[Federal Register Volume 88, Number 172 (Thursday, September 7, 2023)]
[Rules and Regulations]
[Pages 61850-61893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-18658]



[[Page 61849]]

Vol. 88

Thursday,

No. 172

September 7, 2023

Part V





 Securities and Exchange Commission





-----------------------------------------------------------------------





17 CFR Part 240





Exemption for Certain Exchange Members; Final Rule

  Federal Register / Vol. 88, No. 172 / Thursday, September 7, 2023 / 
Rules and Regulations  

[[Page 61850]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-98202; File No. S7-05-15]
RIN 3235-AN17


Exemption for Certain Exchange Members

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to a rule under the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') that exempts certain Commission-
registered brokers or dealers from membership in a registered national 
securities association (``Association''). The amendments replace rule 
provisions that provide an exemption for proprietary trading with 
narrower exemptions from Association membership for any registered 
broker or dealer that is a member of a national securities exchange, 
carries no customer accounts, and effects transactions in securities 
otherwise than on a national securities exchange of which it is a 
member. The amendments create exemptions for such a registered broker 
or dealer that effects securities transactions otherwise than on an 
exchange of which it is a member that result solely from orders that 
are routed by a national securities exchange of which it is a member to 
comply with order protection regulatory requirements, or are solely for 
the purpose of executing the stock leg of a stock-option order.

DATES: 
    Effective date: November 6, 2023.
    Compliance date: The compliance date is September 6, 2024.

FOR FURTHER INFORMATION CONTACT: Michael Bradley, Assistant Director, 
David Michehl, Special Counsel, Nicholas Shwayri, Special Counsel, 
Vince Vuong, Special Counsel, or Alba Baze, Attorney-Advisor, at (202) 
551-5500, Office of Market Supervision, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: 
I. Introduction
II. Background
    A. Regulatory Framework
    B. Updated Background Statistics
III. Discussion of Amendments to Rule 15b9-1
    A. Elimination of the De Minimis Allowance and Proprietary 
Trading Exclusion
    B. Narrowed Criteria for Exemption From Association Membership
    1. Routing Exemption
    2. Stock-Option Order Exemption
IV. Effective Date and Implementation
V. Economic Analysis
    A. Baseline
    1. Regulatory Structure and Activity Levels of Non-FINRA Member 
Firms
    2. Current Market Oversight
    3. Current Competition To Provide Liquidity
    B. Effects on Efficiency, Competition, and Capital Formation
    1. Firm Response and Effects on Market Activity and Efficiency
    2. Effect on Competition To Provide Liquidity
    3. Competitive Effects on Off-Exchange Market Regulation
    C. Consideration of Costs and Benefits
    1. Benefits
    2. Costs
    D. Alternatives
    1. Include a Floor Member Hedging Exemption
    2. Exchange Membership Alternative
    3. Retaining the De Minimis Allowance
    4. Eliminate the Rule 15b9-1 Exemption
    5. Mandate TRACE U.S. Treasury Securities Reporting Without 
Requiring Association Membership
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
VII. Regulatory Flexibility Act Certification
VIII. Other Matters

I. Introduction

    On July 29, 2022, the Commission re-proposed amendments to 17 CFR 
240.15b9-1 (``Rule 15b9-1'').\1\ The Commission is adopting those 
amendments as re-proposed.
---------------------------------------------------------------------------

    \1\ See Securities Exchange Act Release No. 95388 (July 29, 
2022), 87 FR 49930 (Aug. 12, 2022) (``2022 Re-Proposing Release'' or 
``2022 Re-Proposal''). The 2022 Re-Proposal re-proposed amendments 
that the Commission proposed on Mar. 25, 2015. See Securities 
Exchange Act Release No. 74581 (Mar. 25, 2015), 80 FR 18036 (Apr. 2, 
2015) (``2015 Proposing Release'' or ``2015 Proposal'').
---------------------------------------------------------------------------

    Rule 15b9-1 sets forth an exemption from section 15(b)(8) of the 
Act pursuant to which a Commission-registered dealer can engage in 
unlimited proprietary trading of securities on any exchange of which it 
is not a member or in the off-exchange market (collectively referred to 
herein as ``off-member-exchange'') without joining an Association, so 
long as the dealer is a member of a national securities exchange, 
carries no customer accounts, and its proprietary trading is conducted 
with or through another registered broker-dealer.\2\ The Commission 
adopted this exemption several decades ago so that an exchange member's 
limited off-member-exchange proprietary trading activity ancillary to 
its exchange activity--which, at that time, typically was a floor 
business conducted on a single national securities exchange--would not 
necessitate Association membership in addition to exchange 
membership.\3\
---------------------------------------------------------------------------

    \2\ Section 15(b)(8) of the Act prohibits any registered broker 
or dealer from effecting transactions in securities unless it is a 
member of an Association or effects transactions in securities 
solely on an exchange of which it is a member. Section 15(b)(8) 
applies to any security other than commercial paper, bankers' 
acceptances, or commercial bills. 15 U.S.C. 78o(b)(8). References 
herein to ``exchange'' or ``national securities exchange'' are to a 
national securities exchange that is registered with the Commission 
pursuant to section 6 of the Act. See 17 CFR 240.600(b)(45) 
(defining ``national securities exchange''). ``Off-exchange'' as 
used herein means any securities transaction that is covered by 
section 15(b)(8) of the Act that is not effected, directly or 
indirectly, on a national securities exchange. Off-exchange trading 
includes securities transactions that occur through alternative 
trading systems (``ATSs'') or with another broker or dealer that is 
not a registered ATS, and is also referred to as over-the-counter 
(``OTC'') trading.
    \3\ See infra notes 33-34 and accompanying text (discussing the 
adoption of 17 CFR 240.15b8-1 (``Rule 15b8-1''), which was later 
renumbered to Rule 15b9-1).
---------------------------------------------------------------------------

    The adopted amendments update Rule 15b9-1 by rescinding the 
proprietary trading exemption from the rule such that, subject to two 
narrow exemptions, Commission-registered broker-dealers that effect 
off-member-exchange securities transactions must comply with section 
15(b)(8) of the Act by joining an Association. The amended rule's two 
exemptions apply when a broker or dealer that does not carry customer 
accounts and is a member of at least one exchange effects off-member-
exchange securities transactions that: (1) result solely from orders 
that are routed by an exchange of which the broker or dealer is a 
member in order to comply with 17 CFR 242.611 (Rule 611 of Regulation 
NMS) or the Options Order Protection and Locked/Crossed Market Plan; 
\4\ or (2) are solely for the purpose of executing the stock leg of a 
stock-option order.\5\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (Aug. 6, 2009) (``Options Linkage Plan'').
    \5\ See amended Rule 15b9-1, under ``Text of Amendments,'' 
infra. Consistent with section 15(b)(8) of the Act, and unchanged by 
the adopted amendments, a broker or dealer is not required to become 
a member of an Association if the broker or dealer effects 
securities transactions only on an exchange of which it is a member. 
See section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8).
---------------------------------------------------------------------------

    In the decades since the adoption of the proprietary trading 
exemption, the securities markets have undergone a substantial 
transformation that has been

[[Page 61851]]

driven primarily by rapid and ongoing evolution of technologies for 
generating, routing, and executing orders, and the impact of regulatory 
changes.\6\ Today, little trading in the U.S. securities markets is 
floor-based and broker-dealer firms no longer trade primarily on a 
single exchange. Rather, securities trading today is highly automated, 
substantially more complex, and dispersed among many trading centers 
including 24 registered exchanges and a myriad off-exchange venues such 
as ATSs and OTC market makers.\7\ Proprietary trading broker-dealer 
firms have emerged that engage in significant, computer-based or 
algorithmic, securities trading activity for their own account across 
the full range of these exchange and off-exchange venues, often at 
lightning speeds.\8\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 61358 (Jan. 14, 
2010), 75 FR 3594 (Jan. 21, 2010) (Concept Release on Equity Market 
Structure) (``Equity Market Structure Concept Release''), at 3594 
(``Changes in market structure also reflect the markets' response to 
regulatory actions such as Regulation NMS, adopted in 2005, the 
Order Handling Rules, adopted in 1996, as well as enforcement 
actions, such as those addressing anti-competitive behavior by 
market makers in NASDAQ stocks.'').
    \7\ See 2015 Proposing Release, supra note 1, 80 FR 18038; 2022 
Re-Proposal, supra note 1, 87 FR 49935. See also Equity Market 
Structure Concept Release, supra note 6.
    \8\ Proprietary trading firms that engage in so-called high-
frequency trading strategies tend to effect transactions across the 
full range of exchange and off-exchange markets, including ATSs. 
They also typically use complex electronic trading strategies and 
sophisticated technology to generate a large volume of orders and 
transactions throughout the national market system. See 2015 
Proposal, supra note 1, 80 FR 18038; 2022 Re-Proposal, supra note 1, 
87 FR 49935-36. Many, but not all, 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 overnight). 
See Equity Market Structure Concept Release, supra note 6, 75 FR 
3606; see also Staff of the Division of Trading and Markets, 
``Equity Market Structure Literature Review, Part II: High Frequency 
Trading,'' at 4-5 (Mar. 18, 2014) (available at http://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf). Staff 
reports, Investor Bulletins, and other staff documents (including 
those cited herein) represent the views of Commission staff and are 
not a rule, regulation, or statement of the Commission. The 
Commission has neither approved nor disapproved the content of these 
staff documents and, like all staff statements, they have no legal 
force or effect, do not alter or amend applicable law, and create no 
new or additional obligations for any person.
---------------------------------------------------------------------------

    Rule 15b9-1 has remained static, however, as these types of firms 
have emerged and off-member-exchange securities trading has 
proliferated. As detailed in the 2022 Re-Proposal and section II.B 
below, several of these firms effect significant off-member-exchange 
securities transaction volume yet, in reliance on Rule 15b9-1, they are 
not members of the Financial Industry Regulatory Authority, Inc. 
(``FINRA''), the only Association currently.\9\ Broker-dealers that are 
not FINRA members are not subject to FINRA's rules or FINRA's direct, 
membership-based jurisdiction.\10\ As a result, when broker-dealer 
firms that are members of one or more exchanges but not FINRA members 
effect proprietary off-member-exchange securities transactions,\11\ 
these firms are not subject to FINRA's rules or its membership-based 
jurisdiction over such activity and are not all subject to the same set 
of exchange rules and interpretations of those rules, which can vary 
between exchanges.
---------------------------------------------------------------------------

    \9\ See 2022 Re-Proposal, supra note 1, 87 FR 49936-37. See also 
section III, infra. 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.
    \10\ See FINRA Rule 0140.
    \11\ To be consistent with current Rule 15b9-1's proprietary 
trading exemption, off-member-exchange securities trading must occur 
with or through another registered broker-dealer, such as, in the 
case of trading on an exchange where the firm is not a member, 
through a broker-dealer that is a member of the exchange. See 17 CFR 
240.15b9-1(b)(1).
---------------------------------------------------------------------------

    Because such exempt firms are not subject to FINRA's direct, 
membership-based jurisdiction when they engage in off-member-exchange 
securities trading activity, there is less stability and consistency in 
the oversight that is applied to such activity than there would be if 
such firms were Association members. To address this concern, the 
amendments to Rule 15b9-1 help ensure, as mandated by section 15(b)(8) 
of the Act, that an Association (currently, FINRA) generally has 
direct, membership-based oversight over broker-dealers that effect off-
member-exchange securities transactions and the jurisdiction to 
directly enforce their compliance with Federal securities laws, 
Commission rules, and Association rules. Requiring broker-dealers that 
engage in off-member-exchange securities transactions to become 
Association members will provide FINRA with, among other things, the 
ability to apply with a greater degree of autonomy its expertise in 
supervising the firms' off-member-exchange securities trading activity 
and investigating potential misconduct in that market segment. With 
respect to FINRA members, FINRA can determine whether to pursue 
examinations and investigations, and the parameters thereof, in a way 
that it cannot with respect to non-FINRA members.
    Some commenters expressed broad support for the 2022 Re-Proposal, 
while other commenters expressed opposition primarily based on the 
argument that direct, membership-based FINRA oversight of proprietary 
trading broker-dealers is unnecessary in light of existing regulatory 
mechanisms and that the costs of FINRA membership would be unduly 
burdensome.\12\ As discussed in the 2022 Re-Proposal and section III 
below, direct, membership-based jurisdiction by an Association over 
broker-dealers that are not FINRA members cannot be achieved through 
existing self-regulatory organization (``SRO'') oversight mechanisms 
such as joint SRO plans pursuant to 17 CFR 240.17d-2 (``Rule 17d-2'') 
\13\ or regulatory service agreements (``RSA(s)''),\14\ or through 
reliance on the

[[Page 61852]]

Consolidated Audit Trail (``CAT'').\15\ Those regulatory measures are 
useful in many respects but, nevertheless, firms that are not FINRA 
members remain outside FINRA's direct, membership-based jurisdiction, 
and FINRA therefore cannot apply its expertise in supervising these 
firms' off-member-exchange securities trading activity and 
investigating potential misconduct with the same degree of autonomy 
that it can for FINRA members.\16\
---------------------------------------------------------------------------

    \12\ Comments received in response to the 2022 Re-Proposing 
Release are available at https://www.sec.gov/comments/s7-05-15/s70515.htm. The 2022 Re-Proposal re-proposed amendments to Rule 
15b9-1 that the Commission proposed in 2015, with certain 
modifications informed by comments received on the 2015 Proposal, 
which comments the Commission addressed in the 2022 Re-Proposal. See 
2015 Proposal, supra note 1. Comments received in response to the 
2015 Proposing Release are available at https://www.sec.gov/comments/s7-05-15/s70515.shtml.
    \13\ See 17 CFR 240.17d-2. With respect to a broker or dealer 
that is a member of more than one SRO (``common member''), section 
17(d)(1) of the Act 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. See section 17(d)(1) of the Act, 15 U.S.C. 78q(d)(1). To 
implement section 17(d)(1), the Commission adopted 17 CFR 240.17d-1 
(``Rule 17d-1'') and Rule 17d-2 under the Act. See 17 CFR 240.17d-1 
and 240.17d-2. 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 Commission or SRO rules. See 
Securities Exchange Act Release No. 12352 (Apr. 20, 1976), 41 FR 
18808 (May 7, 1976). 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. 
See Securities Exchange Act Release No. 12935 (Oct. 28, 1976), 41 FR 
49091 (Nov. 8, 1976). 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. 17 CFR 240.17d-
2. 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. 
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.
    \14\ In contrast to Rule 17d-2 plans, RSAs are privately 
negotiated agreements between two SROs that can expire or be 
terminated. Under an RSA, one SRO agrees to perform regulatory 
services on behalf of another SRO in exchange for compensation. 
Unlike Rule 17d-2 plans, the SRO paying for regulatory services 
under an RSA retains ultimate legal responsibility for and control 
over the regulatory functions allocated to the SRO providing the 
services. There are RSAs between exchange SROs and FINRA, but under 
these RSAs, for firms that are members of different exchanges but 
not FINRA members, FINRA applies to such firm's off-member-exchange 
trading activity the rules of their different member exchanges using 
the exchanges' interpretations of their rules. See Staff of the 
Division of Trading and Markets, ``Staff Paper on Cross-Market 
Regulatory Coordination,'' (Dec. 15, 2020) (available at https://www.sec.gov/tm/staff-paper-cross-market-regulatory-coordination) 
(``Cross-Market Regulatory Coordination Staff Paper''). In addition 
to regulatory coordination that occurs through Rule 17d-2 plans and 
RSAs, SROs also coordinate regulatory efforts through forums 
provided by the Intermarket Surveillance Group (``ISG''). See id.; 
see also 2022 Re-Proposal, section II.A.
    \15\ See 17 CFR 242.613; Securities Exchange Act Release No. 
79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (``CAT NMS Plan 
Approval Order''); notes 90, 107, and 108, infra, and accompanying 
text. See also 2022 Re-Proposal, 87 FR 49934, 49939. For proprietary 
trading broker-dealer firms that become FINRA members due to the 
amendments to Rule 15b9-1, regulatory coordination mechanisms such 
as Rule 17d-1 DEA designations and Rule 17d-2 plans would be 
available to mitigate the potential for duplicative exchange SRO and 
FINRA oversight.
    \16\ See supra note 14.
---------------------------------------------------------------------------

    Moreover, other regulatory developments have heightened the need 
for Rule 15b9-1 to be updated. In particular, FINRA has established a 
transaction reporting regime under which broker-dealers that are FINRA 
members must report U.S. Treasury securities transactions into the 
Trade Reporting and Compliance Engine (``TRACE'').\17\ Some Commission-
registered dealer firms that are not FINRA members are significantly 
involved in trading U.S. Treasury securities proprietarily but are not 
required to report these transactions since they are not FINRA members 
(although if the transaction involves a FINRA member, then the FINRA 
member must report the transaction to TRACE).\18\ In addition, U.S. 
Treasury securities trading occurs entirely off-exchange, thus these 
non-FINRA members conduct their U.S. Treasury securities trading 
activities outside of the direct SRO oversight of any exchange and, 
since they are not FINRA members, outside of FINRA's direct 
jurisdiction despite the fact that FINRA is the SRO responsible for the 
off-exchange market.
---------------------------------------------------------------------------

    \17\ See FINRA Rule 6700 Series; see also Securities Exchange 
Act Release No. 79116 (Oct. 18, 2016), 81 FR 73167 (Oct. 24, 2016) 
(File No. SR-FINRA-2016-027). In addition, FINRA requires its 
members to report all OTC Equity Security and Restricted Equity 
Security transactions (other than transactions executed on or 
through an exchange) to FINRA's OTC Reporting Facility (``ORF''). 
See FINRA Rules 6410 and 6610; see also FINRA Rules 6420(f) 
(defining ``OTC Equity Security''); 6420(k) (defining ``Restricted 
Equity Security''); 6420(n) (defining ``OTC Reporting Facility''). 
FINRA also requires its members to report off-exchange NMS stock 
trades to two Trade Reporting Facilities (``TRFs'') that FINRA 
operates, one jointly with Nasdaq and the other jointly with the 
NYSE. See FINRA Rule 6110 and the FINRA Rule 6000 Series generally; 
see also 17 CFR 242.600(b) (defining ``NMS stock''). Further, FINRA 
operates the Alternative Display Facility (``ADF'') for NMS stocks, 
which is a FINRA facility for posting quotes and reporting trades 
governed by FINRA's trade reporting rules. See Securities Exchange 
Act Release No. 46249 (July 24, 2002), 67 FR 49821 (July 31, 2002) 
(order approving the ADF); see also Securities Exchange Act Release 
No. 71467 (Feb. 3, 2014), 79 FR 7485 (Feb. 7, 2014) (order approving 
a proposed rule change to update the rules governing the ADF).
    \18\ See FINRA Rule 6730--Transaction Reporting, Supplementary 
Material .07--ATS Identification of Non-FINRA Member Counterparties 
for Transactions in U.S. Treasury Securities.
---------------------------------------------------------------------------

    The rise in electronic proprietary trading and the increasingly 
fragmented market where trading takes place across many active markets 
have put pressure on the status quo and persuaded the Commission of the 
need for there to be more consistent regulation of such trading. 
Accordingly, after considering the comments received in response to the 
2022 Re-Proposal, the Commission is adopting amended Rule 15b9-1 as re-
proposed. The Commission continues to believe that oversight of off 
member-exchange securities trading must be enhanced in light of how 
securities trading occurs today, by narrowing the extent to which 
broker-dealer firms can effect off-member-exchange securities 
transactions--in significant volumes in many cases--while exempt from 
FINRA membership.

