Katten Fact Sheet for Certain Firms That Must Become FINRA Members

As background, the SEC adopted amendments to Rule 15b9-1 of the Securities Exchange Act of 1934 (SEA Rule 15b9-1) that require a broker-dealer to become a FINRA member if the broker-dealer effects transactions other than on an exchange of which it is a member. The new rule requires nearly all broker-dealers to become members of FINRA, thus eliminating a long-standing exemption for proprietary trading broker-dealers from the requirement to become a FINRA member if, generally, they were a member of an exchange and carried no customer accounts. 

The current exceptions are narrow: FINRA membership will be required unless (1) such transactions result solely from orders that are routed by a national securities exchange of which the firm is a member to comply with Rule 611 of Regulation NMS or the Options Order Protection and Locked/Crossed Market Plan, or (2) are solely for the purpose of executing the stock leg of a stock-option order. Due to the amendments, most proprietary SEC-registered broker-dealers will no longer qualify for the exemption and must become FINRA members by the compliance date of September 6, 2024.

Instead of completing a full New Member Application (NMA) Form, under the proposed rule amendment, FINRA will allow an eligible firm to undergo an NMA process with a short-form application. This expedited process also dispenses with the interview process typically required under the NMA. The short-form application is due to FINRA no later than May 9, 2024. So it can manage its workload, FINRA requests the application be filed early and is already processing these applications. For eligible firms, FINRA is charging half the applicable membership application fee.

In order to be eligible for the short-form application process, the applicant must be an SEC-registered, non-FINRA member firm that is required to become a FINRA member due to the amendments to SEA Rule 15b9-1. The applicant also must have been a member of a national securities exchange as of August 23, 2023, and not seek to expand its business.

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.

With FINRA membership comes other responsibilities. Depending on the broker-dealer’s practices, it may be required to:

• enhance its written supervisory procedures;
• undergo more frequent regulatory examinations and become subject to FINRA enforcement;
• have regular contact with its FINRA Risk Monitoring Analyst (RMA); and
• report trades in US Treasury securities to FINRA's fixed-income reporting system, Trade Reporting and Compliance Engine (TRACE) or arrange for the executing firm to report with the proprietary broker-dealer’s MPID.

The SEC's recent changes to Rule 15b9-1 have significant implications for proprietary trading firms registered with the SEC that are currently exempt from FINRA membership. Accordingly, any such firms that are required to become FINRA members should carefully prepare for the FINRA membership application process and ongoing compliance with applicable FINRA rules.