On August 23, 2023, the Securities and Exchange Commission (SEC) adopted amendments to SEC Rule 15b9-1 that effectively will require nearly all broker-dealers to become members of the Financial Industry Regulatory Authority (FINRA).
As background, SEC Rule 15b9-1 provides an exemption to broker-dealers from the requirement to become a member of a registered national securities association (i.e., FINRA). Prior to the recent amendments, SEC Rule 15b9-1 permitted a broker-dealer to avoid FINRA membership if the broker-dealer:
- was a member of an exchange;
- carried no customer accounts; and
- had annual gross income derived from securities transactions otherwise than on a national securities exchange of which it was a member in an amount no greater than $1,000. However, income derived from transactions for the broker-dealer’s own account with or through another registered broker-dealer did not count towards the $1,000 limitation. Collectively, this third prong has been referred to as the “proprietary trading exclusion.”
The SEC’s amendments retain the first and second prongs listed above but eliminate the proprietary trading exclusion described in the third prong. Instead, the proprietary trading exclusion has been replaced by two narrow exceptions that apply to off-member-exchange securities transactions that either (1) result solely from orders that are routed by a national securities exchange to comply with order protection regulatory requirements, or (2) are solely for purposes of executing the stock leg of a stock-option order.
The adopted amendments are identical to the amendments proposed by the SEC on July 29, 2022. More information on the proposal is available at this link.
As a result of the rule amendments, nearly all broker-dealers will be required to obtain FINRA membership prior to the compliance date of the rule amendments. The compliance date will be 365 days after publication in the Federal Register. In a comment letter, FINRA noted that it anticipates processing most of these new membership applications on an expedited basis within 60 days after submission.
Relatedly, FINRA adopted a rule amendment that provides that its Trading Activity Fee (TAF) will not apply to transactions by a proprietary trading firm executed on an exchange on which the proprietary trading firm is a member. FINRA will implement the TAF amendment 60 days after the SEC’s rule amendments to SEC Rule 15b9-1 have been published in the Federal Register.