II. Background

A. Regulatory Framework

    Broker-dealers generally must register with the Commission and 
become members of a SRO.\19\ Self-regulation is a longstanding, key 
component of U.S. securities industry regulation.\20\ The Exchange Act 
defines SRO to include each national securities exchange or 
Association.\21\ An SRO sets standards, conducts examinations, and 
enforces rules regarding its members.\22\ In addition to Commission 
oversight, the Exchange Act requires this layer of SRO oversight, 
pursuant to which SROs act as front-line regulators of their broker-
dealer members.\23\ In particular, there are Federal securities laws, 
Commission rules, and SRO rules that prohibit various forms of improper 
activity by broker-dealers.\24\
---------------------------------------------------------------------------

    \19\ See section 15(a)(1) of the Act, 15 U.S.C. 78o(a)(1). For a 
more detailed background regarding the relevant regulatory 
environment, including the complementary SRO oversight performed by 
exchanges and FINRA, see 2022 Re-Proposal, supra note 1, section II, 
87 FR 49932-39; see also 2015 Proposal, supra note 1, section I, 80 
FR 18036-45.
    \20\ See Securities Exchange Act Release No. 50700 (Nov. 18, 
2004), 69 FR 71256 (Dec. 8, 2004) (``Concept Release Concerning 
Self-Regulation'').
    \21\ See section 3(a)(26) of the Act, 15 U.S.C. 78c(a)(26).
    \22\ See Concept Release Concerning Self-Regulation, supra note 
20 (citing section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8)). 
Congress historically has favored self-regulation for a variety of 
reasons, including that effectively regulating the inner-workings of 
the securities industry at the Federal level was viewed as cost 
prohibitive and inefficient; the complexity of securities practices 
made it desirable for SRO regulatory staff to be intimately involved 
with SRO rulemaking and enforcement; and the SROs could set 
standards such as just and equitable principles of trade and 
detailed proscriptive business conduct standards. Id. (citing, 
generally, S. Rep. No. 1455, 73d Cong., 2d Sess. (1934); H.R. Doc. 
No. 1383, 73d Cong., 2d Sess. (1934); S. Rep. No. 1455, 73d Cong., 
2d Sess. (1934)); see also id., 69 FR 71257-58.
    \23\ Broker-dealers registered with the Commission are subject 
to the Commission's jurisdiction and oversight and must comply with 
Commission rules applicable to registered broker-dealers. See, e.g., 
section 15 of the Act, 15 U.S.C. 78o; 17 CFR 240.15a-6 through 
240.15b11-1; 17 CFR 240.17a-1 through 240.17a-25. Matters related to 
SRO actions or their broker-dealer members also may be referred to 
the Commission or subject to Commission review. See, e.g., sections 
19(d), 15 U.S.C. 78(s)(d), and 19(e), 15 U.S.C. 78s(e), of the Act. 
But the Exchange Act also requires that SROs enforce their members' 
compliance with the Exchange Act, the rules and regulations 
thereunder, and the SRO's own rules. See, e.g., sections 6(b)(1), 15 
U.S.C. 78f(b)(1); 19(g)(1), 15 U.S.C. 78s(g)(1); and 15A(b)(2), 15 
U.S.C. 78o-3(b)(2), of the Act; see also section 11A(a)(3)(B) of the 
Act, 15 U.S.C. 78k-1(a)(3)(B) (authorizing the Commission to require 
SROs to act jointly in planning, developing, operating, or 
regulating the national market system).
    \24\ See, e.g., sections 10(b), 15 U.S.C. 78j(b); 15(c), 15 
U.S.C. 78o(c); and 15(g), 15 U.S.C. 78o(g), of the Act; section 
17(a) of the Securities Act of 1933, 15 U.S.C. 77q(a); 17 CFR 
240.10b-5; FINRA Rules 2020 (Use of Manipulative, Deceptive, or 
Other Fraudulent Devices), 4530 (Reporting Requirements), 5210 
(Publication of Transactions and Quotations); NYSE Rules 2020 (Use 
of Manipulative, Deceptive or Other Fraudulent Devices) and 5220 
(Disruptive Quoting and Trading Activity Prohibited); Nasdaq General 
9, section 1 (General Standards) and Nasdaq General 9, section 53 
(Disruptive Quoting and Trading Activity Prohibited); Cboe Rule 8.6 
(Manipulation).
---------------------------------------------------------------------------

    As SROs, exchanges and Associations are required to examine for and 
enforce compliance by their members and associated persons with the 
Exchange Act, the rules and regulations thereunder, and the SROs' own 
rules.\25\

[[Page 61853]]

Because of this, SROs that operate an exchange generally possess 
expertise in supervising members who specialize in trading the products 
and utilizing the order types that may be unique or specialized within 
the exchange. This expertise complements the expertise of an 
Association in supervising its members' cross-exchange and off-exchange 
securities trading activity. Indeed, the Exchange Act's statutory 
framework places SRO oversight responsibility with an Association for 
off-member-exchange securities trading.\26\
---------------------------------------------------------------------------

    \25\ See section 19(g) of the Act, 15 U.S.C. 78s(g).
    \26\ See sections 15(b)(8), 15 U.S.C. 78o(b)(8); 15A, 15 U.S.C. 
78o-3; 17(d), 15 U.S.C. 78q(d); and 19(g), 15 U.S.C. 78s(g), of the 
Act. Under the self-regulatory structure, the SRO where a broker-
dealer is registered conducts regulatory oversight and assumes 
responsibility for that oversight. For example, 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. See sections 17(d), 15 
U.S.C. 78q(d); and 19(g)(2), 15 U.S.C. 78s(g)(2), of the Act. 
Section 17(d)(1) of the Act enables the Commission to allocate 
authority among SROs when a person is a member of more than one SRO. 
Section 17(d)(1) of the Act, 15 U.S.C. 78q(d)(1). Section 15A of the 
Act provides for the creation of national securities associations of 
broker-dealers, with powers to adopt and enforce rules to regulate 
the off-exchange market. Section 15A of the Act, 15 U.S.C. 78o-3. 
And as described above, section 15(b)(8) of the 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. 
Section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8).
---------------------------------------------------------------------------

    Specifically, section 15(b) of the Act provides that Commission 
registration is generally not effective until the broker-dealer becomes 
a member of an Association or a national securities exchange if the 
broker-dealer effects transactions solely on that exchange.\27\ 
Additionally, section 15(b)(8) of the Act prohibits any registered 
broker or dealer from effecting transactions in securities unless it is 
a member of an Association or effects transactions in securities solely 
on an exchange of which it is a member. Section 15(b)(9) of the Act 
provides the Commission with authority to exempt any broker or dealer 
from section 15(b)(8), if that exemption is consistent with the public 
interest and the protection of investors.\28\ Rule 15b9-1 sets forth an 
exemption from section 15(b)(8) of the Act \29\ pursuant to authority 
conferred to the Commission by section 15(b)(9) of the Act.\30\
---------------------------------------------------------------------------

    \27\ See section 15(b) of the Act, 15 U.S.C. 78o(b).
    \28\ Section 15(b)(9) of the Act, 15 U.S.C. 78o(b)(9).
    \29\ Section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8).
    \30\ Section 15(b)(9) of the Act, 15 U.S.C. 78o(b)(9).
---------------------------------------------------------------------------

    Rule 15b9-1 provides that any broker or dealer required by section 
15(b)(8) of the Act to become a member of an Association shall be 
exempt from such requirement if it is (1) a member of a national 
securities exchange, (2) carries no customer accounts, and (3) 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 (this $1,000 gross income 
allowance is referred to herein as the ``de minimis allowance'').\31\ 
Under Rule 15b9-1, the de minimis allowance does not apply to income 
derived from transactions for a registered dealer's own account with or 
through another registered broker or dealer (referred to herein as the 
``proprietary trading exclusion'').\32\ The Commission adopted the 
original version of Rule 15b9-1 (then Rule 15b8-1 but generally 
referred to herein as Rule 15b9-1) in 1965,\33\ which included the de 
minimis allowance but not the proprietary trading exclusion; the 
Commission adopted the proprietary trading exclusion in 1976.\34\ 
Relying on the de minimis allowance and proprietary trading exclusion, 
a registered dealer can remain exempt from Association membership while 
engaging in unlimited off-member-exchange proprietary trading of 
securities, so long as the dealer is a member of a national securities 
exchange, carries no customer accounts, and its proprietary trading is 
conducted with or through another registered broker-dealer.
---------------------------------------------------------------------------

    \31\ 17 CFR 240.15b9-1(a).
    \32\ 17 CFR 240.15b9-1(b)(1). Rule 15b9-1 also states that the 
de minimis allowance does not apply to income derived from 
transactions through the Intermarket Trading System (``ITS''), and 
defines the term ``Intermarket Trading System'' for purposes of the 
rule. 17 CFR 240.15b9-1(b)(2) and (c). As discussed below, the 
Commission proposed to eliminate from amended Rule 15b9-1 references 
to the ITS because they are obsolete, and the Commission is adopting 
those eliminations by deleting current paragraphs (b)(2) and (c) 
from the amended rule. See infra note 192 and accompanying text.
    \33\ The rule was renumbered to Rule 15b9-1 in 1983. See SECO 
Programs; Direct Regulation of Certain Broker-Dealers; Elimination, 
Securities Exchange Act Release No. 20409 (Nov. 22, 1983), 48 FR 
53688 (Nov. 29, 1983) (``SECO Programs Release''). See also 
Qualifications and Fees Relating to Brokers or Dealers Who Are Not 
Members of National Security [sic] Association, Securities Exchange 
Act Release No. 7697 (Sept. 7, 1965), 30 FR 11673 (Sept. 11, 1965) 
(``Qualifications and Fees Release''). The Commission stated in the 
Qualifications and Fees Release: ``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.'' 
Id. at 11675.
    \34\ See Extension of Temporary Rules 23a-1(T) and 23a-2(T); 
Adoption of Amendments to SECO Rules, Securities Exchange Act 
Release No. 12160 (Mar. 3, 1976), 41 FR 10599 (Mar. 12, 1976) 
(``Adoption of Amendments to SECO Rules''). In adopting the 
proprietary trading exclusion, the Commission indicated that an 
exchange floor broker, through another broker or dealer, could 
effect transactions for its own account on an exchange of which it 
was not a member. Id. at 10600. The Commission stated that such 
transactions ultimately would be effected by a member of that 
exchange. In 1983, the Commission further amended Rule 15b9-1 to 
accommodate transactions effected through the then-new ITS, and 
eliminated references to, and requirements under, the SECO Program, 
which was the Commission's program of direct regulation of certain 
broker-dealers at that time. See SECO Programs Release, supra note 
33.
---------------------------------------------------------------------------

B. Updated Background Statistics

    The 2022 Re-Proposal set forth statistics regarding off-member-
exchange securities trading activity by firms that were Commission-
registered broker-dealers and exchange members but not FINRA members 
during the time periods reviewed by the Commission in the 2022 Re-
Proposal.\35\ Those statistics are updated below for corresponding 
year-over-year time periods.\36\
---------------------------------------------------------------------------

    \35\ See 2022 Re-Proposal, supra note 1, section II, 87 FR 
49932-39.
    \36\ While some updated figures set forth below in this section 
differ from figures set forth in the 2022 Re-Proposal, the 
Commission believes that its conclusions are supported by the 
updated figures as well as the 2022 Re-Proposal's figures.
---------------------------------------------------------------------------

    The Commission estimates that, as of the end of September 2022, 
there were 73 firms that were Commission-registered broker-dealers and 
exchange members but not FINRA members, and that there were 64 such 
firms as of April 2023.\37\ Many of these firms were members of just 
one exchange while others were members of multiple exchanges.\38\ 
Specifically, as of April 2023, 22 of the 64 identified firms were 
single exchange members; 9 of the firms were members of two exchanges; 
15 of the firms were members of more than two but 10 or fewer 
exchanges; and the remainder were members of more than 10 
exchanges.\39\
---------------------------------------------------------------------------

    \37\ Sources: SEC FOCUS Reports (Form X-17A-5); FINRA's Central 
Registration Depository (``CRD'').
    \38\ Source: CRD.
    \39\ Id. 35 out of the 64 identified firms in April 2023 were 
members of a Nasdaq group exchange, 34 firms were members of Nasdaq 
PHLX LLC (``PHLX'') specifically, and five firms were members of 
only PHLX. The Commission believes these figures are consistent with 
one commenter's statement in October 2022 that 39 non-FINRA firms 
were Nasdaq members, 13 of which designated PHLX as their DEA, as 
minor differences in the Commission's and the commenter's figures 
could be explained by changes in firms' Nasdaq membership or 
Commission registration status during the passage of time between 
October 2022 and April 2023. See letter from Erik Wittman, Deputy 
Head of Enforcement, The Nasdaq Stock Market LLC (Oct. 6, 2022) 
(``Nasdaq Letter'') at 4.

---------------------------------------------------------------------------

[[Page 61854]]

    Several of these firms--both single-exchange and multiple-exchange 
members--engage in cross-market and off-exchange proprietary securities 
trading. These firms account for a significant portion of off-exchange 
securities trading volume and initiate a significant number of 
securities transactions on exchanges other than exchanges to which they 
belong as a member.\40\ They forgo FINRA membership presumably in 
reliance on Rule 15b9-1, as their effectuation of transactions in 
securities elsewhere than on exchanges to which they belong as a member 
would trigger section 15(b)(8)'s Association membership requirement but 
for the exemption provided by Rule 15b9-1.
---------------------------------------------------------------------------

    \40\ Source: CAT.
---------------------------------------------------------------------------

    For example, of the estimated 73 broker-dealers that were exchange 
members but not FINRA members as of the end of September 2022, 53 
initiated orders in listed equities in September 2022 that were 
executed on or off an exchange.\41\ These firms' September 2022 off-
exchange listed equities dollar volume executed was approximately $440 
billion,\42\ which was approximately 5.1% of total off-exchange volume 
of listed equities executed that month.\43\ Moreover, these firms' 
September 2022 listed equities dollar volume executed on exchanges of 
which they are not a member was approximately $311 billion.\44\
---------------------------------------------------------------------------

    \41\ Id. A firm ``initiating'' an order is the firm that reports 
the origination of the order as a New Order Event (MENO) to the CAT. 
The other 20 firms did not initiate orders in listed equities in 
Sept. 2022.
    \42\ Id. Dollar volumes set forth in this section represent the 
sum of bought and sold volume during the specified time period.
    \43\ Id. The Commission estimates that there was approximately 
$8.6 trillion in total off-exchange transaction volume in listed 
equities reported by buying and selling firms in Sept. 2022.
    \44\ Id. The Commission also estimates that, in 2022, 48 of the 
73 firms identified as registered broker-dealers and exchange 
members but not FINRA members initiated options order executions 
accounting for approximately 16-27% of daily options contract volume 
traded. The Commission further estimates that 35 of these 48 firms 
initiated executions on an exchange where they are not a member, and 
that this transaction volume represented approximately 3% of these 
35 firms' total options contract transaction volume reported in 
2022, and approximately 1% of all options contract transaction 
volume reported in 2022. Id. These figures, like the other figures 
set forth herein, have been updated from what was set forth in the 
2022 Re-Proposal.
---------------------------------------------------------------------------

    Of the estimated 64 broker-dealers that were exchange members but 
not FINRA members as of April 2023, 45 initiated orders in listed 
equities in April 2023 that were executed on or off an exchange.\45\ 
These firms' April 2023 off-exchange listed equities dollar volume 
executed was approximately $405 billion,\46\ which was approximately 
5.6% of total off-exchange volume of listed equities executed that 
month.\47\ Moreover, these firms' April 2023 listed equities dollar 
volume executed on exchanges of which they are not a member was 
approximately $262 billion.\48\
---------------------------------------------------------------------------

    \45\ Id. The other 19 firms did not initiate orders in listed 
equities in Apr. 2023.
    \46\ Id.
    \47\ Id. The Commission estimates that there was approximately 
$7.2 trillion in total off-exchange transaction volume in listed 
equities reported by buying and selling firms in Apr. 2023.
    \48\ Id. See also Tables 1 and 2, section V.A.1, infra, for 
additional detail regarding these firms' trading activity during the 
noted time periods.
---------------------------------------------------------------------------

    A subset of the identified firms that traded during September 2022 
and April 2023 accounted for the large majority of the identified 
firms' aggregate trading volume. In this regard, the Commission 
estimates that, as of September 2022, 12 of the 53 identified firms 
that initiated orders in listed equities accounted for approximately 
4.5% of total off-exchange listed equities volume executed in September 
2022 and 89% of the off-exchange listed equities transaction volume 
attributable to the 53 identified firms that month.\49\ One of the 12 
firms initiated $180 billion in off-exchange listed equities executions 
in September 2022, which was over 2% of total off-exchange listed 
equities transaction volume that month and approximately one-half of 
the off-exchange volume executions attributable to the 53 identified 
firms.\50\ With respect to the 53 firms' listed equities transaction 
volume on exchanges of which they are not a member, one firm accounted 
for approximately 66% of the $311 billion in volume attributable to the 
53 identified firms in September 2022; six firms (including the 
aforementioned one) accounted for over 90% of that volume; and 22 firms 
(including the aforementioned six firms) accounted for over 99% of that 
volume.\51\
---------------------------------------------------------------------------

    \49\ Id.
    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

    The Commission also estimates that, as of April 2023, 12 of the 45 
identified firms that initiated orders in listed equities then 
accounted for approximately 5.1% of total off-exchange listed equities 
volume executed in April 2023 and 90% of the off-exchange listed 
equities transaction volume attributable to the 45 identified firms 
that month.\52\ One of the 12 firms initiated $222 billion in off-
exchange listed equities executions in April 2023, which was 3.1% of 
total off-exchange listed equities transaction volume that month and 
approximately 55% of the off-exchange volume executions attributable to 
the 45 identified firms.\53\ With respect to the 45 firms' listed 
equities transaction volume on exchanges of which they are not a 
member, one firm accounted for approximately 72% of the $262 billion in 
volume attributable to the 45 identified firms in April 2023; five 
firms (including the aforementioned one) accounted for over 90% of that 
volume; and 21 firms (including the aforementioned six firms) accounted 
for approximately 99% of that volume.\54\
---------------------------------------------------------------------------

    \52\ Id.
    \53\ Id.
    \54\ Id.
---------------------------------------------------------------------------

    With respect to trading in U.S. Treasury securities, all of which 
occurs off-exchange,\55\ the Commission estimates that seven broker-
dealers that were exchange members but not FINRA members accounted for 
over $6 trillion in U.S. Treasury securities volume executed on 
``covered ATSs'' in 2022 that was reported to TRACE,\56\ which was 
approximately 3.67% of total U.S Treasury securities volume traded in 
2022 that was reported to TRACE.\57\ In

[[Page 61855]]

April 2023, the Commission estimates that five broker-dealers that were 
exchange members but not FINRA members accounted for approximately $302 
billion in U.S. Treasury securities volume executed on covered ATSs 
that was reported to TRACE,\58\ which was approximately 2.65% of total 
U.S Treasury securities volume traded in April 2023 that was reported 
to TRACE.\59\
---------------------------------------------------------------------------

    \55\ See U.S. Dep't of the Treasury et al., Joint Staff Report: 
The U.S. Treasury Market on Oct. 15, 2014 (July 13, 2015) (``Joint 
Staff Report'') at 2. The secondary market for U.S. Treasury 
securities (sometimes referred to as the U.S. Treasury cash market) 
is generally bifurcated between the dealer-to-customer market and 
the interdealer market. Trading in the U.S. Treasury securities 
dealer-to-customer market is generally conducted through bilateral 
transactions. Trading often occurs either over the phone or on 
trading venues that facilitate the matching of buy and sell orders 
through electronic systems. In the interdealer market, the majority 
of trading in on-the-run U.S. Treasury securities currently occurs 
on ATSs using electronic central limit order books. For off-the-run 
U.S. Treasury securities, the majority of interdealer trading occurs 
via bilateral transactions through voice-assisted brokers and 
electronic trading platforms. See Securities Exchange Act Release 
No. 90019 (Sept. 28, 2020), 85 FR 87106, 87108 (Dec. 21, 2020). On-
the-run U.S. Treasury securities are the most recently issued U.S 
Treasury securities of a particular maturity. Off-the-run U.S. 
Treasury securities include all U.S. Treasury securities that have 
been issued before the most recent issuance and are still 
outstanding.
    \56\ See FINRA Rule 6730(a)(1) (requiring FINRA members to 
report transactions in TRACE-Eligible Securities, including U.S. 
Treasury securities).
    \57\ See FINRA Rule 6730--Transaction Reporting, Supplementary 
Material .07--ATS Identification of Non-FINRA Member Counterparties 
for Transactions in U.S. Treasury Securities (among other things, 
defining the term ``covered ATS'' as an ATS that executed 
transactions in U.S. Treasury securities against non-FINRA member 
subscribers of $10 billion or more in monthly par value, computed by 
aggregating buy and sell transactions, for any two months in the 
preceding calendar quarter). U.S. Treasury securities market share 
is calculated as the sum of the identified entities' buy and sell 
volume divided by twice the market-wide volume for the period. 
Approximately $165 trillion total U.S. Treasury securities 
transaction volume was reported to TRACE in 2022, of which 
approximately $64 trillion was reported as executed on a covered 
ATS. Beginning in September 2022, a new form of trade reports from 
depository institutions were added to TRACE. These transactions, 
which amounted to $4.5 trillion, are excluded.
    \58\ See supra note 56.
    \59\ Id. One broker-dealer that was not a FINRA member and 
traded U.S. Treasury securities in 2022 joined FINRA prior to April 
2023, and another broker-dealer that was not a FINRA member and 
traded U.S. Treasury securities in 2022 did not appear to trade U.S. 
Treasury securities in April 2023.
---------------------------------------------------------------------------

III. Discussion of Amendments to Rule 15b9-1

    Under the amendments to Rule 15b9-1 being adopted, a broker or 
dealer registered with the Commission pursuant to section 15 of the Act 
will be required by section 15(b)(8) of the Act to join an Association 
if the broker or dealer effects off-member-exchange securities 
transactions, unless it can rely upon one of the amended rule's narrow 
exemptions.\60\ Conversely, and unchanged by these amendments, a broker 
or dealer will not be required to become a member of an Association if 
it effects securities transactions only on an exchange of which it is a 
member.\61\
---------------------------------------------------------------------------

    \60\ See section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8); 
amended Rule 15b9-1, infra.
    \61\ See section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8).
---------------------------------------------------------------------------

    Specifically, Rule 15b9-1, as amended, no longer provides a de 
minimis allowance or proprietary trading exclusion, and allows an 
exemption from Association membership only for a registered broker or 
dealer that is an exchange member, carries no customer accounts, and 
effects securities transactions solely on a national securities 
exchange of which it is a member except in two narrow circumstances: 
(1) a broker or dealer effects off-member-exchange securities 
transactions that result solely from orders that are routed by an 
exchange of which it is a member in order to comply with Rule 611 of 
Regulation NMS or the Options Order Protection and Locked/Crossed 
Market Plan; or (2) a broker or dealer effects off-member-exchange 
securities transactions that are solely for the purpose of executing 
the stock leg of a stock-option order.\62\ In the subsections below, 
the Commission discusses each element of the amended rule in detail.
---------------------------------------------------------------------------

    \62\ See amended Rule 15b9-1, under ``Text of Amendments,'' 
infra.
---------------------------------------------------------------------------

A. Elimination of the De Minimis Allowance and Proprietary Trading 
Exclusion

    The adopted amendments to Rule 15b9-1 eliminate the de minimis 
allowance and proprietary trading exclusion. Rescinding these 
provisions generally eliminates (subject to the exemptions in the 
amended rule) the ability for proprietary trading dealer firms to rely 
on Rule 15b9-1 to effect off-member-exchange securities transactions 
without joining an Association. The Commission proposed these 
rescissions to update Rule 15b9-1 so that it more appropriately 
effectuates Exchange Act principles of complementary exchange SRO and 
Association oversight in today's market, including section 15(b)(9)'s 
mandate that any exemption from section 15(b)(8) be consistent with the 
public interest and protection of investors.\63\
---------------------------------------------------------------------------

