 and 2022, TAF as a 
proportion of regulatory fees received by FINRA ranged from 41% to 56%. 
For the member firms that are proprietary trading firms and conduct 
trades subject to TAF, this may be a closer approximation to the 
maximum share of their regulatory fees that would be subject to the 
proposed TAF exemption.
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    \32\ Some of these 66 member firms may need to adjust their 
business models if they seek to qualify for the proposed TAF 
exemption. Whether these firms would eliminate disqualifying 
activity, move it into a separate entity or decline to take the TAF 
exemption depends on the value of this activity and the extent to 
which the loss of scale economies in conducting the activity in a 
separate entity would affect the cost.
    \33\ See Trading Activity Fee Frequently Asked Questions, 
https://www.finra.org/rules-guidance/guidance/faqs/trading-activity-fee (``Data should be submitted as monthly aggregates at the 
clearing firm level'' A100.6).
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3. Economic Impacts
    FINRA is proposing to amend the TAF to exempt all transactions by a 
FINRA member proprietary trading firm executed on an exchange of which 
it is a member.\34\ The proposed rule change would directly impact 
member proprietary trading firms by providing them an exemption from 
the TAF for such transactions. These member proprietary trading firms 
include current FINRA members as well as those that would join FINRA 
due to the SEC's proposed amendments to SEA Rule 15b9-1. The FINRA 
proposed rule change may also impact the number of non-member 
proprietary trading firms that choose to apply for FINRA membership 
rather than use one of the other options for compliance (as described 
above). All comparisons below are relative to the baseline, and 
therefore assume that SEA Rule 15b9-1 is amended as proposed and that, 
notionally, firms have adjusted their business conduct taking into 
account the SEC proposed rule and market conditions, as described 
above.
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    \34\ As noted above, the TAF currently provides an exemption for 
proprietary transactions by a member firm effected on an exchange of 
which it is a member in its capacity as a specialist or market maker 
in the security on that exchange.
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a. Anticipated Benefits
    FINRA believes that the proposed TAF exemption is clear and simple 
for firms to implement. In addition, the

[[Page 42407]]

proposed TAF exemption will likely dampen potential competitive effects 
and other market impacts as participants determine how to respond to 
proprietary trading firms' change in trading behaviors in response to 
the amendments to SEA Rule 15b9-1, while continuing to assess fees in a 
manner that is fair, reasonable, and equitably allocated among FINRA 
member firms. FINRA anticipates that, by reducing the fees associated 
with FINRA membership, the proposed TAF exemption may result in more 
proprietary trading firms joining FINRA. FINRA membership would allow 
these firms increased flexibility in where and how they trade.
    Proprietary trading firms that are current FINRA members would 
experience a reduction in their TAF assessments to the extent they 
conduct non-market making transactions executed on exchanges of which 
they are members. Under the proposed TAF exemption, proprietary trading 
firms that become FINRA members would incur a smaller TAF assessment 
than they otherwise would pay absent the proposal. FINRA cannot 
determine the number of firms for which the proposed TAF exemption will 
have an impact on their determination of whether to become FINRA 
members and the likelihood or magnitude of any anticipated changes in 
trading behavior. There is significant diversity in the business models 
of proprietary trading firms. FINRA expects that the impacts of the 
exemption would depend on the level of trading activities proprietary 
trading firms conduct other than on the exchanges of which they are 
members. The impacts may also vary with the proportion of TAF to their 
overall FINRA membership costs. When TAF is expected to be a 
significant component of their membership costs, the proposed exemption 
is more likely to affect the firm's decision to become a FINRA member 
under the baseline.
b. Anticipated Costs
    As discussed above, FINRA anticipates that the proposed TAF 
exception may increase the number of proprietary trading firms that 
choose to become FINRA members relative to the baseline. The costs to 
these firms, like the benefits to these firms discussed above, are 
qualitatively the same as those incurred by proprietary trading firms 
that would choose to become FINRA members absent the proposed TAF 
exemption. These firms presumably choose to become FINRA members 
because the overall financial outcome is superior to that which would 
occur without joining FINRA and complying with the SEC proposed rule by 
restricting their trades to exchanges of which they are members.
4. Other Economic Effects
Effects on Trading Activities
    Proprietary trading firms that are current FINRA members may alter 
their trading strategies to take advantage of the proposed TAF 
exemption, which may impact the amount and allocation of trading 
activity among exchange and off-exchange trading venues from the 
baseline. Likewise, the existence of the TAF exemption may impact non-
FINRA member firms' decision whether to become FINRA members, and thus 
also may impact the amount and allocation of trading activity among 
exchange and off-exchange trading venues from the baseline.
