SEC Proposed Rule: Exemption for Certain Exchange Members

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Timeline, Exemption for Certain Exchange Members, SEC
Proposal Date Comment Deadline Final Rule Issue
March 25, 2015 60 days after Federal Register TBA

On March 25, 2015, the SEC proposed a rule that would essentially require proprietary traders to register with a national securities organization such as FINRA. The rule removes a previous exemption from registration for broker-dealers that "a member of a national securities exchange, carry no customer accounts, and have 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 they are a member."

Once the rule appears in the Federal Register, there will be a 60-day comment period. Comments may be filed HERE.


Section 15(b)(9) of the Exchange Act of 1934 allows the SEC to exempt from registration if the exemption is "consistent with the public interest and the protection of investors. "When an exemption was first granted in 1976 for broker-dealers that accepted no client monies in, the trading environment was different that it is today. Exchanges generally acted as self-regulatory organizations for their members.

In 1983, the rule was amended in order to address the off-exchange activities of specialists and floor brokers as part of their exchange functions. 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”). Income for the dealer's own account ("proprietary trading") did not count toward the de minimis allowance.

The commission believes that, with the evolution of the market structure to include alternative trading systems (ATSs), dark pools and multiple listings, the exemption is being used by firms engaged in high-frequency trading and other automated systems, with off-exchange activity comprising a much greater share of trading activity by these firms.

Summary of the Rule[edit]

The rule would be amended to require broker-dealers that conduct off-exchange activity to become members of an Association such as FINRA. 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. Also, a broker-dealer that does not trade off-exchange but that trades indirectly on multiple exchanges would be required 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.

Related Document: Proposed Rule[edit]



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