    \63\ See 2022 Re-Proposal, supra note 1, 87 FR 49932.
---------------------------------------------------------------------------

    Some commenters on the 2022 Re-Proposal broadly agreed that Rule 
15b9-1 should be updated in this way.\64\ They stated that the proposed 
amendments are appropriate and necessary to modify and modernize Rule 
15b9-1 such that it is consistent with the protection of investors and 
the public interest in today's market.\65\ They also stated that the 
current regulatory framework, which includes RSAs, Rule 17d-2 plans, 
and the CAT, among other things, does not provide the full scope of 
regulatory coverage appropriate for comprehensive and consistent 
oversight of proprietary trading activities because an Association 
still lacks regulatory jurisdiction over certain trading activity.\66\ 
FINRA stated that performing regulatory work with respect to broker-
dealer firms that are not FINRA members pursuant to RSAs is less 
certain and stable than direct Association oversight of such firms 
because of the discretionary nature of RSAs.\67\ FINRA also emphasized 
that access to audit trail data does not confer jurisdiction to FINRA 
over such firms, and that FINRA does not have the independent ability 
to examine for, investigate, or enforce potential violations of the 
Federal securities laws or FINRA rules with respect to such firms when 
they are identified through surveillance or other means.\68\ FINRA 
stated that jurisdictional limitations impede comprehensive off-
exchange and cross-market oversight in equities, options, and fixed 
income markets.\69\ Another commenter stated that the proposal would 
help ensure that high-frequency trading firms, which trade large 
volumes of equities and U.S. Treasury securities across and off 
exchanges without being required to join an Association, i.e., FINRA, 
are subject to consistent and robust oversight through FINRA as opposed 
to only being subject to complying with the more narrow regulatory 
requirements specific to each exchange, and that such firms do not take 
advantage of exclusions provided by Rule 15b9-1 that were intended to 
accommodate limited broker-dealer activities.\70\
---------------------------------------------------------------------------

    \64\ See letters from: Marcia E. Asquith, Corporate Secretary, 
EVP, Board of External Relations, FINRA (Sept. 27, 2022) (``FINRA 
Letter'') at 1-2; Stephen W. Hall, Legal Director and Securities 
Specialist, and Scott Farmin, Legal Counsel, Better Markets, Inc. 
(Sept. 27, 2022) (``Better Markets Letter'') at 6-7.
    \65\ See FINRA Letter at 1-2; Better Markets Letter at 6-7; 
letter from Henry M. Phillip (Aug. 1, 2022) (``Phillip Letter''). 
See also Nasdaq Letter at 2 (expressing support for broker-dealers 
being required to join an Association if they effect securities 
transactions off-exchange and/or in the fixed income space).
    \66\ See, e.g., FINRA Letter at 5; memorandum dated June 20, 
2023, regarding a call between Commission staff and FINRA (``6/20/23 
Meeting Memorandum'') (stating that FINRA identified non-FINRA 
member broker-dealer firms as potential respondents in 5% of the 
market regulation investigations it conducted in 2020 and 2021, 
which ranged across asset types and included both cross-exchange and 
off-exchange conduct).
    \67\ See FINRA Letter at 6.
    \68\ Id.
    \69\ Id.
    \70\ See Better Markets Letter at 5, 7-8; see also note 8, 
supra, for a description of high-frequency trading firms. This 
commenter also stated that high-frequency trading represents roughly 
50% of the trading volume in U.S. equities markets and 48% of the 
total U.S. Treasury securities interdealer market, and that recent 
liquidity crises in both the U.S. equities and Treasury securities 
markets have shown the effects on markets dominated by, and heavily 
reliant on, high-frequency trading firms. See Better Markets Letter 
at 3.
---------------------------------------------------------------------------

    Other commenters questioned the necessity and appropriateness of 
the application of FINRA oversight to proprietary trading broker-dealer 
firms that are not FINRA members. They stated that, in light of 
existing regulatory mechanisms that apply to such firms, including, in 
particular, proprietary options trading firms, FINRA membership for 
such firms would be unnecessary and duplicative.\71\ In this

[[Page 61856]]

regard, they stated that exchange SROs, including where appointed as 
DEA over certain of their members, already possess and exercise 
authority and can cooperate on regulatory matters to ensure compliance 
with the securities laws.\72\ They also stated that the CAT provides 
exchanges with sufficient visibility into proprietary broker-dealers' 
off-member-exchange securities trading activity, which, they contended, 
obviates the need for proprietary trading broker-dealers to be required 
to join FINRA.\73\
---------------------------------------------------------------------------

    \71\ See, e.g., Nasdaq Letter at 3; and letters from: John 
Kinahan, CEO, Group One Trading, LP (Sept. 26, 2022) (``Group One 
Letter) at 1-2; Tom Simpson, CEO, PEAK6 Capital Management LLC 
(Sept. 26, 2022) (``PEAK6 Letter'') at 2; Akuna Securities LLC, 
Belvedere Trading, Chicago Trading Company, and Volant Trading 
(Sept. 27, 2022) (``ABCV Letter'') at 3; Angelo Evangelou, Chief 
Policy Officer, and Greg Hoogasian, Chief Regulatory Officer, Cboe 
Global Markets, Inc. (Sept. 27, 2022) (``Cboe Letter'') at 4-7; 
Kirsten Wegner, CEO, Modern Markets Initiative (Sept. 27, 2022) 
(``MMI Letter'') at 2; Thomas M. Merritt, Deputy General Counsel, 
Virtu Financial, Inc. (Sept. 30, 2022) (``Virtu Letter'') at 2-3; 
Joanna Mallers, Secretary, FIA Principal Traders Group (Sept. 27, 
2022) (``FIA PTG Letter''), at 4. See also letter from Chasse R. 
Thomas (Sept. 26, 2022) (``Thomas Letter'') at 2 (stating that the 
proposal should not be adopted because FINRA's ability to monitor 
complex financial market is inefficient and unreliable). Some 
commenters also stated that the FINRA membership application process 
requires information that is duplicative of information already 
provided to the Commission and other SROs. See PEAK6 Letter at 2; 
FIA PTG Letter at 4. The Commission does not believe that the 
submission of information in connection with the FINRA membership 
application process that is duplicative of information already 
provided to the Commission or exchange SROs is a reason to forgo the 
amendments to Rule 15b9-1 being adopted. To the extent information 
requested by FINRA is duplicative, firms may be able to leverage 
their prior submissions when applying for FINRA membership. 
Moreover, it is important that each SRO of which a broker-dealer is 
a member, including FINRA, have the requisite information required 
by its membership application, regardless of any duplication of the 
information, because each SRO has regulatory responsibilities over 
the broker-dealer. FINRA may require the same information that is 
provided to exchange SROs so that it may be able to review the 
information in order to approve the membership application and 
effectively regulate the firm. Additionally, Commission-registered 
broker-dealers that are exchange members and that join FINRA as 
result of these rule amendments would not be situated any 
differently from the many Commission-registered broker-dealers that 
are exchange members and already FINRA members. In addition, see 
discussion below in this section as well as in section V, infra, 
regarding FINRA membership costs for broker-dealer firms that must 
join FINRA as a result of the adopted amendments.
    \72\ See, e.g., Group One Letter at 1-2; PEAK6 Letter at 2; ABCV 
Letter at 3; Cboe Letter at 4-7; Nasdaq Letter at 3; FIA PTG Letter 
at 4; MMI Letter at 2; Virtu Letter at 2-3.
    \73\ See, e.g., MMI Letter at 2; FIA PTG Letter at 2; Cboe 
Letter at 2-3; STA Letter at 2-3; ABCV Letter at 3; PEAK6 Letter at 
3; Group One Letter at 2; letter from Eric Chern, Co-Founder, 
Chicago Trading Company, LLC (Sept. 27. 2022) (``CTC Letter'') at 4.
---------------------------------------------------------------------------

    As explained below in this section, the Commission continues to 
believe that, in today's market, the de minimis allowance and 
proprietary trading exclusion must be eliminated from Rule 15b9-1 such 
that there is direct, membership-based Association SRO oversight of 
broker-dealers' off-member-exchange securities trading activity, in 
accordance with section 15(b)(8) of the Act and with the section 
15(b)(9) requirement that any exemption from section 15(b)(8) be 
consistent with the protection of investors and the public 
interest.\74\
---------------------------------------------------------------------------

    \74\ Commenters' critiques of the 2022 Re-Proposal are largely 
the same as those that the Commission received in response to the 
2015 Proposal, and the Commission continues to disagree with them 
for many of the same reasons expressed in the 2022 Re-Proposal. See 
2022 Re-Proposal, supra note 1, 87 FR 49941.
---------------------------------------------------------------------------

    Requiring broker-dealers that engage in off-member-exchange 
securities transactions to become FINRA members will provide FINRA with 
direct jurisdiction and the ability to apply with a greater degree of 
autonomy its expertise to the firms' off-member-exchange securities 
trading activity and investigate potential misconduct in that market 
segment. With respect to FINRA members, FINRA can determine whether to 
pursue examinations and investigations, and the parameters thereof, in 
a way that it cannot with respect to non-FINRA members, as FINRA's 
oversight over the latter depends on RSA arrangements, pursuant to 
which exchange SROs retain legal responsibility and final decision-
making authority with respect to the covered exchange members.\75\ In 
contrast, for FINRA member broker-dealer firms that effect off-member-
exchange securities transactions, FINRA possesses legal responsibility 
and decision-making authority with respect to exercising SRO oversight 
because FINRA can directly apply its own jurisdiction and rules to such 
firms. As such, FINRA can unilaterally decide whether and how to 
examine and investigate off-member-exchange activity by a FINRA member 
firm for compliance with FINRA rules, and what course of action to 
pursue if potential FINRA rule violations are identified.
---------------------------------------------------------------------------

    \75\ See supra note 14.
---------------------------------------------------------------------------

    Moreover, due to FINRA's experience and expertise in cross-market 
and off-exchange oversight, FINRA is well-positioned to perform direct, 
membership-based oversight over broker-dealer firms that effect off-
member-exchange securities transactions, as FINRA could bring such 
broker-dealers within the applicable regulatory operations that FINRA 
already has in place for its direct oversight of FINRA members that 
trade across markets. And this FINRA oversight extends to U.S. Treasury 
securities trading activity, unlike RSA-based SRO oversight, which does 
not extend to such activity.\76\
---------------------------------------------------------------------------

    \76\ See FINRA Letter at 8. FINRA has taken an active role in 
overseeing trading activity in U.S. Treasury securities by, for 
example, requiring U.S. Treasury securities to be reported to TRACE, 
and by publishing daily files of aggregated U.S. Treasury securities 
transactions data reported to TRACE. See FINRA Rules 6730 and 6750; 
see also Treasury Daily Aggregate Statistics, available at https://www.finra.org/finra-data/browse-catalog/about-treasury/daily-file. 
In addition, FINRA has taken enforcement action regarding U.S. 
Treasury securities trading activity and reporting. See, e.g., FINRA 
Department of Enforcement v. BGC Financial, L.P., FINRA Letter of 
Acceptance, Waiver, and Consent No. 2020068558701 (Jan. 20, 2023), 
available at https://www.finra.org/sites/default/files/fda_documents/2020068558701%20BGC%20Financial%2C%20L.P.%20CRD%2019801%20AWC%20va%20%282023-1676852400276%29.pdf.
---------------------------------------------------------------------------

    While FINRA traditionally has been the SRO that primarily oversees 
off-member-exchange securities trading activity, in the context 
relevant here--proprietary trading broker-dealer firms with exchange-
only SRO membership that effect off-member-exchange securities 
transactions--FINRA is unable to directly enforce such firms' 
compliance with Federal securities laws and Commission rules applicable 
to broker-dealers, or apply its own rules to such firms, because they 
are not FINRA members. Without direct, membership-based FINRA 
oversight, SRO oversight of such firms' off-member-exchange securities 
trading activity is largely a function of cooperative regulatory 
arrangements among SROs, but those arrangements do not confer 
membership-based jurisdiction to FINRA to enforce compliance with the 
Exchange Act and applicable rules. These arrangements include those 
discussed in the 2022 Re-Proposal and highlighted by commenters, such 
as exchange SRO oversight through being appointed as DEA for certain 
exchange members pursuant to Rule 17d-1 and through Rule 17d-2 plans, 
indirect FINRA oversight pursuant to RSAs with exchange SROs, and the 
CAT.\77\ As discussed below in this section, while these arrangements 
serve useful purposes and enhance regulatory outcomes, the Commission 
continues to believe that, in today's market, they are inadequate 
substitutes for direct, membership-based FINRA jurisdiction over firms 
that effect off-member-exchange securities transactions.
---------------------------------------------------------------------------

    \77\ See CAT NMS Plan Approval Order, supra note 15, 81 FR 
84836-41, for a discussion of the benefits provided to SROs by the 
CAT with regard to surveillance, examinations, enforcement 
investigations, and tips and complaints.
---------------------------------------------------------------------------

    Commenters described the general proficiency of direct exchange SRO 
oversight over exchange members.\78\ As

[[Page 61857]]

discussed in the 2022 Re-Proposal, in contrast to FINRA, the regulatory 
focus of exchange SROs is generally on trading by their members on 
their respective exchanges.\79\ Exchange SROs generally monitor market 
activity specific to their own exchanges and have expertise in 
regulating unique aspects of their markets.\80\ The focus of the 
amendments being adopted here, however, is different. Here, the 
Commission is concerned with off-member-exchange securities trading 
activity, SRO oversight of which traditionally has been and remains 
primarily FINRA's responsibility. As discussed above and in the 2022 
Re-Proposal, several broker-dealer firms that are exchange members but 
not FINRA members effect off-member-exchange securities 
transactions.\81\ This includes firms that trade options proprietarily 
and are engaged in proprietary options market making. While some 
commenters stated that membership-based FINRA oversight over such firms 
would be unnecessary and would duplicate existing exchange SRO 
oversight, the Commission continues to believe that direct, membership-
based FINRA oversight over these firms (and therefore the amendments 
being adopted here) is necessary because they effect securities 
transactions off-member-exchange and thus generally outside the 
expertise of any exchange where they are a member and within FINRA's 
primary area of expertise.
---------------------------------------------------------------------------

    \78\ See Nasdaq Letter at 2 (citing traditional operational 
responsibilities such as real-time surveillance, and the 
establishment of an investigation and enforcement team in 2017 
dedicated to prosecuting member misconduct on its equities and 
options markets); Cboe Letter at 6 (stating that SROs operate 
comprehensive in-house regulatory programs which include cross 
market surveillance, such as CAT).
    \79\ See 2022 Re-Proposal, supra note 1, 87 at 49934 n. 46.
    \80\ See 2022 Re-Proposal, supra note 1, 87 FR 49934; Cross-
Market Regulatory Coordination Staff Paper, supra note 14. See also 
Cboe Letter at 4 (stating that the exchanges know their markets 
best, including the products traded, the intricacies of the trading 
mechanics, and their members' business models).
    \81\ See supra section II.B; see also 2022 Re-Proposal, supra 
note 1, 87 FR 49935-40.
---------------------------------------------------------------------------

    Moreover, the Exchange Act provides a way to help address commenter 
concerns regarding regulatory duplication. Specifically, with respect 
to common members, section 17(d) of the Act authorizes the Commission 
to relieve an SRO of the responsibility to receive regulatory reports; 
to examine for and enforce compliance with applicable statutes, rules, 
and regulations; or to perform other specified regulatory 
functions.\82\ Section 17(j)(1) of the Act also requires the SROs' 
cooperation and coordination of broker-dealer examination and oversight 
activities and elimination of any unnecessary and burdensome 
duplication in the examination process.\83\
---------------------------------------------------------------------------

    \82\ Section 17(d) of the Act, 15 U.S.C. 78q(d).
    \83\ Section 17(j)(1) of the Act, 15 U.S.C. 78q(j)(1).
---------------------------------------------------------------------------

    To implement section 17(d)(1) of the Act, the Commission adopted 
two rules thereunder: Rule 17d-1 and Rule 17d-2. Rule 17d-1 authorizes 
the Commission to name a single SRO as the DEA to examine a common SRO 
member (i.e., a broker-dealer that is a member of the DEA SRO as well 
as other SROs) for compliance with the financial responsibility 
requirements imposed by the Act, Commission rules, or the rules of the 
SROs where the broker-dealer is a member.\84\ When an SRO has been 
named as a common member's DEA, all other SROs to which the common 
member belongs are relieved of the responsibility to examine the firm 
for compliance with the applicable financial responsibility rules. Rule 
17d-1 addresses only an SRO's obligations to enforce member compliance 
with financial responsibility requirements. Rule 17d-1 does not relieve 
an SRO from its obligation to examine a common member for compliance 
with its own rules and provisions of the Federal securities laws 
governing matters other than financial responsibility, including sales 
practices and trading activities and practices.
---------------------------------------------------------------------------

    \84\ 17 CFR 240.17d-1. See supra note 13; see also 2022 Re-
Proposal, supra note 1, 87 FR 49933; Securities Exchange Act Release 
No. 12352 (Apr. 20, 1976), 41 FR 18808 (May 7, 1976).
---------------------------------------------------------------------------

    To further address regulatory duplication, the Commission also 
adopted Rule 17d-2 under the Act. Rule 17d-2 permits SROs to propose 
joint plans for the allocation of regulatory responsibilities with 
respect to their common members. 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. FINRA has 
experience coordinating with exchanges in the oversight of broker-
dealers that are common members of FINRA and the exchanges on which 
they trade securities pursuant to such plans.\85\ Such coordination 
among FINRA and exchange SROs pursuant to Rule 17d-2 plans cannot 
occur, however, with respect to broker-dealer firms that are not FINRA 
members.\86\
---------------------------------------------------------------------------

    \85\ See Staff Paper on Cross-Market Regulatory Coordination, 
supra note 14.
    \86\ RSAs are mechanisms through which such coordination can 
occur, but they are subject to limitations including that they do 
not relieve the contracting SRO of its legal responsibilities to 
provide SRO oversight or provide FINRA with jurisdiction. See supra 
note 14 and the discussion infra in this section.
---------------------------------------------------------------------------

    Rule 17d-1 DEA arrangements and Rule 17d-2 plans are relevant with 
respect to commenters' concern that direct, membership-based FINRA 
oversight of broker-dealer firms would duplicate exchange SRO 
oversight.\87\ Mitigating duplicative SRO oversight is the primary 
purpose of these regulatory arrangements.\88\ To the extent broker-
dealer firms join FINRA as a result of the amendments to Rule 15b9-1 
\89\ and are members of one or more exchanges, Rule 17d-1 could be 
utilized to mitigate duplicative oversight with respect to financial 
responsibility by exchange SROs and FINRA over these common members. 
And Rule 17d-2 plans could similarly be utilized by exchange SROs and 
FINRA to mitigate the potential for duplicative SRO oversight over 
their common members in areas other than financial responsibility. This 
is what occurs today with common SRO members, and therefore the 
Commission believes the same will likely occur for proprietary trading 
broker-dealer firms that are exchange members and newly join FINRA as a 
result of these amendments.\90\
---------------------------------------------------------------------------

    \87\ See supra note 13. See also Group One Letter at 3 (stating 
that the Commission should ensure that FINRA serves as the DEA for 
options market making firms that newly join FINRA as a result of the 
amendments to Rule 15b9-1 so that these firms do not pay DEA fees 
that are duplicative of their current DEA fees paid to an exchange).
    \88\ See Securities Exchange Act Release No. 12935 (Oct. 28, 
1976), 41 FR 49091 (Nov. 8, 1976); see also note 13, supra.
    \89\ See infra sections V.B.1 and V.C.2.d (discussing firms' 
options for complying with the amendments, and that a firm may 
choose to join additional exchanges rather than FINRA when the costs 
of joining FINRA exceed the costs of joining additional exchanges to 
cover all of the exchanges on which the firm currently trades).
    \90\ Generally, FINRA is the DEA for financial responsibility 
rules for exchange members that also are members of FINRA. See 2022 
Re-Proposal, supra note 1, 87 FR 49935 n. 55; see also Cross-Market 
Regulatory Coordination Staff Paper, supra note 14 (stating that 
``FINRA serves as the Designated Regulation NMS Examining Authority 
(`DREA') and Designated CAT Surveillance Authority (`DCSA') for 
common exchange members that are also members of FINRA, and assumes 
certain examination and enforcement responsibilities for those 
members with respect to specified Regulation NMS rules (i.e., 606, 
607, 611, 612 and 613(g)(2)), and for the cross-market surveillance, 
examination, investigation and enforcement of Rule 613 and the rules 
of the SROs regarding compliance with the CAT NMS Plan''). Some 
exchanges serve as DEA for certain of their members, but these cases 
mostly involve 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. See 2022 Re-Proposal, supra 
note 1, 87 FR 49956 and n. 228.
---------------------------------------------------------------------------

    FINRA has entered into RSAs with certain exchange SROs, which allow 
for some SRO oversight of off-member-exchange equities and options 
trading activity by proprietary trading broker-dealer firms that are 
exchange members

[[Page 61858]]

but not FINRA members.\91\ RSAs can serve useful purposes, but they 
generally are not publicly available and are not subject to Commission 
approval. Rather, they are voluntary private agreements between SROs 
that are not mandated by any Commission rule or statutory obligation, 
and that may expire or be terminated by the parties. As a result, to 
the extent oversight is performed on non-FINRA member firms' off-
member-exchange securities trading activity based on RSAs, such 
oversight relies upon discretionary arrangements between exchanges and 
FINRA insofar as equities and options are concerned; and such 
agreements to date have not covered U.S. Treasury securities trading 
activity.\92\ In addition, under an RSA, FINRA examines for compliance 
with the rules of the exchange with which it has entered into the 
RSA.\93\ Thus, non-FINRA members that are members of different 
exchanges may be subject to different exchange rules and 
interpretations when they effect off-member-exchange securities 
transactions to the extent these rules and interpretations are 
different. This approach provides the potential for a less stable and 
consistent regulatory regime for the covered off-member-exchange 
securities transactions than one in which Association membership and 
oversight is mandated.\94\ Moreover, there is no regulatory requirement 
that any RSA pursuant to which FINRA oversight currently is applied to 
a non-FINRA member broker-dealer's off-member-exchange securities 
trading activity must continue to exist.\95\
---------------------------------------------------------------------------