    These potential changes in trading activity of proprietary trading 
firms may affect liquidity, execution quality and trading volume on the 
various trading venues. However, the extent and direction of the effect 
is generally not determinate and depends on how other market 
participants, including non-proprietary trading firms, respond to 
proprietary firms' actions.\35\ To the extent the TAF exemption dampens 
a decrease in liquidity that may otherwise result as trading firms 
adjust to the amendments to SEA Rule 15b9-1, such an impact could help 
improve outcomes for investors seeking to trade, including lowering 
transaction costs or providing greater immediacy in trading relative to 
the baseline.
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    \35\ See Proposing Release, supra note 10, 87 FR 49930, 49959.
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Effects on Competition
    FINRA members that are proprietary trading firms may compete to 
provide liquidity with other FINRA members. Since the proposed TAF 
exemption is only available for proprietary trading firms, it could 
provide those firms with a competitive advantage over other members 
that engage in similar trading activity but do not qualify as 
proprietary trading firms by changing the relative costs of trading. 
However, this advantage would not be greater than what non-FINRA member 
proprietary trading firms currently experience (prior to the potential 
amendments of SEA Rule 15b9-1).
    In addition, to the extent the proposed rule change leads to more 
proprietary trading firms joining FINRA, the proposed rule change may 
increase competition by having a more level playing field in terms of 
the costs associated with FINRA membership and regulatory requirements. 
As discussed in the SEC Proposal, competition in liquidity provision 
may be distorted by inequalities in regulatory requirements.\36\ With 
more uniform regulatory requirements and oversight due to the potential 
increase in FINRA membership, proprietary trading firms could compete 
more equitably to supply liquidity both on and off-exchange.
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    \36\ See Proposing Release, supra note 10, 87 FR 49930, 49960.
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5. Alternatives Considered
    FINRA considered alternatives to the exemption proposed in this 
proposed rule change. FINRA believes that the proposed TAF exemption is 
preferable to an exemption from other types of fees and is directly 
related to the impacts on the provision of liquidity that the SEC 
discusses in its proposal.
    FINRA also considered other alternative changes to the TAF, 
including adjusting the overall rate of the TAF or implementing a 
tiered TAF structure based on trading activity or providing caps. 
However, such alternatives could likely be more costly to implement for 
both the affected firms and FINRA, compared to the proposed TAF 
exemption. Accordingly, FINRA believes that the simple structure in 
this proposed rule change would be more cost effective to implement. 
FINRA will have more information about the total fees paid by 
proprietary trading firms, and their impact on FINRA's regulatory 
programs and fees once these firms become FINRA members.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Following the SEC's 2015 Proposal to amend SEA Rule 15b9-1, FINRA 
published Regulatory Notice 15-13 to solicit comment on a proposal to 
exclude from FINRA's TAF transactions by a proprietary trading firm on 
exchanges of which the firm is a member.\37\ Four comment letters were 
received in response to the 2015 Notice.\38\ Following the SEC's re-

[[Page 42408]]

proposal of amendments to SEA Rule 15b9-1 in December 2022, FINRA re-
opened the comment period for Regulatory Notice 15-13 by publishing 
Regulatory Notice 22-30.\39\ Four additional comment letters were 
received in response to the 2022 Notice.\40\ A copy of both Regulatory 
Notices are available on FINRA's website at http://www.finra.org. 
Copies of the comment letters received in response to both Regulatory 
Notices are also available on FINRA's website.
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    \37\ See Regulatory Notice 15-13 (May 2015) (``2015 Notice'').
    \38\ Letter from Mary Ann Burns, Chief Operating Officer, FIA 
Principal Traders Group (``FIA PTG''), to Marcia E. Asquith, 
Corporate Secretary, FINRA, dated June 19, 2015 (``FIA PTG 2015 
Letter''); Letter from Adam Nunes, Hudson River Trading LLC 
(``HRT''), to Marcia E. Asquith, Corporate Secretary, FINRA, dated 
June 19, 2015 (``HRT 2015 Letter''); Letter from Rory O'Kane, 
Chairman of the Board & James Toes, President and CEO, Security 
Traders Association (``STA''), to Marcia E. Asquith, Corporate 
Secretary, FINRA, dated June 19, 2015 (``STA Letter''); and Letter 
from Theodore R. Lazo, Managing Director and Associate General 
Counsel, Securities Industry and Financial Markets Association 
(``SIFMA''), to Marcia E. Asquith, Corporate Secretary, FINRA, dated 
June 22, 2015 (``SIFMA Letter'').
    \39\ See Regulatory Notice 22-30 (December 2022) (``2022 
Notice'').