    \91\ See FINRA Letter at 4 (stating that Rule 17d-2 plans and 
RSAs are not without their limitations).
    \92\ See id. at 8.
    \93\ In the context of an RSA in which an exchange SRO contracts 
with FINRA for FINRA to provide regulatory services on behalf of the 
exchange SRO, FINRA's oversight of the off-member-exchange trading 
activity of a firm that is a member of the exchange but not a FINRA 
member is for compliance with the exchange's rules, not FINRA's 
rules, since FINRA's rules apply only to its members.
    \94\ See FINRA Letter at 5 (stating that RSAs are privately 
negotiated contracts, vary in their scope of regulatory coverage, 
and can be terminated by the parties thereto; that FINRA examines 
for compliance with the rules of certain individual exchanges under 
RSAs and, therefore, firms that are not FINRA members may be subject 
to different exchange rules and interpretations with respect to the 
same activity; and that RSAs do not provide FINRA with membership-
based jurisdiction to directly enforce such firms' compliance with 
the Federal securities laws or subject such firms to FINRA's rules 
for their OTC trading, even where such trading may not be 
comprehensively addressed by exchange rules or RSAs). As a result of 
amended Rule 15b9-1, any broker-dealer that effects off-member-
exchange securities transactions will need to join an Association, 
pursuant to section 15(b)(8) of the Act, unless the broker-dealer's 
off-member-exchange securities transactions are covered by an 
exemption in the amended rule.
    \95\ See infra section V (setting forth expiration dates for 
RSAs).
---------------------------------------------------------------------------

    One commenter stated that firms still will be subject to multiple 
sets of rules and interpretations if amended Rule 15b9-1 is adopted as 
re-proposed, and that it will be important for FINRA to continue to 
work collaboratively as part of the Cross-Market Regulation Working 
Group (``CMRWG''), a subgroup of the ISG.\96\ The ISG was established 
in 1981 and is an international group of exchanges, market centers, and 
market regulators that perform front-line market surveillance in their 
respective jurisdictions. The group was formed to facilitate the 
coordination and development of programs and procedures to identify 
possible fraudulent and manipulative activities across markets and to 
facilitate information sharing related to those efforts. In 2020, the 
CMRWG was established with U.S. SROs as a working group of the ISG's 
U.S. Subgroup to focus on ways to reduce unnecessary regulatory 
duplication.\97\ The Commission agrees that continued collaboration 
will be important.
---------------------------------------------------------------------------

    \96\ See Nasdaq Letter at 3; see also Cboe Letter at 5 
(discussing the formation of the ISG and CMRWG to facilitate 
coordination among the SROs).
    \97\ See FINRA Information Notice--4/8/20 available at https://www.finra.org/rules-guidance/notices/information-notice-040820 
(informing members of the existence and role of the CMRWG).
---------------------------------------------------------------------------

    One commenter stated that an exchange can take action against its 
member for exchange rule violations associated with the conduct of a 
non-member broker-dealer that accessed the exchange through the member, 
or the exchange may refer the activity to another SRO.\98\ This 
commenter also stated that the access-providing exchange member is 
likely to be a FINRA member.\99\ Similarly, other commenters stated 
that options trading firms that are members of exchanges where they 
trade options do not need to be FINRA members because, when they 
conduct off-member-exchange trading activity, they do so through a 
FINRA member broker-dealer.\100\ In the same vein, one commenter stated 
that volume effected by options trading firms in the equities markets 
is often processed through FINRA members and, thus, options trading 
firms effectively trade like customers, making a requirement that they 
join FINRA no more useful than requiring FINRA registration for any 
non-broker-dealer customers that trade in the equities market through a 
FINRA registered broker-dealer.\101\
---------------------------------------------------------------------------

    \98\ See Cboe Letter at 4.
    \99\ See id. at 2-3.
    \100\ See, e.g., CTC Letter at 3; Group One Letter at 2.
    \101\ See Cboe Letter at 2-3.
---------------------------------------------------------------------------

    In response, the Commission does not believe that its concerns 
regarding non-FINRA member broker-dealers that effect off-member-
exchange securities transactions are addressed when such broker-dealers 
act in the capacity of a customer of another broker-dealer that is a 
FINRA member. A broker-dealer acting in a customer capacity does not 
provide a basis for regulatory oversight of that broker-dealer's off-
member-exchange activities as required by section 15(b)(8) when the 
broker-dealer is not a FINRA member. The Commission believes that such 
activities should be subject to direct, membership-based FINRA 
oversight, which carries with it an obligation to comply with FINRA's 
rules and FINRA's direct examination authority. This is not 
accomplished when a broker-dealer acts as a customer of a FINRA member 
but is not itself a FINRA member.
    In addition, in the scenarios presented by commenters, neither the 
exchange where the violative conduct occurred nor FINRA would have 
direct authority to address the conduct of the broker-dealer that is 
not a member of the exchange (and is not a FINRA member). If the 
exchange referred the matter to another exchange SRO where the broker-
dealer is a member, the two exchanges could have different rules or 
different interpretations of their respective existing rules. In other 
words, there would be separate recourse by separate exchanges with 
potentially different rules or rule interpretations against different 
broker-dealers for the same conduct on one of the exchanges. The 
Commission believes this presents the potential for inconsistent 
outcomes, as the exchange where the conduct occurred could choose to 
pursue recourse against its member but the referred-to exchange could, 
for the same conduct, choose not to pursue recourse against its member. 
A requirement that all broker-dealers that effect off-member-exchange 
securities transactions become FINRA members (if not exempt under 
amended Rule 15b9-1) is more consistent with the protection of 
investors and the public interest. If both broker-dealers were FINRA 
members in the scenarios presented by

[[Page 61859]]

commenters, FINRA could take a consistent approach in addressing both 
broker-dealers' involvement in the conduct.
    Exchange SRO rules would, of course, continue to apply to broker-
dealer firms that are exchange members and become FINRA members as a 
result of the amendments to Rule 15b9-1.\102\ The potential for 
inconsistent recourse by exchanges where such firms are a member could, 
therefore, continue to exist. But such firms would be common members of 
FINRA and their member exchanges, and SROs have a statutory obligation 
to eliminate unnecessarily duplicative oversight of their common 
members.\103\ While FINRA rules and exchange rules would apply to such 
firms, the Commission believes that Rule 17d-1 DEA designations and 
Rule 17d-2 plans will likely be utilized in areas of overlap to 
mitigate duplicative application of exchange SRO and FINRA oversight, 
in the same fashion as they already are utilized for the many broker-
dealer firms that are exchange members and FINRA members. As a result, 
with respect to broker-dealer firms that become FINRA members and are 
exchange members, the Commission believes that FINRA likely will be the 
only SRO with regulatory responsibility regarding these firms' 
compliance with rules that FINRA and their member exchange(s) have in 
common.\104\ Moreover, FINRA already directly regulates cross-market 
and off-exchange trading activity by FINRA members for compliance with 
FINRA rules, and would extend that direct oversight to new FINRA 
members' off-member-exchange activity (without needing to rely on RSAs 
to do so). Exchange SROs would remain primarily responsible for their 
members' on exchange activity (subject to Rule 17d-1 DEA designations, 
Rule 17d-2 plans, or RSAs). This complementary structure with FINRA as 
the SRO primarily responsible for off-member-exchange activity by FINRA 
members and exchange SROs primarily responsible for member exchange 
activity is consistent with the Exchange Act's statutory framework, 
which places SRO oversight responsibility with an Association for off-
member-exchange securities trading.\105\
---------------------------------------------------------------------------

    \102\ See, e.g., Cboe Letter at 6 (stating that requiring FINRA 
membership for non-member FINRA firms would add regulatory 
duplication and administrative burden to the firms and SROs with 
whom the firm is already a member).
    \103\ See section 17(d)(1) of the Act, 15 U.S.C. 78q(d)(1).
    \104\ See infra note 275 (stating that FINRA serves as the DEA 
for the majority of member firms).
    \105\ See supra note 26 and accompanying text.
---------------------------------------------------------------------------

    The Commission also does not believe that the CAT mitigates the 
need for proprietary trading broker-dealer firms that effect off-
member-exchange securities transactions to be required to join FINRA, 
as was asserted by some commenters.\106\ The CAT is an important audit 
trail tool through which exchange SROs and FINRA are able to perform 
surveillance of trading activity in NMS and OTC securities using CAT 
data.\107\ In addition, FINRA has stated that it surveils 100% of the 
equities and options markets with CAT data.\108\ But access to CAT data 
does not confer jurisdiction to FINRA over a firm that is not a FINRA 
member and that trades securities off-member-exchange.\109\ As a 
result, when FINRA encounters potentially problematic conduct by firms 
that are not FINRA members,\110\ it lacks the independent ability to 
examine for and investigate potential violations of, or enforce 
compliance with, the Federal securities laws, Commission rules, or 
FINRA rules.\111\ Moreover, access to CAT data alone does not enable 
FINRA to conduct additional investigative methods, such as collecting 
documents, interviewing witnesses, and otherwise investigating the 
firm.\112\ Even if one or more exchanges of which a broker-dealer is a 
member and FINRA could coordinate SRO oversight of the non-FINRA member 
firm's off-member-exchange securities trading activity through the use 
of CAT data and RSAs, performing SRO oversight pursuant to RSAs is, as 
discussed above in this section, a less certain and stable approach 
than direct Association oversight of such trading activity due to the 
discretionary nature of RSAs, and frustrates the regulatory scheme 
established by Congress in which an Association directly regulates 
broker-dealers that effect off-member-exchange securities 
transactions.\113\ And any such coordinated efforts would not apply to 
U.S. Treasury securities trading activity, which is not reported to the 
CAT and not covered by RSAs. In short, even with this coordination, 
FINRA would still not have direct membership-based jurisdiction over 
the firm. This limitation impedes stable and consistent SRO oversight 
of off-member-exchange securities trading activity through direct, 
membership-based FINRA jurisdiction by continuing the dependence upon 
RSAs for such oversight,\114\ and impedes comprehensive SRO oversight 
of off-member-exchange securities trading activity since RSAs, the CAT, 
and coordinated regulatory efforts using these tools do not cover U.S. 
Treasury securities trading activity.\115\
---------------------------------------------------------------------------

    \106\ See, e.g., MMI Letter at 2; FIA PTG Letter at 2; Cboe 
Letter at 2-3; STA Letter at 2-3; ABCV Letter at 3; PEAK6 Letter at 
3; Group One Letter at 2; CTC Letter at 4.
    \107\ Exchange rules require their members to report to CAT. 
See, e.g., Cboe BYX Rules 4.5 through 4.17; Nasdaq General 7; NYSE 
Rule 6800.
    \108\ See FINRA Letter at 6.
    \109\ Id. See also Concept Release Concerning Self-Regulation, 
supra note 20, 69 FR 71266 (stating that ``[w]hile the full 
implementation of robust intermarket order audit trails would be a 
significant step forward, an order audit trail is simply a tool that 
can be used by regulators to better surveil for illicit trading 
activity'' and that ``the SRO regulatory function would still play a 
critical role in the regulation of intermarket trading''). Likewise, 
the ISG is a valuable forum for the coordination of regulatory 
efforts and sharing of information and serves an important function, 
but it does not confer jurisdiction to FINRA over a broker-dealer 
that is not a FINRA member and effects off-member-exchange 
securities transactions. The ISG also does not create rules or 
impose disciplinary actions; rather, the information sharing between 
members allows for the proper authority, regulator, or exchange to 
pursue appropriate rule changes or pursue legal action on market 
participants based on evidence gathered.
    \110\ See, e.g., FINRA Letter at 5; 6/20/23 Meeting Memorandum 
(stating that FINRA identified non-FINRA member broker-dealer firms 
as potential respondents in 5% of the market regulation 
investigations it conducted in 2020 and 2021, which ranged across 
asset types and included both cross-exchange and off-exchange 
conduct).
    \111\ See FINRA Letter at 6. Such a case may be referred to the 
Commission or an exchange where the firm is a member for further 
investigation.
    \112\ See 2022 Re-Proposal, supra note 1, 87 FR 49938.
    \113\ See Section 15(b)(8) of the Act, 15 U.S.C. 78o(b)(8); 2015 
Proposing Release, supra note 1, 80 FR 18039 at notes 28-33 and 
accompanying text describing the regulatory history of off-exchange 
trading. See also Cross-Market Regulatory Coordination Staff Paper, 
supra note 14 (stating that ``[w]hile multiple SROs reviewing the 
same securities activities can have benefits, in that the resources 
and expertise from several organizations can be brought to bear on 
assessing these activities, it also can lead to duplication and 
inefficiencies in the regulatory process and increased burdens on 
member firms''). FINRA and the exchange SROs have a history of 
coordinating and can work together to address concerns of firms that 
are receiving duplicative regulatory requests such as through the 
Cross Market Regulatory Working Group. Id.
    \114\ As discussed above in this section, if FINRA has an RSA 
with a given exchange, FINRA is able to apply that exchange's rules 
to off-member-exchange activity by members of that exchange, even if 
they are not FINRA members, assuming that the RSA assigned to FINRA 
the oversight of those rules. But RSAs are not required to continue 
to exist pursuant to any regulatory requirement, and exchanges with 
potentially different rules and interpretations thereof retain legal 
responsibility and decision-making authority under RSAs, which could 
lead to inconsistent outcomes. FINRA does not need to rely on RSAs 
for its oversight of FINRA members, and so it can apply its 
jurisdiction directly to FINRA members' off-member-exchange trading 
activity. Further, for FINRA member firms that also are exchange 
members, Rule 17d-1 DEA designations and Rule 17d-2 plans could be 
utilized in areas of overlap to mitigate duplicative application of 
exchange and FINRA oversight.
    \115\ See FINRA Letter at 6 (stating that ``there are key 
regulatory limitations that remain when FINRA encounters potentially 
problematic Non-Member Firm conduct'' via audit trail data and that 
the limitations posed by RSAs ``impede comprehensive OTC and cross-
market oversight in the equities, options, and fixed income 
markets'').

---------------------------------------------------------------------------

[[Page 61860]]

    Relatedly, the Commission continues to believe that direct, 
membership-based FINRA jurisdiction is necessary for proprietary 
trading broker-dealer firms that effect transactions in U.S. Treasury 
securities, and that FINRA oversight would not duplicate any exchange 
SRO oversight in this area.\116\ U.S. Treasury securities are not 
traded on any exchange, and to the Commission's knowledge, unlike 
FINRA,\117\ no exchange SRO possesses expertise on U.S. Treasury 
securities trading activity. Further, as discussed above in this 
section, U.S. Treasury securities trading activity also is not covered 
by RSAs between exchange SROs and FINRA, so RSAs are not a mechanism 
through which FINRA currently could apply exchange rules (to the extent 
any would be applicable) to U.S. Treasury securities trading activity 
by proprietary trading broker-dealer firms that are exchange members 
but not FINRA members. Thus, aside from certain surveillances (other 
than the CAT),\118\ no SRO oversight is performed with respect to the 
U.S. Treasury securities trading activity of proprietary trading 
broker-dealer firms that are not FINRA members.
---------------------------------------------------------------------------

    \116\ Some commenters agreed with the Commission. See, e.g., 
Cboe Letter at 2 (stating that Cboe believes it is appropriate for 
broker-dealers that are not FINRA members that effect fixed income 
transactions to register with FINRA to ensure FINRA insight into, 
and sufficient regulatory coverage of, those transactions).
    \117\ See FINRA Letter at 8 (stating that individual fixed 
income securities generally are not traded on exchange and their 
markets rely exclusively on FINRA oversight); see also supra note 
76.
    \118\ See FINRA Letter at 10 (stating that FINRA surveils and 
examines for manipulative or other illegal activity in the fixed 
income market, including with respect to U.S. Treasury securities 
trading). As discussed above in this section, trading activity in 
U.S. Treasury securities is not reported to the CAT, so the CAT is 
not a tool that can be used by SROs to surveil that activity. A 
commenter suggested that the Commission could require that TRACE 
data and other securities trading data be reported to the CAT. See 
Phillip Letter. Such an undertaking would not, however, provide 
FINRA with needed, membership-based jurisdiction over broker-dealers 
that trade U.S. Treasury securities.
---------------------------------------------------------------------------

    For example, FINRA stated that, subject to audit trail limitations, 
it has observed that firms that are not FINRA members were identified 
in 17 percent of the surveillance alerts generated by its U.S. Treasury 
security manipulation pattern surveillance in 2020 and 2021.\119\ FINRA 
has no jurisdiction over such firms and, therefore, no authority to 
address their involvement in potential market misconduct that is 
identified.\120\ Since, to the Commission's knowledge, no exchange SRO 
has expertise or performs oversight in this area, broker-dealer firms 
that are not FINRA members may participate in the U.S. Treasury 
securities market effectively without SRO oversight applied to their 
activity in that market (other than, as discussed below, what can be 
discerned by regulators when non-FINRA member broker-dealer U.S. 
Treasury securities transactions are reported to TRACE by FINRA 
members).\121\ This rulemaking would facilitate oversight consistent 
with the protection of investors and the public interest.
---------------------------------------------------------------------------

    \119\ See FINRA Letter at 10; see also Better Markets Letter at 
9. The 17% figure reflects an upper bound of the rate at which 
Commission-registered broker-dealers that are not FINRA members 
appeared in the alerts generated by FINRA's U.S. Treasury security 
manipulation pattern surveillance in 2020 and 2021. See 6/20/23 
Meeting Memorandum. The Commission understands that the actual rate 
at which Commission-registered broker-dealers that are not FINRA 
members appeared in these alerts is likely lower than 17%, as some 
portion of the alerts may have involved non-FINRA member proprietary 
trading firm entities that are not Commission-registered broker-
dealers. Id. More precise estimates are not possible in light of the 
way proprietary trading firms are identified under current audit 
trail rules and the way FINRA evaluates conduct by potentially 
affiliated entities. Id.
    \120\ See FINRA Letter at 10.
    \121\ As discussed below in this section, the Commission retains 
authority over broker-dealers, but the Exchange Act contemplates 
dual layers of oversight of broker-dealers through such Commission 
authority working in tandem with SRO authority. The focus here is on 
strengthening the SRO layer of oversight.
---------------------------------------------------------------------------

    Insofar as U.S. Treasury securities transaction reporting and 
transparency in particular are concerned, FINRA's TRACE system is the 
regulatory vehicle that facilitates mandatory reporting of OTC 
transactions in U.S. Treasury securities, among other eligible fixed 
income securities.\122\ But as discussed in the 2022 Re-Proposal, 
proprietary trading broker-dealer firms that are not FINRA members are 
not required to report their U.S. Treasury securities transactions to 
FINRA's TRACE system because TRACE reporting obligations for U.S. 
Treasury securities transactions apply only to broker-dealers that are 
FINRA members.\123\ Thus, exchange SRO membership alone is not enough 
to subject proprietary trading broker-dealer firms that effect U.S. 
Treasury securities transactions to FINRA's reporting requirement for 
such transactions.
---------------------------------------------------------------------------

    \122\ See FINRA Rule 6700 series. FINRA publishes aggregated 
transaction information and statistics on U.S. Treasury securities 
on its website. See FINRA.org, Treasury Aggregate Statistics, 
available at https://www.finra.org/finra-data/browse-catalog/about-treasury (last visited Aug. 9, 2023); FINRA Rule 6750, Supplementary 
Material .01(b); see also Securities Exchange Act Release No. 95438 
(Aug. 5, 2022), 87 FR 49626 (Aug. 11, 2022) (File No. SR-FINRA-2022-
017) (order approving FINRA publication of aggregated U.S. Treasury 
securities transactions more frequently than weekly, such as on a 
daily basis). Also, pursuant to effective national market system 
plans which are also effective transaction reporting plans (as both 
terms are defined in 17 CFR 242.600(b) (Rule 600(b) of Regulation 
NMS)), namely the Nasdaq UTP Plan and the CTA Plan, FINRA reports to 
the Securities Information Processors (``SIPs'') information for 
off-exchange NMS stock transactions that are reported to FINRA's 
TRFs, and the SIPs in turn distribute the information in the public 
consolidated market data feeds. See section VIII(a) of the CTA Plan; 
section VIII.B of the Nasdaq UTP Plan.
    \123\ See FINRA Rule 6720--Participation in TRACE; see also 2022 
Re-Proposal, supra note 1, 87 FR 49938. Since Sept. 1, 2022, certain 
depository institutions (``covered depository institutions'') have 
been required to report to TRACE transactions in U.S. Treasury 
securities, agency debt securities and agency mortgage-backed 
securities. See FINRA.org, Federal Reserve Depository Institution 
Reporting to TRACE, available at https://www.finra.org/filing-reporting/trace/federal-reserve-depository-institution-reporting 
(last visited Aug. 8, 2023). In addition, in order to enhance the 
regulatory audit trail and ensure data is reported in a more timely 
manner, FINRA adopted amendments to Rule 6730 to require members to 
report U.S. Treasury securities transaction data in the smallest 
increment available to the member and as soon as practicable, but no 
later than 60 minutes following a transaction. See Securities 
Exchange Act Release No. 95635 (Aug. 30, 2022), 87 FR 54579 (Sept. 
6, 2022).
---------------------------------------------------------------------------

    When a non-FINRA member broker-dealer trades U.S. Treasury 
securities through a ``covered ATS,'' the covered ATS is obligated in 
its TRACE report to identify the non-FINRA member broker-dealer via its 
Market Participant ID (``MPID''),\124\ thus providing visibility to 
regulators as to what transactions on covered ATSs are attributable to 
non-FINRA members.\125\ But regulators have no such visibility when 
non-FINRA member broker-dealers trade U.S. Treasury securities 
otherwise than on a covered ATS. If non-FINRA member broker-dealers 
trade on a non-covered ATS or bilaterally with a counterparty that is a 
FINRA member or covered depository institution, the ATS or FINRA member 
or covered depository institution reports the trade, but the non-FINRA 
member is not specifically identified via a MPID and instead is 
identified only as a ``customer.'' \126\ If

[[Page 61861]]

non-FINRA member broker-dealers trade U.S. Treasury securities 
otherwise than on an ATS and with a counterparty that is not a FINRA 
member and not a covered depository institution, there is no TRACE 
reporting obligation and the trade is not reported.\127\
---------------------------------------------------------------------------

    \124\ See FINRA Rule 6730--Transaction Reporting, Supplementary 
Material .07--ATS Identification of Non-FINRA Member Counterparties 
for Transactions in U.S. Treasury Securities.
    \125\ In the proposal the Commission issued in Jan. 2022 to, 
among other things, amend Regulation ATS for ATSs that trade U.S. 
government securities, and the reopening release issued in Apr. 
2023, which provides supplemental information and economic analysis 
on the Jan. 2022 proposal, the Commission estimated that there would 
be a number of trading systems that would be required to comply with 
Regulation ATS under the proposal. See Securities Exchange Act 
Release Nos. 94062 (Jan. 26, 2022), 87 FR 15496, 15585 (Mar. 18, 
2022); 97309 (Apr. 14, 2023), 88 FR 29448, 29466 (May 5, 2023).
    \126\ In 2022, there were approximately 60 million transactions 
reported in U.S. Treasury securities, totaling $165 trillion in 
dollar volume. Approximately 35.7 million of those transactions, 
representing approximately $64 trillion in dollar volume, were 
executed on ATSs. The balance of approximately 24.3 million reported 
transactions, or $100 trillion in dollar volume, that was not traded 
on an ATS was reported by FINRA members with a counterparty that, if 
not a FINRA member, was identified as a ``customer'' in the reported 
data. The Commission estimates that approximately 12.7 million 
transactions and $60 trillion in dollar volume not executed on an 
ATS had a counterparty identified as a ``customer'' in the reported 
data. This represents 52% of the 24.3 million transactions and 60% 
of the $100 trillion in dollar volume not executed on an ATS, or 21% 
of the 60 million total transactions and 36% of the $165 trillion 
total dollar volume. Further, the Commission estimates that, of the 
35.7 million transactions and $64 trillion in dollar volume executed 
on an ATS, approximately 98.2% of that transaction volume and 99% of 
that dollar volume was executed on a covered ATS; approximately 1.8% 
of the 35.7 million transactions and 1% of the $64 trillion dollar 
volume, representing approximately 0.6 million transactions and $536 
billion, respectively, was executed on a non-covered ATS; and 
approximately 4.8% of the 0.6 million transactions and 22% of the 
$536 billion in dollar volume executed on a non-covered ATS, 
representing approximately 15,000 transactions and $59 billion, 
respectively, was reported with a counterparty identified as a 
``customer.'' Customer volume and transaction counts are calculated 
as half the sum of ATS-to-customer buys and ATS-to-customer sells.
    \127\ In addition, in the context of an NMS stock transaction 
effected between a FINRA member and a non-FINRA member otherwise 
than on an exchange, only the FINRA member is obligated to report 
the transaction to the FINRA TRF and the non-FINRA member generally 
is not identified on the trade report as the contra party to the 
trade. See Trade Reporting Frequently Asked Questions, Reporting 
Relationships and Responsibilities, section 202: Reporting Trades 
with a Non-FINRA Member, available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq#202 
(last visited Aug. 9, 2023). The non-FINRA member is, however, 
identified in CAT in this context.
---------------------------------------------------------------------------

    The Commission continues to believe that regulators' lack of 
visibility into U.S. Treasury securities transactions effected by 
proprietary trading broker-dealer firms that are not FINRA members, in 
the circumstances described above in which such firms are not 
identified by MPID in TRACE data, detracts from the comprehensiveness 
of U.S. Treasury securities TRACE data and regulators' ability to 
utilize that data to reconstruct market events, and detect and deter 
improper trading activity in the U.S. Treasury securities market.\128\ 
The Commission does not know if all U.S. Treasury securities 
transactions by non-FINRA member broker-dealer firms are reported to 
TRACE, and for those that are reported, any non-FINRA member broker-
dealer firm that is a counterparty remains anonymous if the transaction 
did not occur on a covered ATS. As a result, the Commission cannot 
quantify total secondary market trading by broker-dealers in U.S. 
Treasury securities, and regulators cannot readily identify from TRACE 
when a non-FINRA member broker-dealer is the source of reported U.S. 
Treasury securities order flows executed otherwise than on a covered 
ATS and cannot link any such order flows to any particular non-FINRA 
member broker-dealer.\129\ Moreover, broker-dealers that are not FINRA 
members have a potential competitive advantage over those that are 
FINRA members, as FINRA members incur the costs of reporting 
transactions in U.S. Treasury securities transactions but non-FINRA 
members do not.\130\
---------------------------------------------------------------------------

    \128\ For example, in a Nov. 2021 report, an inter-agency 
working group comprised of staff of the U.S. Department of the 
Treasury, Commission, Commodity Futures Trading Commission, Federal 
Reserve Bank of New York, and Board of Governors of the Federal 
Reserve System stated that ``[i]n March 2020, large flows from 
investors were captured by TRACE data but were not identifiable 
beyond the FINRA-member dealer intermediary that facilitated the 
trade. Understanding the source of these flows required the official 
sector to contact dealers, wait for other datasets that are 
significant lagged, and rely on separate sources of information.'' 
See U.S. Dep't of the Treasury et al., Recent Disruptions and 
Potential Reforms in the U.S. Treasury Market: A Staff Progress 
Report (Nov. 8, 2021) (``2021 Interagency Report'') available at 
https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf.
    \129\ See id.
    \130\ See supra section V.C.2 for estimated costs of TRACE 
reporting.
---------------------------------------------------------------------------

    Some commenters broadly agreed with the Commission's concern, 
expressed in the 2022 Re-Proposal, regarding transparency and reporting 
of U.S. Treasury securities transactions by proprietary trading broker-
dealer firms that are not FINRA members.\131\ Other commenters stated 
that there is no reporting gap that must be addressed with respect to 
U.S. Treasury securities transactions by proprietary trading broker-
dealer firms that are not FINRA members because, according to the 
commenters, existing TRACE reporting requirements meaningfully capture 
effectively all proprietary broker-dealer U.S. Treasury securities 
transactions.\132\ One of these commenters also stated that potential 
concerns around the identification of non-FINRA member counterparties 
to U.S. Treasury securities transactions on non-covered ATSs are not 
implicated by proprietary broker-dealer transactions in any meaningful 
way, or could be remedied by requiring that such transactions be 
reported with account ownership identifiers, which, according to the 
commenter, would not necessitate FINRA membership.\133\ Similarly, 
other commenters suggested, as an alternative to what the Commission 
has proposed, an approach under which proprietary trading broker-dealer 
firms could remain exempt from section 15(b)(8)'s Association 
membership requirement so long as they report their U.S. Treasury 
securities transactions to FINRA's TRACE system.\134\
---------------------------------------------------------------------------

    \131\ See FINRA Letter at 9 (stating that FINRA has no 
visibility into the identity of non-FINRA firms for U.S. Treasury 
securities transactions that occur otherwise than on a covered ATS 
or on any other non-ATS platform); Better Markets Letter at 9 
(stating that a significant proportion of U.S. Treasury securities 
transaction activity is performed on a bilateral basis without data 
reporting requirements, and that this lack of visibility undermines 
regulators' ability to monitor risks, understand how those risks 
evolve into potentially systemic risks, and react to them in real-
time, and inhibits robust price discovery) (citing 2021 Interagency 
Report, supra note 128); Cboe Letter at 9.
    \132\ See FIA/PTG Letter at 3 (acknowledging concerns regarding 
the identification of non-FINRA member counterparties but noting 
they are not aware of the situation applying to proprietary broker-
dealer transactions in a ``meaningful'' way); MMI Letter at 2 
(arguing CAT and TRACE data ``effectively captures'' all proprietary 
broker-dealer transactions). It is difficult to assess the accuracy 
of the commenter statement that there is no reporting gap with 
respect to U.S. Treasury securities transactions by proprietary 
trading broker-dealer firms that are not FINRA members because, as 
discussed above in this section, if non-FINRA member broker-dealers 
trade U.S. Treasury securities otherwise than on an ATS and with a 
counterparty that is not a FINRA member and not a covered depository 
institution, there is no TRACE reporting obligation and the trade is 
not reported. And even when a non-FINRA member broker-dealer's 
transactions in U.S. Treasury securities are reported by a 
counterparty that does have a TRACE reporting obligation, such as a 
FINRA member or covered depository institution, the non-FINRA member 
is identified only as ``customer'' in the reported data unless the 
transaction occurred on a covered ATS.
    \133\ See FIA/PTG Letter at 3.
    \134\ See, e.g., PEAK6 Letter at 6; Group One Letter at 2; CTC 
Letter at 3; Cboe Letter at 7; Virtu Letter at 7.
---------------------------------------------------------------------------

    The reporting requirements suggested by commenters could help 
address the potential anonymity of proprietary trading broker-dealer 
firms in TRACE data. But as discussed above in this section, a lack of 
transparency to regulators when non-FINRA member broker-dealers trade 
U.S. Treasury securities--and the resulting difficulty it poses for 
regulators when trying to identify the source of U.S. Treasury 
securities order flows, detect and deter improper trading activity, and 
reconstruct market events--is not the full scope of what the Commission 
believes must be addressed. There also is the necessity, described 
above in this section, for FINRA to have the authority to allow it to 
independently examine for, investigate, or address potential off-
member-exchange misconduct by proprietary trading broker-dealer firms 
in the securities markets, including the

[[Page 61862]]

markets for U.S. Treasury securities, equities and options. Such FINRA 
authority is necessary notwithstanding the Commission's authority over 
broker-dealers in order to strengthen the SRO layer of oversight of 
off-member-exchange securities trading, consistent with the dual 
Commission and SRO oversight of broker-dealers required by the Exchange 
Act.\135\ As a membership-based organization, FINRA's jurisdiction, and 
thus its authority, is limited to its members and their associated 
persons. As such, authority to independently examine, investigate, or 
enforce potential violations against non-FINRA member broker-dealers is 
not conferred to FINRA through reporting requirements without FINRA 
membership. For example, FINRA stated that it identified non-FINRA 
member broker-dealer firms as potential respondents in five percent of 
the market regulation investigations it conducted in 2020 and 2021, 
which ranged across asset types and included both cross-exchange and 
off-exchange conduct), and FINRA identified non-FINRA member firms in 
17 percent of the surveillance alerts generated by its U.S. Treasury 
security manipulation pattern surveillance in 2020 and 2021.\136\ If 
those non-FINRA member firms could remain exempt from section 
15(b)(8)'s Association membership requirement as long as they report 
their U.S. Treasury securities transactions to TRACE, FINRA would 
continue to lack the independent ability to examine and investigate 
those firms to generate evidence, such as by collecting documents and 
interviewing witnesses.
---------------------------------------------------------------------------

    \135\ See supra note 22 (stating that Congress historically has 
favored self-regulation for a variety of reasons, including that 
effectively regulating the inner-workings of the securities industry 
at the Federal level was viewed as cost prohibitive and inefficient; 
the complexity of securities practices made it desirable for SRO 
regulatory staff to be intimately involved with SRO rulemaking and 
enforcement; and the SROs could set standards such as just and 
equitable principles of trade and detailed proscriptive business 
conduct standards).
    \136\ See FINRA Letter at 5, 10; see also 6/20/23 Meeting 
Memorandum (specifying that non-FINRA member broker-dealer firms 
made up the 5% of the market regulation investigations that FINRA 
conducted in 2020 and 2021, and that the 17% figure reflects an 
upper bound of the rate at which Commission-registered broker-
dealers that are not FINRA members appeared in the alerts generated 
by FINRA's U.S. Treasury security manipulation pattern surveillance 
in 2020 and 2021).
---------------------------------------------------------------------------

    In contrast, the rescission of the de minimis allowance and 
proprietary trading exclusion helps solve both for the need for FINRA 
authority over off-member-exchange securities trading activity and for 
the anonymity in TRACE data of proprietary trading broker-dealer firms 
when they trade U.S. Treasury securities otherwise than on a covered 
ATS. Under the adopted approach, proprietary trading broker-dealer 
firms that effect off-member-exchange securities transactions and that 
become FINRA members will be subject to direct, membership-based FINRA 
jurisdiction. Further, those that effect U.S. Treasury securities 
transactions otherwise than on a covered ATS will be specifically 
identified by MPID in TRACE.\137\
---------------------------------------------------------------------------

    \137\ See FINRA Rule 6730--Transaction Reporting, Supplementary 
Material .07--ATS Identification of Non-FINRA Member Counterparties 
for Transactions in U.S. Treasury Securities. FINRA membership also 
would require that such firms be identified in off-exchange NMS 
stock transaction reports to FINRA's TRFs, and thus promote broader 
public market transparency in NMS stocks. See FINRA Rule 6000 
Series--Quotation, Order, and Transaction Reporting Facilities and 
FINRA Rule 7000 Series--Clearing, Transaction and Order Data 
Requirements, and Facility Charges; see also supra note 17; 2022 Re-
Proposal, supra note 1, 87 FR 49942.
---------------------------------------------------------------------------

    In addition to discussing existing regulatory mechanisms and 
suggesting reporting-specific requirements as alternatives to FINRA 
membership, commenters addressed the Commission's position, set forth 
in the 2022 Re-Proposal, that it is appropriate for FINRA to exercise 
direct, membership-based oversight over firms that do not carry 
customer accounts.\138\ FINRA agreed with the Commission that direct, 
membership-based FINRA oversight over proprietary trading broker-dealer 
firms would be appropriate even though they typically do not carry 
customer accounts.\139\ FINRA stated that active trading firms have the 
potential to introduce risk into the markets even where they do not 
have customers, and for that reason, FINRA's rules and regulatory 
programs cover a cross section of activity and risks beyond sale 
practices.\140\ FINRA stated that certain member risk controls overseen 
by FINRA are particularly relevant to proprietary trading dealer firms, 
such as controls for credit risk to counterparties, market risk, market 
integrity risk, and liquidity risk.\141\ FINRA also observed that while 
non-FINRA members may not have customers of their own, they nonetheless 
can have a significant role executing customer orders routed to them by 
other broker-dealers.\142\ Other commenters stated that FINRA 
regulation is customer-focused and not appropriate for proprietary 
trading firms that do not carry customer accounts.\143\
---------------------------------------------------------------------------

    \138\ See, e.g., FINRA Letter at 11; ABCV Letter at 2; PEAK6 
Letter at 2; Group One Letter at 1-2; letter from James Toes, 
President & CEO, and Kate McAllister, Chair of the Board, Securities 
Traders Association (Oct. 5, 2022) (``STA Letter'') at 3-4.
    \139\ See FINRA Letter at 11 (stating that certain proprietary 
trading dealer firms that are not FINRA members have a significant 
market footprint and the scope of their activities introduces a 
moderate to high degree of risk to the market and market 
counterparties).
    \140\ See id.
    \141\ Id.
    \142\ See id. at 7-8.
    \143\ See, e.g., ABCV Letter at 2; PEAK6 Letter at 2; Group One 
Letter at 1-2; STA Letter at 3-4.
---------------------------------------------------------------------------

    The Commission continues to believe that it is appropriate for 
FINRA to have direct, membership-based jurisdiction over proprietary 
trading broker-dealer firms that effect off-member-exchange securities 
transactions even though such firms typically do not carry customer 
accounts. As discussed above,\144\ several non-FINRA member broker-
dealer firms that do not carry customer accounts effect significant 
volumes of off-member-exchange securities transactions. The Commission 
believes that such firms--and such trading activity--should not remain 
exempt from FINRA's direct, membership-based oversight on the basis 
that such firms do not carry customer accounts. FINRA's ability to 
create a consistent regulatory framework for all broker-dealers that 
effect off-member-exchange securities transactions is undermined by the 
subset of such broker-dealers that do not carry customer accounts and 
are not FINRA members in reliance on Rule 15b9-1.\145\ The rescission 
of the de minimis allowance and proprietary trading exclusion will help 
address this by eliminating the legal basis upon which such firms 
generally are able to effect off-member-exchange securities 
transactions without joining FINRA.
---------------------------------------------------------------------------

    \144\ See section II.B, supra.
    \145\ See FINRA Letter at 11 (stating that FINRA jurisdiction 
over proprietary trading dealer firms and the ability to identify 
their activity in all of FINRA's audit trails would further enable 
FINRA to assess individual entities' impacts on the market and 
market counterparties, and that the 2022 Re-Proposal would enable 
FINRA to directly and more comprehensively oversee such firms and 
their trading activity, which, in turn, would enhance market 
integrity and foster the maintenance of fair, orderly, and efficient 
markets); Better Markets Letter at 5 (stating that the amendments to 
Rule 15b9-1 would ``help ensure that dealers such as high-frequency 
trading firms, which conduct an enormous volume of trading, are 
subject to consistent and robust oversight through FINRA, not only 
the more narrow regulatory requirements that are specific to each 
exchange'').
---------------------------------------------------------------------------

    In particular, as discussed in the 2022 Re-Proposal, FINRA is well-
positioned to exercise direct oversight over such firms. FINRA has 
established a regulatory regime for broker-dealers that effect off-
member-exchange securities transactions that applies to FINRA members 
regardless of whether they handle customer orders or carry customer 
accounts.\146\ For example,

[[Page 61863]]

FINRA, not unlike exchanges, has developed a detailed set of rules in 
core areas such as trading practices,\147\ business conduct,\148\ 
financial condition and operations,\149\ and supervision,\150\ many of 
which apply to FINRA members regardless of whether they handle customer 
orders or carry customer accounts.\151\ As another example, FINRA's 
transaction reporting regime is not limited to broker-dealers with 
customers and applies to FINRA members regardless of whether they 
handle customer orders or carry customer accounts.\152\ Continuing to 
permit an exemption from FINRA membership on the basis that broker-
dealers that, for example, trade U.S. Treasury securities proprietarily 
do not have customers would not help improve the comprehensiveness of 
U.S. Treasury securities transaction TRACE data or address the 
potential competitive advantage of non-FINRA member broker-dealers 
that, unlike FINRA member broker-dealers, may trade U.S. Treasury 
securities without incurring the costs of reporting those trades to 
TRACE.
---------------------------------------------------------------------------

    \146\ Many broker-dealer firms that derive all or most of their 
revenue from proprietary trading already are FINRA members. See 
Securities Exchange Act Release No. 97798 (June 26, 2023), 88 FR 
42404, 42406 (June 30, 2023) (``TAF Amendment'') (stating that FINRA 
estimates that approximately 66 member firms derive all or most of 
their revenue from proprietary trading). As FINRA members, these 
broker-dealers are subject to FINRA's rules and FINRA's direct 
jurisdiction even though they effect securities transactions for 
their own account and not on behalf of customers.
    \147\ See FINRA Rule 5000 Series--Securities Offerings and 
Trading Standards and Practices. For instance, FINRA prohibits 
members from coordinating prices and intimidating other members. See 
FINRA Rule 5240(a) (stating, 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'').
    \148\ See FINRA Rule 2000 Series--Duties and Conflicts.
    \149\ See FINRA Rule 4000 Series--Financial and Operational 
Rules. For example, FINRA Rule 4370(a) provides, 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. The business continuity plan must be made available 
promptly upon request to FINRA staff.''
    \150\ See FINRA Rule 3000 Series--Supervision and 
Responsibilities Relating to Associated Persons. This rule series 
generally requires FINRA member firms, among other things, to 
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.
    \151\ See, e.g., the FINRA rules set forth in notes 17-18, 56-
57, 122-124, 137 and 147-150, and accompanying text, supra. In 
addition, FINRA has regulatory programs and staff dedicated to fixed 
income regulation. See FINRA.org, Key Topics--Fixed Income, 
available at https://www.finra.org/rules-guidance/key-topics/fixed-income#overview.
    \152\ See FINRA Rule 6000 Series (Quotation, Order, and 
Transaction Reporting Facilities).
---------------------------------------------------------------------------

    The Commission also continues to believe that it is important to 
the protection of investors and the public interest that FINRA has 
direct, membership-based jurisdiction over proprietary trading broker-
dealer firms that effect off-member-exchange securities transactions 
regardless of whether they carry customer accounts. An Association's 
regulatory responsibility, like exchange SROs', includes an obligation 
to enforce compliance with the Federal securities laws and rules 
thereunder and the SRO's rules. As an Association, the Exchange Act's 
statutory framework places SRO oversight responsibility with FINRA for 
off-member-exchange securities trading, and FINRA is well-positioned to 
carry out this responsibility with respect to its members.
    For example, FINRA gains familiarity with a member's operational 
risk by assigning dedicated staff members to each firm (e.g., a Risk 
Monitoring Analyst to act as the primary point of contact and a Risk 
Monitoring Director) and having staff with subject matter expertise 
relevant to a member's business model conduct examinations and carry 
out monitoring duties.\153\ Firms are classified into five primary 
business models and then further sorted into various subgroups overseen 
by exam and risk monitoring staff.\154\ Risk monitoring teams seek to 
understand the unique aspects of each firm monitored, and use that 
expertise to inform exam staff in the preparation of exams. Employing a 
risk-based approach, FINRA examines firms on a one, two or four-year 
frequency and makes use of specialist teams (e.g., anti-money 
laundering, cybersecurity or fixed income). Further, FINRA gains 
familiarity with a member's operational risk through customer 
complaints and regulatory tips or calls, which may trigger a ``cause'' 
exam (in contrast to the routine exams described above) focusing on the 
issues raised in the complaints.\155\ Finally, FINRA staff is informed 
of changes in operational risk associated with a material change in 
business operations or change of control through FINRA Rule 1017.\156\ 
The Continuing Member Application triggered under FINRA Rule 1017, 
among other things, reviews if the member's contractual and business 
relationships support the proposed change, if communications and 
operational systems are appropriate, financial and internal controls, 
and the adequacy of the member's supervisory system to prevent and 
detect violations.\157\
---------------------------------------------------------------------------

    \153\ See FINRA Risk Monitoring Program, FINRA, available at 
https://www.finra.org/contact-finra/risk-monitoring-program; FINRA 
Examination and Risk Monitoring Programs, FINRA, available at 
https://www.finra.org/rules-guidance/key-topics/finra-examination-risk-monitoring-programs#overview.
    \154\ See FINRA Examination and Risk Monitoring Programs, FINRA, 
available at https://www.finra.org/rules-guidance/key-topics/finra-examination-risk-monitoring-programs#overview.
    \155\ Id.
    \156\ See FINRA Rule 1017; Form CMA, FINRA, available at https://www.finra.org/registration-exams-ce/broker-dealers/registration-forms/form-cma.
    \157\ See Filing a Change in Membership Application, The ``What 
to Expect'' Webcast Series (2010), FINRA, available at https://www.finra.org/sites/default/files/Education/p018711.pdf.
---------------------------------------------------------------------------

    The inability of FINRA to directly enforce regulatory compliance by 
proprietary trading broker-dealer firms that are not FINRA members--
whether or not they handle customer orders or carry customer accounts--
may create a risk to the fair and orderly operation of the market 
because FINRA may not be as familiar with the firm's operational risks 
or other risks posed by the firm's off-member-exchange securities 
trading activity as FINRA would be with a FINRA member firm, and FINRA 
may not be as well positioned potentially to mitigate those risks. In 
addition, if FINRA were to detect that a non-FINRA member is effecting 
off-member-exchange securities transactions that are not in compliance 
with the Exchange Act or applicable rules, FINRA would not have direct, 
membership-based jurisdiction to directly address the behavior.\158\
---------------------------------------------------------------------------

    \158\ FINRA could refer such a matter to the Commission or to an 
exchange where the firm is a member or, as discussed above in this 
section, potentially address the matter through an RSA if covered by 
the terms of the RSA. See also supra note 14. But FINRA may lack 
certain investigative tools, discussed above in this section, with 
respect to non-FINRA member broker-dealers that it possesses with 
respect to FINRA members, which could help FINRA further investigate 
potentially violative behavior before making a referral to the 
Commission or an exchange, or help prevent FINRA from failing to 
make referrals when they are warranted. See also section V, infra. 
Further, the Commission believes that regulatory efforts based on 
discretionary RSA arrangements among exchange SROs and FINRA, while 
beneficial in many contexts, are a less stable and consistent 
mechanism for SRO oversight than the FINRA membership required by 
the Exchange Act in the context presented here, and are less 
comprehensive than membership-based FINRA oversight because they do 
not cover U.S. Treasury securities trading activity.