    \40\ Letter from Adam Nunes, Hudson River Trading LLC, to 
Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, 
dated February 13, 2023 (``HRT 2023 Letter''); Letter from Joanna 
Mallers, Secretary, FIA PTG, to Jennifer Piorko Mitchell, Office of 
Corporate Secretary, FINRA, dated March 8, 2023 (``FIA PTG 2023 
Letter''); Letter from John Kinahan, Chief Executive Officer, Group 
One Trading, LP (``Group One''), to Jennifer Piorko Mitchell, Office 
of Corporate Secretary, FINRA, dated March 15, 2023 (``Group One 
Letter''); and Letter from University of Pittsburgh, School of Law 
(``Pittsburgh University'') to Jennifer Piorko Mitchell, Office of 
Corporate Secretary, FINRA, dated March 17, 2023 (``University of 
Pittsburgh Letter'').
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    FINRA received four generally supportive comment letters in 
response to Regulatory Notice 15-13.\41\ All of these commenters also 
suggested expanding the proposed TAF exemption to cover additional 
proprietary trades. FINRA received three supportive \42\ and one 
unsupportive \43\ comment letter in response to Regulatory Notice 22-
30.
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    \41\ See FIA PTG 2015 Letter; HRT 2015 Letter; SIFMA Letter; and 
STA Letter.
    \42\ See FIA PTG 2023 Letter; Group One Letter; and HRT 2023 
Letter.
    \43\ See University of Pittsburgh Letter.
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Supportive Comments
    The FIA PTG 2023 Letter, HRT 2023 Letter, and Group One Letter 
stated that the proposed TAF exemption would help address the 
significant increase in costs that affected firms would otherwise face 
in light of the SEC's proposed amendments. HRT and FIA PTG further 
stated that the proposed exemption from TAF appropriately recognizes 
the differences in the activities between proprietary trading 
businesses and customer businesses, and the accompanying costs related 
to regulating each type of business.\44\ Group One added that 
implementing the proposed TAF exemption would support the ability of 
proprietary trading firms to continue to provide liquidity in the least 
disruptive manner possible.\45\ HRT, FIA PTG, and Group One also 
asserted that implementing the TAF exemption would achieve an equitable 
allocation of fees and be in line with FINRA's actual cost of 
regulating its members.\46\ SIFMA also generally supported the proposed 
TAF exemption and stated that FINRA should not assess TAF on any 
principal transactions executed on exchanges of which the firm is a 
member, regardless of the type of firm.\47\
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    \44\ See HRT 2023 Letter, at 1-2; FIA PTG 2023 Letter.
    \45\ See Group One Letter, at 1.
    \46\ See HRT 2023 Letter; FIA PTG 2023 Letter; and Group One 
Letter.
    \47\ See SIFMA Letter, at 2.
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Requests for Modifications
    The FIA PTG 2015 Letter and SIFMA Letter requested that the 
proposed TAF exemption be broadened to include all principal trades 
done on an exchange of which a firm is a member, rather than just 
trades by proprietary trading firms.\48\ Similarly, STA recommended 
that FINRA ``reduce the TAF rates for equity transactions by 
proprietary firms on over-the-counter and exchanges of which they are 
not a member.'' \49\
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    \48\ Some comments also addressed the potential restructuring of 
the TAF as well as issues related to other FINRA fees. For example, 
STA suggested that FINRA reduce the current TAF rate for equity 
securities and, in particular, consider reducing the rate for over-
the-counter and exchange trades by proprietary trading firms. SIFMA 
requested that FINRA review its fees more broadly and provide more 
transparency into how it uses and allocates the revenues it receives 
from fees and other sources of income. While these comments are not 
germane to the instant proposal--which seeks to provide an exemption 
from the TAF for a proprietary trading firm for transactions on an 
exchange of which it is a member--FINRA notes that it reviews its 
revenues as part of its budgeting process and revises fees as 
appropriate, both their application and their rates. In this regard, 
on October 14, 2020, FINRA amended various regulatory fees to 
increase the revenues that FINRA, as a not-for-profit self-
regulatory organization, relies upon to fund its regulatory mission. 
The proposed fee increases were designed to better align FINRA's 
revenues with its costs while preserving the existing equitable 
allocation of fees among FINRA members. See Securities Exchange Act 
Release No. 90176 (October 14, 2020), 85 FR 66592 (October 20, 2020) 
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2020-032).
    \49\ See STA Letter, at 4.
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    HRT proposed that all principal trades executed on any exchange be 
exempt from the TAF, adding that ``off-exchange trades, as well as 
Agency and Riskless Principal trades executed on an exchange, should 
continue to be charged the TAF.'' \50\ HRT stated that, as proposed, 
the TAF exemption may discourage firms from engaging in customer-based 
business \51\ or, alternatively, could result in such firms operating 
multiple broker-dealers to avoid the proprietary firm business 
incurring a TAF obligation on exempt exchange transactions.\52\
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    \50\ See HRT 2015 Letter, at 2.
    \51\ See supra note 50.
    \52\ See supra note 50; see also FIA PTG 2015 Letter, at 3.