---------------------------------------------------------------------------

[[Page 61864]]

    As is discussed in the 2022 Re-Proposal and in more detail in the 
Economic Analysis, infra section V, firms that become FINRA members as 
a result of the adopted rule amendments will be required to apply for 
membership with FINRA and 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.\159\ These regulatory fees 
include a Trading Activity Fee (``TAF'').\160\ FINRA issued a 
Regulatory Notice in 2015 in which it proposed to amend the TAF such 
that it would not apply to transactions by a proprietary trading firm 
effected on exchanges of which the firm is a member.\161\ In June 2023, 
after the 2022 Re-Proposal, FINRA filed a proposed rule change with the 
Commission, pursuant to section 19 of the Act, to amend the TAF such 
that it does not apply to transactions by a proprietary trading firm 
effected on exchanges of which the firm is a member.\162\ FINRA 
designated this proposed rule change as ``establishing or changing a 
due, fee or other charge'' under section 19(b)(3)(A)(ii) of the Act and 
17 CFR 240.19b-4(f)(2) (``Rule 19b-4(f)(2)'') thereunder, which renders 
the rule effective upon filing with the Commission.
---------------------------------------------------------------------------

    \159\ See FINRA Schedule A to the By-Laws of the Corporation 
(``FINRA Schedule A''), at section 1, available at https://www.finra.org/rules-guidance/rulebooks/corporate-organization/section-1-member-regulatory-fees.
    \160\ 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, at 
section 1(a). The TAF is generally assessed on FINRA member firms 
for all equity sales transactions that are not performed in the 
capacity of a registered exchange specialist or market maker. See 
id. at section 1(b). FINRA charges its members other fees as well, 
such as an annual Gross Income Assessment (``GIA''). See id. at 
section 1.
    \161\ See FINRA Regulatory Notice 15-13, Trading Activity Fee 
(May 2015), available at http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-13.pdf. FINRA re-opened the 
comment period on its 2015 Regulatory Notice after the 2022 Re-
Proposal. See FINRA Regulatory Notice 22-30, Trading Activity Fee 
(Dec. 15, 2022) available at https://www.finra.org/sites/default/files/2022-12/Regulatory-Notice-22-30.pdf.
    \162\ See TAF Amendment. The TAF Amendment's implementation 
date, which FINRA will announce in a Regulatory Notice, will be no 
earlier than the date of the Commission's adoption of amended Rule 
15b9-1 and no later than the effective date of amended Rule 15b9-1. 
Id.
---------------------------------------------------------------------------

    Comments on the 2022 Re-Proposal, submitted prior to the TAF 
Amendment, stated that the costs of applying for FINRA membership, as 
well as ongoing costs of FINRA membership such as the TAF, are high and 
burdensome and could affect liquidity provision.\163\ In particular, 
commenters stated that proprietary options trading firms should remain 
exempt from section 15(b)(8)'s Association membership requirement 
because they do not trade U.S. Treasury securities and the equities 
transaction volume that they effect is hedging activity.\164\ 
Commenters urged the Commission to adopt an exemption for proprietary 
options trading broker-dealer firms, such that their off-member-
exchange securities trading activity would not trigger section 
15(b)(8)'s Association membership requirement if such activity is to 
hedge or in furtherance of their options trading activity on their 
member exchange(s).\165\ If proprietary options trading firms do not 
remain exempt, commenters stated, there could be a negative impact on 
options market liquidity and smaller options trading firms could cease 
trading, which could lead to consolidation and decreased 
competition.\166\ FINRA stated that most proprietary trading dealer 
firms that newly join FINRA would not incur membership application fees 
exceeding $12,500.\167\ FINRA also stated (prior to filing the TAF 
Amendment with the Commission) that it is committed to amending the TAF 
to lessen its impact on such firms.\168\
---------------------------------------------------------------------------

    \163\ See, e.g., MMI Letter at 3; PEAK6 Letter at 4-5; FIA PTG 
Letter at 4; Group One Letter at 2-3; ABCV Letter at 2-3; CTC Letter 
at 4; Cboe Letter at 7. One commenter estimated that some 
proprietary broker-dealers would incur TAF fees greater than 
$1,000,000 per year under the current TAF structure. See FIA PTG 
Letter at 4. Another commenter opined on the substance of FINRA's 
contemplated TAF amendment. See PEAK6 Letter at 4. Some commenters 
also stated that FINRA must amend the TAF before the Rule 15b9-1 
amendments are adopted so firms can assess the fee-related costs of 
FINRA membership on proprietary trading firms. See PEAK6 Letter at 
4; FIA PTG Letter at 4.
    \164\ See, e.g., Cboe Letter at 3; see also ABCV Letter at 2 
(stating that any trading by options market makers in the underlying 
cash equities markets is related to legitimate hedging of their 
options positions).
    \165\ See Cboe Letter at 2-3; ABCV Letter at 3-4; CTC Letter at 
5; PEAK6 Letter at 4; Nasdaq Letter at 2. Commenters also stated 
that options trading firms' equities volume often is processed 
through a FINRA member, and stated that a hedging exemption would be 
particularly appropriate if the routing away from a member exchange 
is through a broker-dealer that is a FINRA member. See Cboe Letter 
at 2-3; ABCV Letter at 2-4; CTC Letter at 5; PEAK6 Letter at 4. As 
discussed supra in this section, the Commission does not agree. See 
supra notes 98-101 and accompanying text.
    \166\ See STA Letter at 3-4; Cboe Letter at 2-3, 7; ABCV Letter 
at 2-4; CTC Letter at 5; PEAK6 Letter at 4-6.
    \167\ See FINRA Letter at 12 n. 40 (also stating that FINRA does 
not anticipate that new member proprietary trading dealer firms 
would incur the one-time clearing surcharge that applies to new 
applicants engaged in clearing and carrying activity).
    \168\ See id. at 14. See also note 170 and accompanying text, 
infra.
---------------------------------------------------------------------------

    The Commission believes that a hedging exemption for broker-dealers 
that are proprietary options trading firms, like that sought by 
commenters, could continue to result in a significant volume of off-
member-exchange trading activity not being subject to direct, 
membership-based FINRA oversight. Proprietary options trading firms 
make up the majority of the 12 firms that the Commission identified 
above as accounting for 5.1% of all off-exchange listed equities volume 
in April 2023 and the majority of the 21 firms that the Commission 
identified as accounting for approximately 99% of the $262 billion in 
listed equities transaction volume executed on exchanges where they are 
not a member.\169\ As a result, significant off-member-exchange trading 
activity could continue not to be subject to direct FINRA oversight 
under commenters' suggested exemption. The Commission continues to 
believe that this would not be consistent with the protection of 
investors or the public interest, or with the historical rationale for 
Rule 15b9-1 of accommodating limited off-member-exchange trading 
activities.\170\
---------------------------------------------------------------------------

    \169\ See section II.B, supra.
    \170\ See 2022 Re-Proposal, supra note 1, sections III.B.2 and 
III.C, 87 FR 49947-50. Section 15(b)(9) of the Act provides the 
Commission with the authority, by rule or order, and as it deems 
consistent with the public interest and the protection of investors, 
to conditionally or unconditionally exempt from the requirements of 
section 15(b)(8) any broker or dealer or class of brokers or 
dealers. Accordingly, if a broker or dealer or class of brokers or 
dealers believes that it should be exempted from the requirements of 
section 15(b)(8) in a manner that is not provided by amended Rule 
15b9-1, it may seek an exemption from the Commission, by order, 
pursuant to section 15(b)(9). For example, the Commission may 
consider granting such an exemption, where appropriate, if a dealer 
or class of dealers chooses to limit its exchange trading activity 
to the physical floor of an exchange of which it is a member, but 
must effect limited securities transactions elsewhere for its own 
account in order to facilitate its exchange-floor business.

---------------------------------------------------------------------------

[[Page 61865]]

    The effect of not including a hedging exemption in Rule 15b9-1 will 
be that proprietary options trading broker-dealer firms (among other 
types of proprietary trading broker-dealer firms) will no longer be 
exempt from section 15(b)(8)'s Association membership requirement if 
they effect off-member-exchange securities transactions (unless they 
are covered by one of the exemptions in the amended rule). Therefore, 
these firms will be required by section 15(b)(8) of the Act to join 
FINRA in order to continue any off-member-exchange securities trading 
activity. The Commission is mindful of the FINRA membership costs, 
including application and TAF fees, that would be incurred by 
proprietary trading broker-dealer firms, including options trading 
firms, that join FINRA as a result of the rescission of the de minimis 
allowance and proprietary trading exclusion, and the Commission is 
mindful of the potential impact of those costs on options market 
liquidity.
    The Commission believes it is unlikely, however, that such firms 
would be unable to continue operating their trading businesses or 
providing liquidity in their normal course due to the costs of FINRA 
membership. Insofar as the costs of joining FINRA are concerned, the 
Commission believes that a $12,500 FINRA membership application fee 
would be manageable for proprietary trading options firms that newly 
join FINRA, and is small enough such that it should not materially 
impact their ability to provide liquidity.\171\ As for concerns 
regarding the TAF, an ongoing FINRA cost, FINRA, after considering the 
potential impact of the TAF on proprietary trading firms that join 
FINRA, has amended its rules 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.
---------------------------------------------------------------------------

    \171\ See infra section V.C.2 (stating that the Commission 
believes that the median application fee for the 12 largest (by 
volume traded) non-FINRA member broker-dealer firms would be 
$12,500).
---------------------------------------------------------------------------

    In addition, commenters stated that small options trading firms 
could be adversely affected by the rule amendments to the point of 
providing less liquidity or ceasing to trade.\172\ While commenters did 
not indicate how they are defining ``small'' options firms, the 
Commission believes that smaller firms should be able to absorb the 
ongoing costs of FINRA membership, such as the GIA and TAF.\173\ As 
discussed in the Economic Analysis below,\174\ the estimated aggregate 
costs for the 12 largest non-FINRA member broker-dealer firms as of 
April 2023 represent the majority of the aggregate costs stemming from 
the amendments to Rule 15b9-1. Therefore, the Commission believes that 
smaller non-FINRA member broker-dealer firms as well as new entrants 
will experience much lower initial and ongoing costs and that these 
FINRA membership costs would not materially impede their ability to 
continue their trading businesses, which may include providing 
liquidity in the options market, if they join FINRA.\175\
---------------------------------------------------------------------------

    \172\ See STA Letter at 3-4; ABCV Letter at 2-3; Cboe Letter at 
7; Nasdaq Letter at 3-4.
    \173\ See infra section V.C.2 (stating that the 12 largest non-
FINRA member broker-dealer firms (as measured by off-exchange 
equities volume traded in April 2023) had average and median annual 
total revenues of approximately $1.2 billion and $491 million, 
respectively, in 2022; would incur an estimated median GIA of 
$327,870; and would incur an estimated median and average TAF of 
approximately $119,256 and $304,994, respectively).
    \174\ See infra section V.C.2.
    \175\ The Commission believes that the potential FINRA 
membership costs that could be incurred by firms not among the 12 
largest non-FINRA member broker-dealers is the best data point 
available to the Commission to assess commenters' assertion. As 
discussed in section V.B.2, infra, the Commission cannot, however, 
rule out the possibility that the addition of FINRA costs will serve 
as a catalyst for one or more small non-FINRA member options market 
makers to exit the market, although FINRA's exemption of TAF fees 
should reduce the likelihood that firms will choose to exit in 
response to the adopted rule amendments. In addition, as discussed 
in section VII, infra, the Commission estimates that not more than 
three of the 64 non-FINRA member broker-dealer firms that the 
Commission identified as of April 2023 have total capital of less 
than $500,000 and are not affiliates of any person (other than a 
natural person) that is not a small business or small organization 
and would, as a result, be considered small entities under 
Regulatory Flexibility Act (``RFA'') standards. These three small 
firms--by RFA standards--could be significantly impacted by the 
adopted rule amendments because they could be required to become a 
member of FINRA under section 15(b)(8) of the Act, if they effect 
off-member-exchange securities transactions and do not qualify for 
one of the adopted exemptions. These three firms are not among the 
12 largest non-FINRA member broker-dealer firms identified by the 
Commission, and so, as discussed in the paragraph above and in 
section V.C.2 infra, their initial and ongoing FINRA membership 
costs, should they join FINRA, likely would be low. This suggests 
that, while they could be significantly impacted by the adopted rule 
amendments in that they may no longer be exempt from FINRA 
membership, their trading businesses nevertheless might not be 
materially impeded by the costs of FINRA membership.
---------------------------------------------------------------------------

    Further, since the 2015 Proposal, as commenters observed, there has 
been a decrease in the number of Commission-registered broker-dealers 
that are exchange members but not FINRA members.\176\ There also has 
been significant consolidation among broker-dealers generally over the 
past decade.\177\ Meanwhile, despite this decline in the number of 
firms, options market liquidity has remained robust, as reflected by 
data suggesting that options quoted spreads have remained flat or 
slightly declined in recent years as overall option trading volumes 
have continued to hit record highs.\178\ Therefore, as discussed in the 
Economic Analysis below,\179\ the Commission does not believe that the 
adopted rule amendments will undermine options market liquidity 
provision. In addition, as discussed in the Economic Analysis 
below,\180\ the Commission believes that amended Rule 15b9-1 is not 
likely to have an economically meaningful effect on direct capital 
formation, and that changes in the allocation of regulatory fees and 
direct FINRA supervision within the off-member-exchange market may 
result in improved efficiency of capital allocation by the financial 
industry, as current FINRA members might commit additional capital to 
liquidity provision when the trading environment has more uniform 
regulatory requirements.
---------------------------------------------------------------------------

    \176\ See STA Letter at 3-4; ABCV Letter at 2-3. See also infra 
section V.B.2. The decrease is largely the result of such firms 
ceasing their broker-dealer operations and withdrawing their 
registration as broker-dealers with the Commission.
    \177\ See FINRA.org, 2022 Industry Snapshot, at 13, available at 
https://www.finra.org/sites/default/files/2022-03/2022-industry-snapshot.pdf (last visited Aug. 8, 2023) (reflecting the following 
number of FINRA-registered firms in 2017-2021: 3,726 in 2017; 3,607 
in 2018; 3,517 in 2019; 3,435 in 2020; and 3,394 in 2021); compare 
2015 Proposal, supra note 1, 80 FR 18042, with section II.B supra 
(reflecting a decrease in the Commission's estimate of the number of 
broker-dealers registered with the Commission that are exchange 
members but not FINRA members from 125 in the 2015 Proposal to 64 as 
of Apr. 2023). This trend began well before the amendments being 
adopted in this release, and may or may not continue regardless of 
the adopted rule amendments. In other words, if options trading 
firms ceased operating in the future, the Commission does not 
believe the cause necessarily would be the amendments to Rule 15b9-1 
as other factors have caused this trend before these amendments and 
likely would continue to be relevant.
    \178\ See section V.B, infra (among other things, citing an 
academic study showing that options bid-ask spreads have remained 
flat since 2015, and citing NYSE Data Insights 2021 Options Year in 
Review, available at https://www.nyse.com/data-insights/2021-options-year-in-review, which reflects that options quoted spreads 
have remained flat or slightly declined in recent years as overall 
option trading volumes have continued to hit record highs).
    \179\ See id.
    \180\ See 2022 Re-Proposal, supra note 1, 87 FR 49960; section 
V.B.1, infra.
---------------------------------------------------------------------------

    Finally, commenters stated that the Commission already possesses 
and can exercise authority over Commission-registered broker-dealers 
that are not FINRA members.\181\ While this is

[[Page 61866]]

true,\182\ as discussed above and in the 2022 Re-Proposal,\183\ the 
Exchange Act requires dual SRO and Commission oversight of registered 
broker-dealers, with SROs acting as robust, front-line regulators of 
their broker-dealer members. While the Commission retains examination 
authority over the SROs and can bring enforcement actions, including 
pursuant to SRO referrals, that Commission layer of regulatory 
oversight is meant to work in tandem with, not in place of, a robust 
front-line layer of SRO oversight. The Commission continues to believe 
that the front-line layer of SRO oversight must be strengthened with 
respect to proprietary trading broker-dealer firms that effect off-
member-exchange securities transactions notwithstanding the 
Commission's plenary jurisdiction over Commission-registered broker-
dealers. Section 15(b)(8)'s complementary SRO oversight structure 
generally has enabled exchange SROs to specialize in oversight of 
securities trading activity that occurs on the exchange, and FINRA to 
specialize in oversight of off-member-exchange securities trading 
activity. The Commission continues to believe that rescinding Rule 
15b9-1's de minimis allowance and proprietary trading exclusion would 
better enable robust and consistent FINRA oversight in the area of its 
expertise through direct, membership-based jurisdiction of broker-
dealers that effect off-member-exchange securities transactions 
proprietarily. This, in turn, could strengthen the front-line layer of 
SRO regulatory oversight that is applied to off-member-exchange 
proprietary securities trading in today's market.\184\
---------------------------------------------------------------------------

    \181\ See, e.g., Virtu Letter at 2.
    \182\ See section I, supra; 2022 Re-Proposal, supra note 1, 87 
FR 49931-32 (stating that the Commission may bring enforcement 
actions, including pursuant to referrals made by SROs, to enforce 
compliance with the Exchange Act and applicable rules).
    \183\ See section I, supra; 2022 Re-Proposal, supra note 1, 87 
FR 49932.
    \184\ One commenter stated that, ``by adopting a Commission rule 
requiring certain broker-dealers to register with FINRA, FINRA will 
become, at least as to those broker-dealers, a `part of the 
Government' under the standard set forth by the U.S. Supreme Court 
in Free Enterprise Fund v. Public Company Accounting Board, 561 U.S. 
477 (2010).'' Letter from W. Hardy Callcott (Sept. 3, 2022). FINRA 
disputed this. See FINRA Letter at 15-20. The Commission disagrees 
that the amendments to Rule 15b9-1 would make FINRA ``part of the 
Government'' under Free Enterprise. In that case, the Supreme Court 
reasoned that, ``[u]nlike the self-regulatory organizations,'' the 
Public Company Accounting Oversight Board was ``a Government-
created, Government appointed entity.'' 561 U.S. at 485. These 
distinctions between FINRA and the PCAOB remain unchanged by the 
amendments to Rule 15b9-1. See also, e.g., Desiderio v. Nat'l Ass'n 
of Sec. Dealers, Inc., 191 F.3d 198, 206 (2d Cir. 1999) (NASD ``is a 
private actor, not a state actor,'' because it is a ``private 
corporation that receives no federal or state funding,'' ``[i]ts 
creation was not mandated by statute, nor does the government 
appoint its members or serve on any NASD board or committee.'').
---------------------------------------------------------------------------

    On March 28, 2022, the Commission proposed new rules to further 
define certain language as used in the definition of ``dealer'' and 
``government securities dealer'' under sections 3(a)(5) and 3(a)(44) of 
the Exchange Act, respectively.\185\ Some commenters stated that the 
amendments to Rule 15b9-1 may affect proprietary trading firms that are 
not Commission-registered dealers, but could be required to register as 
such if the definition of ``dealer'' is amended.\186\ To the extent the 
Commission amends the definition of ``dealer'' in the future, the 
adopted amendments to Rule 15b9-1 would become part of the baseline 
from which the effects of any such new rule on the definition of 
``dealer'' are measured.
---------------------------------------------------------------------------

    \185\ See Securities Exchange Act Release No. 94524 (Mar. 28, 
2022), 87 FR 23054 (Apr. 18, 2022).
    \186\ See, e.g., MMI Letter at 3; STA Letter at 2; Virtu Letter 
at 4.
---------------------------------------------------------------------------

B. Narrowed Criteria for Exemption From Association Membership

    The Commission proposed to add to Rule 15b9-1 a new paragraph (c) 
that would set forth two narrow circumstances in which a broker or 
dealer would continue to be exempt from section 15(b)(8)'s Association 
membership requirement if it effects transactions in securities 
otherwise than on an exchange of which it is a member.\187\ 
Specifically, following the existing paragraphs of Rule 15b9-1 that 
require that a broker or dealer be a member of a national securities 
exchange and carry no customer accounts (both of which paragraphs would 
be retained), the Commission proposed to add language that states: 
``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) . . .'' \188\ The two proposed exemptions 
followed in new paragraphs (c)(1) and (2).
---------------------------------------------------------------------------

    \187\ See 2022 Re-Proposal, supra note 1, 87 FR 49944-49. 
Relatedly, the Commission proposed that existing paragraph (a) of 
Rule 15b9-1 would remain the same except it would no longer be 
numbered as paragraph (a); existing paragraph (a)(1) would be 
renumbered as paragraph (a); and existing paragraph (a)(2) would be 
renumbered as paragraph (b). See 2022 Re-Proposal, supra note 1, 87 
FR 49945 n. 156.
    \188\ See 2022 Re-Proposal, supra note 1, 87 FR 49945.
---------------------------------------------------------------------------

    As discussed in turn below, the Commission is adopting as proposed 
new paragraphs (c)(1) and (2) (as well as the above-quoted 
language).\189\ Paragraphs (c)(1) and (2) of the amended rule are 
intended to provide more focused exemptions from Association membership 
for types of off-member-exchange activity that are similar to the off-
member-exchange activities that Rule 15b9-1 was originally intended to 
cover, and that are consistent with the protection of investors and the 
public interest in accordance with section 15(b)(9) of the Act.
---------------------------------------------------------------------------

    \189\ See amended Rule 15b9-1(c), under ``Text of Amendments,'' 
infra. The Commission also is adopting the proposed renumbering of 
paragraphs (a) and (b) in the amended rule. See supra note 187.
---------------------------------------------------------------------------

1. Routing Exemption
    The Commission proposed to add a new paragraph (c)(1) to Rule 15b9-
1 that sets forth an exemption from Association membership if a broker 
or dealer that meets the criteria of paragraphs (a) and (b) of the rule 
effects transactions in securities otherwise than on a national 
securities exchange of which it is a member that result solely from 
orders that are routed by a national securities exchange of which it is 
a member to comply with Rule 611 of Regulation NMS \190\ or the Options 
Order Protection and Locked/Crossed Market Plan.\191\ Relatedly, the 
Commission also proposed to eliminate from Rule 15b9-1 outdated 
references to the ``Intermarket Trading System,'' \192\ which is a now-
obsolete NMS plan that was discontinued in 2007 because it was 
superseded by Regulation NMS.\193\ The Commission is adopting these 
aspects of the 2022 Re-Proposal by adding new paragraph (c)(1), as re-
proposed, to Rule 15b9-1, and by removing from Rule 15b9-1 the ITS 
provisions in pre-existing paragraphs (b)(2) and (c).
---------------------------------------------------------------------------

    \190\ 17 CFR 242.611.
    \191\ See 2022 Re-Proposal, supra note 1, 87 FR 49945. See also 
Options Linkage Plan, supra note 22.
    \192\ The ITS was an NMS plan, the full title of which 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'' (``ITS Plan''). The ITS Plan was 
provisionally approved by the Commission in 1978 and finally 
approved by the Commission in 1983. See Securities Exchange Act 
Release Nos. 14661 (Apr. 14, 1978), 43 FR 17419 (Apr. 24, 1978) 
(``Initial ITS Plan Approval Order''); 19456 (Jan. 27, 1983), 48 FR 
4938 (Feb. 3, 1983) (``Final ITS Plan Approval Order''). All 
national securities exchanges that traded exchange-listed stocks and 
the National Association of Securities Dealers (``NASD'') were 
participants in the ITS Plan.
    \193\ See 2022 Re-Proposal, supra note 1, 87 FR 49945; see also 
Notice of Filing and Immediate Effectiveness of the Twenty Fourth 
Amendment to the ITS Plan Relating to the Elimination of the ITS 
Plan, Securities Exchange Act Release No. 55397 (Mar. 5, 2007), 72 
FR 11066 (Mar. 12, 2007).
---------------------------------------------------------------------------

    As discussed in the 2022 Re-Proposal, Rule 611 of Regulation NMS 
requires trading centers, such as national securities exchanges, to 
establish, maintain, and enforce written policies

[[Page 61867]]

and procedures reasonably designed to prevent trade-throughs in 
exchange-listed stocks, subject to certain exceptions.\194\ In general, 
Rule 611 protects automated quotations that are the best bid or offer 
of a national securities exchange or an Association.\195\ To facilitate 
compliance with Rule 611, national securities exchanges have developed 
the capability to route orders through brokers or dealers (many of 
which are affiliated with the exchanges) to other trading centers with 
protected quotations.\196\ Similarly, in the options market, the 
Options Linkage Plan is an NMS plan that requires linkages between the 
options exchanges to protect the best-priced displayed quotes in the 
market and to avoid locked and crossed markets.\197\ The Options 
Linkage Plan includes written policies and procedures that provide for 
order protection and address locked and crossed markets in eligible 
options classes.\198\
---------------------------------------------------------------------------

    \194\ 17 CFR 242.611. See also 17 CFR 242.600(b)(94) (defining a 
``trade-through'' under Regulation NMS); 17 CFR 240.600(b)(95) 
(defining ``trading center''); Options Linkage Plan, supra note 4 
(defining ``trade-through'' in the options context).
    \195\ 17 CFR 242.611.
    \196\ See 17 CFR 242.600(b)(71) (defining ``protected 
quotation'' under Regulation NMS); 17 CFR 242.600(b)(70) (defining 
``protected bid'' and ``protected offer'' under Regulation NMS); see 
also Options Linkage Plan, supra note 4 (defining ``protected bid'' 
and protected offer'' in the options context).
    \197\ See Options Linkage Plan, supra note 4. A locked or 
crossed market occurs when a trading center displays an order to buy 
at a price equal to or higher than an order to sell, or an order to 
sell at a price equal to or lower than an order to buy, that is 
displayed on another trading center.
    \198\ Id.
---------------------------------------------------------------------------

    The Commission proposed the routing exemption in paragraph (c)(1) 
to accommodate securities transactions away from a broker's or dealer's 
member exchange(s) that are to comply with these regulatory 
requirements.\199\ In essence, a broker or dealer may, as a necessary 
part of its business trading on exchanges of which it is a member and 
in light of today's market structure, effect securities transactions 
elsewhere than an exchange where it is a member solely as a consequence 
of routing by its member exchange(s) to comply with the requirements of 
Rule 611 of Regulation NMS or the Options Linkage Plan.\200\ The 
Commission continues to believe that it would be consistent with 
section 15(b)(9)'s goal of protecting investors and the public interest 
if transactions effected solely to comply with these regulatory 
requirements, via routing by the broker's or dealer's member 
exchange(s), do not trigger section 15(b)(8)'s Association membership 
requirement for a broker or dealer that otherwise limits its securities 
transactions to an exchange of which it is a member (or to stock 
transactions that are covered by the stock-option order exemption 
discussed below). The routing exemption is intended to serve the 
limited, narrowly defined purpose of facilitating compliance with 
intermarket order protection requirements.
---------------------------------------------------------------------------

    \199\ See 2022 Re-Proposal, supra note 1, 87 FR 49945.
    \200\ Amended Rule 15b9-1 provides an exemption from section 
15(b)(8) of the Act's Association membership requirement for routing 
broker-dealers that meet the conditions for the exemption, but it 
does not provide routing broker-dealers with an exemption from the 
rules of an exchange that are applicable to routing broker-dealers 
that operate as facilities of that exchange (and that the exchange 
uses to conduct routing to other trading centers). As discussed in 
the 2022 Re-Proposal, a routing broker-dealer continues to be 
required to comply with the applicable rules of any exchange for 
which it performs outbound routing services, including those 
requiring the routing broker-dealer to be overseen by an 
unaffiliated SRO such as FINRA. See, e.g., Cboe BZX Exchange, Inc. 
Rule 2.11 (Cboe Trading, Inc. as Outbound Router); NYSE Rule 17(c) 
(Operation of Routing Broker); Nasdaq Options 5, section 4 (Order 
Routing).
---------------------------------------------------------------------------

    The Commission also stated in the 2022 Re-Proposal that it would be 
consistent with the protection of investors and the public interest to 
permit reliance on the routing exemption only where the routing is 
performed by a national securities exchange of which the broker or 
dealer is a member.\201\ The Commission stated that this limitation 
would help ensure that the broker's or dealer's member exchange has 
visibility into the routing transactions and thus is better able to 
provide effective SRO oversight of its member's trading activity that 
is related to its trading on the exchange and may not be overseen by 
another SRO if the member is exempt from Association membership under 
amended Rule 15b9-1.\202\
---------------------------------------------------------------------------

    \201\ As stated in the 2022 Re-Proposal, the routing exemption 
is applicable where the broker's or dealer's member exchange 
utilizes the services of a designated broker-dealer (which could be 
affiliated or unaffiliated with the exchange) to perform the 
exchange's outbound routing. See 2022 Re-Proposal, supra note 1, 87 
FR 49946. An exchange's routing fees must be consistent with the 
Act, including sections 6(b)(4) and 6(b)(5), which require an 
equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using any facility of 
the exchange, and require that the exchange's fees not be designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers.
    \202\ See 2022 Re-Proposal, supra note 1, 87 FR 49946.
---------------------------------------------------------------------------

    Some commenters stated that the routing exemption should be 
broadened for proprietary options trading broker-dealer firms so that 
it covers routing that is not performed by member-exchange 
routers.\203\ The Commission stated in the 2022 Re-Proposal that this 
would not be consistent with the protection of investors and the public 
interest because it could permit scenarios in which there is 
insufficient SRO oversight of the broker-dealer's off-member-exchange 
securities trading activity.\204\ Commenters suggested that the 
Commission's concerns in this regard are mitigated in the context of 
options trading firms because they typically route to non-member 
exchanges via another broker-dealer,\205\ and are especially mitigated 
where that routing broker-dealer is a FINRA member.\206\
---------------------------------------------------------------------------

    \203\ See Cboe Letter at 3; ABCV Letter at 4. It appeared to the 
Commission that commenters intertwined this point with a different 
point, and for the sake of completeness, the Commission has 
addressed both. Specifically, in this section, the Commission 
interprets and addresses these comments as a request that the 
routing exemption cover off-member-exchange securities transactions 
to comply with intermarket order protection requirements that are 
effected via routers other than a member exchange router. These and 
other commenters also requested an exemption for proprietary options 
trading broker-dealer firms under which their off-member-exchange 
securities trading activity would not trigger section 15(b)(8)'s 
Association membership requirement if such activity is to hedge or 
in furtherance of their options trading activity on their member 
exchange(s). See supra note 165 and accompanying text. This request 
is addressed in section III.A, supra.
    \204\ See 2022 Re-Proposal, supra note 1, 87 FR 49946.
    \205\ See Cboe Letter at 3.
    \206\ See ABCV Letter at 4. Likewise, commenters suggested that 
it would be particularly appropriate to continue to exempt options 
trading firms from section 15(b)(8)'s Association membership 
requirement where their routing away from a member exchange is 
through a broker-dealer that is a FINRA member. See Cboe Letter at 
2-3; ABCV Letter at 3-4; CTC Letter at 5; PEAK6 Letter at 4. As 
discussed supra in section III.A, the Commission does not agree. See 
supra notes 98-101 and accompanying text.
---------------------------------------------------------------------------

    The Commission does not agree. As stated previously, consistent 
with the original design of Rule 15b9-1, the narrowed exemptions from 
section 15(b)(8)'s Association membership requirement set forth in 
amended Rule 15b9-1 are designed to apply to limited off-member-
exchange securities trading activity that is ancillary to the 
registered broker's or dealer's trading activity on a national 
securities exchange of which it is a member. As stated above, Rule 
15b9-1 previously exempted securities transactions effected through the 
ITS. The ITS Plan required each participant--exchanges and the NASD--to 
provide electronic access to its displayed best bid and offer, and 
provided an electronic mechanism for routing orders, called 
``commitments to trade,'' to access those displayed

[[Page 61868]]

prices.\207\ The ITS Plan provided each participant market limited 
access to the other participant markets for the purpose of avoiding a 
trade-through or a locked or crossed market.\208\ Specifically, the ITS 
enabled a broker or dealer that was physically present in (and a member 
of) one market center to transmit its own or its customer's commitment 
to trade in an ITS-traded stock to another market center, which could 
then be accepted by a broker or dealer at the receiving market 
center.\209\ When a broker or dealer initiated a commitment to trade 
from an exchange where it was a member, it did so to prevent orders on 
its member exchange from trading through or locking or crossing 
quotations displayed on away market centers, and the member exchange 
was inextricably involved in the routing activity covered by the 
exemption.
---------------------------------------------------------------------------

    \207\ See Initial ITS Plan Approval Order, supra note 192.
    \208\ Id.
    \209\ Id.
---------------------------------------------------------------------------

    In contrast, if the routing exemption were expanded, as suggested 
by commenters, to cover routing for intermarket order protection 
purposes performed by a non-exchange-designated router on behalf of a 
broker-dealer trading firm, the exemption could cover trading activity 
that is not ancillary to the firm's trading activity on any exchange 
where it is a member. Under the commenters' approach, the trading firm 
could remain exempt from Association membership while utilizing a non-
exchange-designated routing broker-dealer to effect securities 
transactions solely on off-member-exchange venues without any nexus to 
an exchange where the trading firm is a member. The Commission remains 
concerned that, in this type of scenario, there would not be an 
exchange where the trading firm is a member that has visibility into 
the routing transactions and that is able to provide effective SRO 
oversight of the trading firm's order routing activity. Among other 
things, no exchange where the trading firm is a member would be 
positioned to assess whether the routing transactions complied with the 
terms of the exemption. This would be the case even if the routing is 
performed by a routing broker-dealer that also is a FINRA member.\210\ 
This would be inconsistent with the Commission's intention to continue 
to permit exemptions from section 15(b)(8)'s Association membership 
requirement that are narrowly tailored to limited off-member-exchange 
securities trading activity that is ancillary to the registered 
broker's or dealer's trading activity on a national securities exchange 
of which it is a member and, in the Commission's view, would be 
inconsistent with the protection of investors and the public interest.
---------------------------------------------------------------------------

    \210\ While there could be direct exchange SRO or FINRA 
oversight over the routing broker-dealer in this scenario, the 
Commission does not believe this is adequate, as discussed above, 
due to the lack of direct FINRA oversight over the broker-dealer 
initiating the order. See supra notes 98-101 and accompanying text 
(discussing that separate exchange SRO recourse against different 
broker-dealers for the same conduct can present the potential for 
inconsistent outcomes).
---------------------------------------------------------------------------

    To be clear, nothing in amended Rule 15b9-1 prohibits broker-dealer 
firms from effecting securities transactions away from their member 
exchange(s) by utilizing routing services provided by non-exchange-
designated broker-dealers, so long as they comply with section 15(b)(8) 
of the Act. Any broker-dealer firm may continue to route orders away 
from its member exchange(s) for order protection or any other 
appropriate purposes using non-exchange-designated routing broker-
dealers. But a broker-dealer firm cannot do so without joining FINRA, 
as such trading activity is not exempt from, and therefore would 
trigger, section 15(b)(8) (assuming the trading activity is not 
otherwise covered by the stock option order exemption discussed below), 
which would require Association membership for the firm.\211\
---------------------------------------------------------------------------

    \211\ Alternatively, a firm wishing to route orders to exchanges 
using a non-exchange-designated routing broker-dealer could comply 
with section 15(b)(8) by becoming a member of all exchanges to which 
it routes orders. But any such firm would still be required to join 
FINRA to the extent it effects off-exchange securities transactions 
(unless exempted by the stock-option order exemption). See section 
V.D, infra.
---------------------------------------------------------------------------

2. Stock-Option Order Exemption
    The Commission proposed to add a new paragraph (c)(2) to Rule 15b9-
1 that sets forth an exemption from Association membership if a broker 
or dealer that meets the criteria of paragraphs (a) and (b) of the rule 
effects off-member-exchange securities transactions, with or through 
another registered broker or dealer, that are solely for the purpose of 
executing the stock leg of a stock-option order.\212\ The Commission 
also proposed to require in new paragraph (c)(2) that a broker or 
dealer seeking to rely on the exemption establish, maintain, and 
enforce written policies and procedures reasonably designed to ensure 
and demonstrate that such transactions are solely for the purpose of 
executing the stock leg of a stock-option order, and that the broker or 
dealer preserve a copy of its policies and procedures in a manner 
consistent with 17 CFR 240.17a-4 (``Rule 17a-4'') until three years 
after the date the policies and procedures are replaced with updated 
policies and procedures.\213\ One commenter referenced the stock-option 
order exemption.\214\ The Commission is adopting paragraph (c)(2) as 
proposed.
---------------------------------------------------------------------------

    \212\ See 2022 Re-Proposal, supra note 1, 87 FR 49947.
    \213\ See id.
    \214\ See Cboe Letter at 3 (stating that the existence of a 
stock-option exemption in the 2022 Re-Proposal is an acknowledgment 
that activity critical to the functioning of the options market 
should not be adversely impacted).
---------------------------------------------------------------------------

    As the Commission stated in the 2022 Re-Proposal, the Commission 
understands that there are firms that trade stock-option orders whose 
business is focused on one or more options exchanges of which they are 
a member, and whose trading elsewhere is primarily to effect the 
execution of stock orders to facilitate their stock-option order 
business. These firms' stock trading activity is for a limited purpose 
and ancillary to their primary business handling stock-option orders on 
an options exchange of which they are member. Moreover, there is a 
close link between the stock component transaction of a stock-option 
order and the relevant options exchange. As such, the stock-option 
order exemption permits these types of firms to continue their stock-
option order trading business without being required to join stock 
exchanges or an Association solely in order to effect the execution of 
the stock legs of stock-option orders that they handle.
    As stated above, the Commission estimates that, in 2022, 48 of the 
73 firms identified as registered broker-dealers and exchange members 
but not FINRA members initiated options order executions.\215\ The 
Commission estimates that 17 of the firms that initiated options order 
executions also effected the execution of stock leg transactions, and 
therefore could potentially rely on the proposed stock-option order 
exemption to the extent that they effect the stock leg executions off-
exchange or on an exchange where they are not a member.\216\ Because 
the

[[Page 61869]]

broker or dealer relying on Rule 15b9-1(c)(2) would not itself be a 
member of an exchange on which such stock transactions are executed, or 
a member of an Association, such stock leg transactions must be 
effected with or through another registered broker or dealer that is a 
member of the exchange where the transactions are executed or a member 
of an Association (or both).
---------------------------------------------------------------------------

    \215\ See supra note 44.
    \216\ Source: CAT. The Commission previously estimated that, in 
2021, seven such firms effected stock leg transactions and could 
potentially rely on the stock-option order exemption to the extent 
that they effect the stock leg transactions off-exchange or on an 
exchange where they are not a member. See 2022 Re-Proposal, supra 
note 1, 87 FR 49947. The Commission attributes the increase from 
2021 to 2022 of its estimated number of broker-dealers that are not 
FINRA members and that executed stock leg transactions mainly to an 
increase in the percentage of stock leg transactions that are 
captured in the CAT in a manner that enables the Commission to 
identify the firms that initiated the transactions.
---------------------------------------------------------------------------

    Options exchanges define the term ``stock-option order'' in their 
rules.\217\ Further, the Commission stated in the 2022 Re-Proposal that 
its understanding is that all options exchanges accept a stock-option 
order only if it complies with the Qualified Contingent Trade (``QCT'') 
Exemption (``QCT Exemption'') from Rule 611(a) of Regulation NMS.\218\ 
For purposes of relying on the exemption provided by Rule 15b9-1(c)(2), 
a broker or dealer should adhere to the stock-option order definition 
of the options exchange where the stock-option order is handled and of 
which the broker or dealer is a member.\219\ Specifically, the broker 
or dealer could rely on that definition to determine whether, for 
purposes of amended Rule 15b9-1(c)(2), an order is in fact a stock-
option order and a stock order is in fact the stock leg of a stock-
option order. Moreover, the exemption applies regardless of whether the 
component legs of a stock-option order are executed electronically, on 
a physical exchange floor, or through a combination of both.
---------------------------------------------------------------------------