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    As discussed above, FINRA believes that it is appropriate to 
proceed with an exemption from TAF for proprietary trading firms with 
respect to their transactions on an exchange of which they are a member 
because FINRA anticipates that regulatory costs largely will relate to 
overseeing such firms' activity over the counter or across exchanges.
    The FIA PTG 2015 Letter requested that, should the TAF exemption be 
limited to ``proprietary trading firms'' as proposed, FINRA provide 
guidance regarding the scope of the term ``proprietary trading firm'' 
to clarify: (i) the scope of the term ``customer'' for purposes of the 
exemption, and (ii) the requirement that traders be owners of, 
employees of, or contractors to the firm. Specifically, the FIA PTG 
2015 Letter requested that FINRA clarify that the criteria ``does not 
have customers'' only applies to customers that are engaged in 
transactions in securities that are subject to the TAF, and not to 
``non-securities transactions, fixed-income transactions, and other 
businesses such as stock-lending and licensing of technology.'' \53\ 
FIA PTG also asked that FINRA specify what time period is relevant for 
purposes of determining whether a firm is engaged in a customer 
business.\54\ Further, FIA PTG requested that FINRA clarify that 
traders or other associated persons could be employed by an affiliate 
of the firm (rather than firm itself) without losing the ability to 
rely on the proposed exemption.\55\ FIA PTG asserted that such 
employment arrangements are ``a common structure'' for such firms.\56\
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    \53\ See FIA PTG 2015 Letter, at 4.
    \54\ See supra note 53.
    \55\ See supra note 53, at 5.
    \56\ See supra note 53, at 5.
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    In response to these comments, FINRA is clarifying that the 
relevant activities for purposes of the proposed definition of 
``proprietary trading firm'' are securities activities. The term 
``securities activities'' would include transactions in any security 
(including fixed income) and also would include securities lending 
transactions. However, the term would not include non-securities 
activities such as licensing of technology or non-securities 
transactions. In addition, FINRA is modifying the definition of 
``proprietary trading firm'' to clarify that ``customer'' would include 
``any person, other than a broker or dealer, with whom the member 
engages, or within the past six

[[Page 42409]]

months has engaged, in securities activities.'' FINRA believes that the 
six-month proposed timeframe will provide additional clarity as to the 
application of the rule as members' businesses may evolve over time. 
Thus, for example, if a member restructures its business such that it 
ceases engaging in securities activities with customers, the member 
would be able to avail itself of the proposed proprietary trading firm 
exemption after a six-month period (assuming that the other conditions 
of the exemption are met). The six-month timeframe would be assessed on 
an ongoing basis; therefore, any securities activity with a customer 
would cause the firm to be ineligible for the exemption for six months 
from the time the firm ceases to engage in such customer activity. 
Finally, FINRA is proposing to include within the scope of 
``proprietary trading firm'' a firm that (in addition to the other 
criteria) conducts all trading through the firm's accounts by traders 
that are owners of, employees of, or contractors to the firm ``or 
employees of an affiliate of the firm.''
Unsupportive Comments
    Pittsburgh University stated that proprietary trading firms engage 
in significant trading in the marketplace, which pose a substantial 
risk to the market, and that there is a related cost for FINRA to 
supervise and oversee proprietary trading firm activity and that, 
therefore, FINRA should apply a TAF rate to proprietary trading firms 
that is proportional to the cost of regulating such firms.\57\ 
Pittsburgh University also stated that ``[w]hile the cost to regulate 
proprietary trading firms is less than the cost to regulate firms which 
trade on behalf of customers, proprietary trading firms should not be 
entirely exempt from the TAF when trading on an exchange on which they 
are members.'' \58\
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    \57\ See University of Pittsburgh Letter, at 6.
    \58\ See University of Pittsburgh Letter. Pittsburgh University 
added that ``[t]o exempt proprietary trading firms from TAFs would 
alter the balance between the TAF and other FINRA fees that fund 
FINRA's operations, due to an increased cost in regulation without a 
similar increase of resources.''
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    FINRA agrees that regulating proprietary trading firm trading 
activity will involve a cost. For this reason, FINRA is not proposing 
to exempt proprietary trading firms from the TAF altogether. As 
discussed above, FINRA believes it is appropriate to exempt proprietary 
trading firms from the TAF for transactions on an exchange of which 
they are a member because FINRA anticipates that regulatory costs 
largely will relate to overseeing such firms' activity over the counter 
or across exchanges.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \59\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\60\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.
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    \59\ 15 U.S.C. 78s(b)(3)(A).
    \60\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-FINRA-2023-009 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-FINRA-2023-009. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website 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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of FINRA. Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to file number SR-FINRA-2023-009 and should be submitted 
on or before July 21, 2023.
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    \61\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2023-13894 Filed 6-29-23; 8:45 am]
BILLING CODE 8011-01-P