    \217\ See, e.g., Cboe Rules 1.1 and 5.33(b)(5); MIAX Rule 
518(a)(5); MIAX Emerald Rule 518(a)(5); Nasdaq Options 5, section 
1(4) (defining ``Complex Trade''); Nasdaq PHLX Options 5, section 
1(d) (defining ``Complex Trade''); Nasdaq ISE Options 5, section 
1(d) (defining ``Complex Trade''); Nasdaq BX Chapter 5, section 
27(a)(v)(1) of the ``Grandfathered Rules'' of the Boston Stock 
Exchange, Inc.; NYSE Arca Rule 6.62-O(h)(1); NYSE American Rule 
900.3NY(h)(1).
    \218\ See, e.g., Cboe Rule 5.33, Interpretations and Policies 
.04 Stock Option Orders; Supplementary Material .07 to Nasdaq ISE 
Options 3, section 14; Commentary .01 to MIAX Rule 518. A qualified 
contingent trade is ``a transaction consisting of two or more 
component orders, executed as agent or principal where: (1) at least 
one component order is in an NMS stock; (2) all components are 
effected with a product or price contingency that either has been 
agreed to by the respective counterparties or arranged for by a 
broker-dealer as principal or agent; (3) the execution of one 
component is contingent upon the execution of all other components 
at or near the same time; (4) the specific relationship between the 
component orders (e.g., the spread between the prices of the 
component orders) is determined at the time the contingent order is 
placed; (5) the component orders bear a derivative relationship to 
one another, represent different classes of shares of the same 
issuer, or involve the securities of participants in mergers or with 
intentions to merge that have been announced or since cancelled; and 
(6) the transaction is fully hedged (without regard to any prior 
existing position) as a result of the other components of the 
contingent trade.'' Securities Exchange Act Release No. 54389 (Aug. 
31, 2006), 71 FR 52829 (Sept. 7, 2006); see also Securities Exchange 
Act Release No. 57620 (Apr. 4, 2008), 73 FR 19271 (Apr. 9, 2008).
    \219\ Presumably, an options exchange would accept only those 
stock-option orders that meet the exchange's definition thereof. In 
addition, the Commission's understanding is that, currently, 
consistent with options exchange definitions, a stock-option order 
contains only one stock leg. See supra note 217. Therefore, the 
stock-option order exemption currently covers stock-option orders 
with only one stock leg.
---------------------------------------------------------------------------

    The Commission continues to believe, as discussed in the 2022 Re-
Proposal, that the stock-option order exemption's reliance on the 
options exchange's ``stock-option order'' definition should enhance an 
exchange's ability to monitor whether its members are appropriately 
relying on the exemption and thereby enhance its ability to provide 
effective SRO oversight of its members' stock-option order trading 
activity. Under options exchange rules, an exchange member submitting a 
stock-option order to the exchange must designate to the exchange one 
or more specific broker-dealers: (i) that are not affiliated with the 
exchange; (ii) with which the exchange member has entered into a 
brokerage agreement; (iii) that the exchange has identified as having 
connectivity to electronically communicate the stock components of 
stock-option orders to stock trading venues; and (iv) to which the 
exchange will electronically communicate the stock component of the 
stock-option order on behalf of the member.\220\ The option exchange's 
execution of the stock-option order is contingent on the exchange's 
receipt from the designated broker-dealer of an execution report for 
the stock component transaction confirming that the transaction has 
occurred.\221\ In light of these rules, the Commission continues to 
believe that there is a close link between the stock component 
transaction of a stock-option order and the relevant options exchange. 
Accordingly, the Commission continues to believe that this exemption 
would serve the limited, narrowly defined purpose of facilitating the 
execution of stock-option orders consistent with options exchange rules 
and that the options exchange would be able to monitor and oversee the 
totality of the securities trading activity of any of its members that 
rely on the exemption.
---------------------------------------------------------------------------

    \220\ See, e.g., Cboe Rule 5.33(l) and Interpretations and 
Policies .04; Nasdaq ISE Options 3, section 7 and Supplementary 
Material .01, Options 3, section 14 and Supplementary Material .07; 
MIAX Rule 518 and Commentary .01.
    \221\ See, e.g., Cboe Rule 5.33(l); Nasdaq ISE Options 3, 
section 7 and Supplementary Material .01, Options 3, section 14 and 
Supplementary Material .07; MIAX Rule 518 and Commentary .01.
---------------------------------------------------------------------------

    The Commission also continues to believe that the exchange's 
oversight capabilities will be further enhanced, consistent with the 
public interest and protection of investors, by requiring brokers and 
dealers to develop written policies and procedures in connection with 
the stock-option exemption in paragraph (c)(2) of the amended rule. 
This requirement should help facilitate exchange SRO supervision of 
brokers and dealers relying on the stock-option order exemption because 
it would provide an efficient and effective way for the relevant 
options exchange to assess compliance with the exemption. Moreover, the 
Commission continues to believe that requiring brokers and dealers to 
develop written policies and procedures would provide sufficient 
flexibility to accommodate potentially varying business models of 
brokers and dealers that effect stock-option orders and may seek to 
rely on this exemption.
    Such written policies and procedures must be reasonably designed to 
ensure and demonstrate that the broker's or dealer's securities 
transactions elsewhere than on an exchange of which it is a member are 
solely for the purpose of executing the stock leg of a stock-option 
order. Accordingly, a broker or dealer seeking to rely upon the stock-
option order exemption must establish, maintain, and enforce written 
policies and procedures reasonably designed to ensure and demonstrate 
that such transactions are solely for the purpose of executing the 
stock leg of a stock-option order. For example, the broker or dealer 
could maintain documentation that demonstrates its compliance with the 
stock-option order requirements of any options exchange of which it is 
a member and where it effects the execution of stock-option orders. 
Indeed, in addition to the Commission, the options exchange of which 
the broker or dealer is a member and where the stock-option order is 
handled would be able to enforce compliance with the stock-option order 
exemption. In the context of routine examinations of its members, the 
options exchange generally would review the adequacy of its members' 
written policies and procedures and assess whether its members' off-
member-exchange transactions comply with those written policies and 
procedures as well as the terms of the exemption itself, as set forth 
in amended Rule 15b9-1.\222\
---------------------------------------------------------------------------

    \222\ Section 19(g)(1) of the Act, 15 U.S.C. 78s(g), 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), 15 U.S.C. 
78q(d), or section 19(g)(2), 15 U.S.C. 78s(g)(2), of the Act.

---------------------------------------------------------------------------

[[Page 61870]]

    Finally, a broker or dealer seeking to rely on the stock-option 
order exemption is 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.\223\ Accordingly, a 
broker or dealer is required to keep the policies and procedures 
relating to its use of this exemption as part of its books and records 
while they are in effect, and for three years after they are updated.
---------------------------------------------------------------------------

    \223\ See, e.g., 17 CFR 240.17a-4(e)(7).
---------------------------------------------------------------------------

IV. Effective Date and Implementation

    The Commission proposed that the compliance date for amended Rule 
15b9-1 be one year after publication of any final rule in the Federal 
Register.\224\ In proposing this compliance date, the Commission 
considered various factors that impact the time that it takes to become 
a FINRA member, as well as that firms that choose to adjust their 
business models such that they are not required to join FINRA would 
need time to do so.\225\ The Commission understood that, on average, 
the FINRA membership application process takes approximately six 
months.\226\
---------------------------------------------------------------------------

    \224\ See 2022 Re-Proposal, supra note 1, 87 FR 49951.
    \225\ Id.
    \226\ Id.
---------------------------------------------------------------------------

    Some commenters on the 2022 Re-Proposal characterized the FINRA 
membership application process as lengthy.\227\ One commenter stated 
that it understood FINRA's membership application process to take more 
than a year, and suggested a revised compliance period in which firms 
must only submit their FINRA registration application within 360 days 
of adoption of amended Rule 15b9-1, and allow for 540 days from 
adoption for FINRA approval of the application.\228\ FINRA stated that 
it typically has 180 days to issue a decision after the filing of a new 
membership application, but that, depending on the characteristics of 
an application, FINRA may issue a ``fast-track'' decision within 100 
days.\229\ FINRA also stated that, based on the types of proprietary 
trading dealer firms that would be likely to join FINRA as a result of 
the Rule 15b9-1 amendments, it intends to implement an expedited 
membership application process for these applicants pursuant to which 
it anticipates processing their applications within 60 days after 
submission.\230\
---------------------------------------------------------------------------

    \227\ See, e.g., FIA PTG Letter at 4-5; PEAK6 Letter at 2.
    \228\ See FIA PTG Letter at 4-5.
    \229\ See FINRA Letter at 12.
    \230\ See id. at 12-13.
---------------------------------------------------------------------------

    The Commission believes that a compliance date for amended Rule 
15b9-1 that is 365 days after publication of amended Rule 15b9-1 in the 
Federal Register would provide a sufficient period of time for 
proprietary trading broker-dealer firms to comply with the amended 
rule. Based on FINRA's statements regarding its ability to issue a 
``fast-track'' decision within 100 days and expectation that it would 
process proprietary trading dealer firm applications within 60 days 
after submission,\231\ for any FINRA membership application submitted 
by such a firm in a timely manner, the Commission expects FINRA to be 
able to process the application and render a decision within the 
compliance period. Additionally, some commenters stated that the FINRA 
membership application process requires information that is duplicative 
of information already provided to the Commission and other SROs as 
part of their prior Commission registration and exchange SRO 
application process.\232\ Accordingly, the Commission believes that 
when applying to be FINRA members, firms in this situation may be able 
to leverage their prior submissions to the Commission and exchange SROs 
to be able to have a more expedient application process with FINRA than 
they would otherwise if they had not already prepared such information 
for submission to the Commission and exchange SROs. More broadly, any 
existing broker-dealer firm that applies for FINRA membership as a 
result of the amendments to Rule 15b9-1 would have already completed 
the application processes for becoming a Commission-registered broker-
dealer and a member of at least one exchange and, the Commission 
believes, should be able to leverage those experiences to expedite 
their application process with FINRA.
---------------------------------------------------------------------------

    \231\ See supra notes 229-230 and accompanying text.
    \232\ See PEAK6 Letter at 2; FIA PTG Letter at 4.
---------------------------------------------------------------------------

V. Economic Analysis

    The Commission is amending Rule 15b9-1 to help ensure that an 
Association generally has direct, membership-based oversight over 
broker-dealers that effect off-member-exchange securities transactions 
and the jurisdiction to directly enforce their compliance with Federal 
securities laws, Commission rules, and Association rules. In addition, 
these amendments will provide a more consistent regulatory framework 
for broker-dealers,\233\ which in turn should enhance competition and 
result in potential efficiency gains for market participants.
---------------------------------------------------------------------------

    \233\ See section III.A, supra.
---------------------------------------------------------------------------

    The Exchange Act's statutory framework places SRO oversight 
responsibility with an Association for trading that occurs elsewhere 
than on an exchange to which a broker or dealer belongs as a 
member.\234\ However, currently pursuant to Rule 15b9-1, a broker or 
dealer may engage in unlimited off-member-exchange \235\ proprietary 
trading without becoming a member of an Association, so long as its 
proprietary trading activity is conducted with or through another 
registered broker or dealer. Currently, off-exchange equity activity 
and exchange listed options trading of non-FINRA member broker-dealers 
is surveilled by FINRA through CAT data and supervised in part via the 
use of RSAs.\236\ However, RSAs are voluntary, privately negotiated 
agreements that can expire or be terminated, and accordingly, these 
agreements do not provide the consistent and stable oversight that 
direct Association oversight of such trading activity does.\237\ For 
example, of the current FINRA RSA contracts: one RSA contract expires 
at the end of 2023, seven RSA contracts expire at the end of 2024, and 
three RSA contracts expire at the end of 2025 unless extended or 
terminated early.\238\ The amendments will provide consistency and 
stability of oversight.\239\
---------------------------------------------------------------------------

    \234\ See section I, supra.
    \235\ ``Off-member-exchange'' trading of securities refers to 
trading by a broker-dealer on any national securities exchange of 
which it is not a member or in the off-exchange market. See supra 
note 2 and accompanying text.
    \236\ See section V.A.2, infra.
    \237\ See sections I and III.A, supra.
    \238\ Based on information provided by FINRA.
    \239\ Current non-FINRA members that choose to join FINRA in 
response to the amendments will face direct Association oversight of 
their off-member exchange trading instead of oversight that occurs 
and is based on an RSA. The Exchange Act's statutory framework 
places SRO oversight responsibility with an Association for off-
member-exchange securities trading, and FINRA's role with respect to 
non-FINRA member broker-dealers is limited to what is covered in 
RSAs it enters into with the exchanges. See supra section III for a 
discussion of issues related to RSA-administered oversight of off-
member exchange trading.
---------------------------------------------------------------------------

    In the case of U.S. Treasury securities and other fixed income 
securities (other than municipal bonds) \240\ that trade off-exchange, 
surveillance relies on TRACE data which is collected by FINRA from

[[Page 61871]]

its members.\241\ Some dealer firms that are not FINRA members are 
significantly involved in trading U.S. Treasury securities \242\ 
proprietarily but are not required to report these transactions because 
they are not FINRA members. Consequently, trades that do not occur on 
an ATS or with a covered depository institution,\243\ and that are 
between two non-FINRA member broker-dealers, are not reported to TRACE 
at all, and trades that occur otherwise than on a covered ATS do not 
specifically identify the non-FINRA member in the information reported 
by the ATS to TRACE.\244\ The amendments will provide for all fixed 
income trading by broker-dealers to be subject to FINRA's rules, 
including its rules requiring reporting to TRACE.
---------------------------------------------------------------------------

    \240\ Municipal bond trades are reported to the MSRB but not 
TRACE, so the Commission does not expect the proposed amendments to 
affect the data collected on municipal bonds. Off-exchange trading 
of both listed and unlisted equities by non-FINRA member broker-
dealers is already reported to CAT.
    \241\ Non-FINRA member depository institutions also report U.S. 
Treasury securities trades to TRACE. See supra note 123.
    \242\ The Commission can observe and quantify some of this 
activity through the reporting of U.S. Treasury securities on 
covered ATSs as discussed in supra section III.A. See supra note 59. 
It is likely that non-member broker-dealers also trade fixed-income 
securities other than U.S. Treasury securities and these 
transactions are also not reported to TRACE. This Economic Analysis 
focuses on the effects on equities, options, and U.S. Treasury 
securities markets. To the extent that non-FINRA member broker-
dealers do trade in additional asset classes, the Commission 
believes that the economic impacts discussed herein would also 
apply. In particular, if a non-FINRA member broker-dealer does trade 
in an asset class which requires reporting to FINRA, the proposal 
would improve transparency for these securities, which would enhance 
the regulatory oversight of such activity. See infra section V.C.2.c 
for information on the costs of TRACE reporting for non-FINRA member 
firms.
    \243\ These trades do not include those with depository 
institutions that are mandated for TRACE reporting.
    \244\ See section III.A, supra. The Commission believes this is 
a small fraction of U.S. Treasury securities trading. In Apr. 2023, 
the Commission estimates that non-FINRA member broker-dealers' U.S. 
Treasury securities transactions executed on covered ATSs accounted 
for 2.65% of total U.S. Treasury securities transaction volume 
reported to TRACE that month. See supra note 57. The unreported 
trades involving only non-FINRA member firms that are not executed 
on covered ATSs might be similar but could be a lower fraction of 
the total U.S. Treasury securities volume.
---------------------------------------------------------------------------

    Section 15(b)(8)'s complementary SRO oversight structure generally 
has enabled exchange SROs to specialize in oversight of securities 
trading activity that occurs on the exchange, and FINRA to specialize 
in oversight of off-member-exchange securities trading activity. The 
amendments will rescind the de minimis allowance and proprietary 
trading exclusion so that the regulatory scheme more appropriately 
effectuates Exchange Act principles regarding complementary exchange 
SRO and Association oversight.\245\ For broker-dealers relying on the 
exemption that will be required to register with FINRA under the 
amendments, joining FINRA will expose these firms to additional costs 
that they previously did not incur.\246\ While reliance on the 
exemption may be cost-efficient for these firms, it introduces 
inefficiencies for exchange SROs, FINRA, and regulatory oversight more 
generally. FINRA, the sole Association, has a rulebook, surveillance 
infrastructure, and supervisory expertise that is targeted to cross-
exchange and off-exchange trading of both listed and unlisted 
securities. When FINRA detects potentially violative behavior by a non-
FINRA member firm,\247\ it can and does refer such cases to other SROs 
or the SEC. However, it may lack certain investigative tools which 
could help it further investigate potentially violative behavior before 
making such referrals. The Commission believes that, particularly in 
the case of fixed income trading, FINRA is well positioned to 
efficiently investigate such instances of violative behavior because of 
its TRACE data collection and expertise in such trading, and such a 
role is consistent with the SRO structure mandated by the Exchange Act.
---------------------------------------------------------------------------

    \245\ See section III.A, supra.
    \246\ FINRA member firms that compete with these firms may 
currently be at a cost disadvantage due to this fee disparity.
    \247\ The term ``non-FINRA member firm'' refers to a broker-
dealer that is not a FINRA member.
---------------------------------------------------------------------------

    The Commission discusses below a number of economic effects that 
are likely to result from the adoption of these amendments.\248\ As 
discussed in detail below, the effects are quantified to the extent 
practicable. Although the Commission is providing estimates of direct 
compliance costs where practicable, the Commission also anticipates 
that brokers and dealers affected by the amendments, as well as 
competitors of those broker and dealers, might 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.\249\ To the extent that non-FINRA member firms 
change their business practices, such as reducing or eliminating their 
off-member-exchange trading activity or joining FINRA and increasing 
their off-member-exchange activity, the amendments may impact 
competition and liquidity, particularly in the off-member-exchange 
markets. The adoption would increase costs for non-FINRA member firms 
that will have to register with FINRA, which might result in decreased 
liquidity provision by these non-FINRA member firms to certain markets. 
Additionally, the amendments to Rule 15b9-1 might create incentives for 
non-FINRA member firms that are impacted by the amendments to form a 
new Association. The creation of such a new Association would entail 
large startup costs but could spur competition with the existing 
Association and might lower general self-regulatory financial burdens. 
The amendments may also result in potential benefits to competition, 
since current FINRA members will be operating on a more level 
regulatory playing field relative to non-FINRA members.
---------------------------------------------------------------------------

    \248\ 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, to consider or determine whether an action is 
necessary or appropriate in the public interest, and to consider, in 
addition to the protection of investors, whether the action would 
promote efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f). 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. See 15 
U.S.C. 78w(a)(2). 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.
    \249\ See infra section V.B.1 for further discussion of the 
difficulties in estimating market quality effects likely to result 
from the amendments.
---------------------------------------------------------------------------

A. Baseline

1. Regulatory Structure and Activity Levels of Non-FINRA Member Firms
    The Exchange Act governs the way in which the U.S. securities 
markets and their brokers and 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.'' \250\ 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.'' \251\ Generally, any broker-dealer that wants to 
interact directly on a securities exchange must register with the 
Commission as a broker-dealer before applying to gain direct access to 
the exchange,\252\ and broker-dealers generally must become members of 
an Association to trade securities elsewhere than on an exchange to 
which

[[Page 61872]]

a broker or dealer belongs as a member.\253\
---------------------------------------------------------------------------

    \250\ 15 U.S.C. 78c(a)(4)(A).
    \251\ 15 U.S.C. 78c(5)(A).
    \252\ A firm that wishes to transact business upon an exchange 
without becoming a broker or dealer generally can do so by engaging 
a broker-dealer that is a member of that exchange to provide market 
access and settlement services.
    \253\ See supra note 19.
---------------------------------------------------------------------------

    There is diversity in the size and business activities of brokers 
and dealers. Carrying brokers and dealers hold customer funds and 
securities; some of these are also clearing brokers, which handle the 
clearance and settlement aspects of customer trades. In contrast, 
introducing brokers provide services to customers, but do not hold 
customers funds or execute or clear trades themselves. However, of 
3,515 registered brokers and dealers, only 210 were classified as 
carrying or clearing brokers and dealers and around 1,200 firms were 
classified as introducing brokers at the end of 2022.\254\ Thus, the 
majority of brokers and dealers 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 a broker solely on an exchange; and providing liquidity to 
securities markets, which includes, but is not limited to, the 
activities of registered market makers.
---------------------------------------------------------------------------

    \254\ Based on the number of firms that answered yes to items 
I8084 or I8085 on Schedule I in December 2022. The number of 
introducing broker dealers was estimated from the question ``Does 
applicant refer or introduce customers to any other broker or 
dealer?'', as reported on Form BD.
---------------------------------------------------------------------------

    Sixty-six percent of brokers and dealers employ 15 or fewer 
associated persons and only 10% of brokers and dealers employ over 100 
associated persons.\255\ Further, while there are many registered 
brokers and dealers, a small minority of brokers and dealers controls 
the majority of broker and dealer capital.\256\
---------------------------------------------------------------------------

    \255\ Based on Dec. 2022 Annual FOCUS data filings. See also 
supra note 150.
    \256\ See infra section VII.
---------------------------------------------------------------------------

    The Commission has identified 64 firms that, as of April 2023, were 
Commission registered broker-dealers and exchange members, but not 
members of FINRA, that may be required to either join an Association or 
change their trading practices under the amendments.\257\ In September 
2022, there were 73 registered broker-dealers that were exchange 
members but not FINRA members.\258\ Because of Rule 15b9-1's exclusion 
of proprietary trading, a dealer that had not carried customer accounts 
might not be required to join an Association as long as it had been a 
member of an exchange SRO, even when that dealer had substantial off-
member-exchange trading activity.
---------------------------------------------------------------------------

    \257\ Historically, floor brokers had only incidental trading on 
exchanges of which they were not members and limited off-exchange 
trading activity. The background and history of Rule 15b9-1 are 
discussed in section I.
    \258\ See supra note 37. Some commenters, citing the 
Commission's proposal to amend the definition of ``dealer,'' stated 
that number of firms affected by the amendments to Rule 15b9-1 could 
increase if the definition of ``dealer'' is amended. See, e.g., STA 
Letter at 2. The economic analysis appropriately considers existing 
regulatory requirements, including recently adopted rules but not 
proposed rules, as part of its economic baseline against which the 
costs and benefits of the final rule are measured. To the extent the 
Commission amends the definition of ``dealer'' in the future, the 
adopted amendments to Rule 15b9-1 would become part of the baseline 
from which the effects of any such new rule on the definition of 
``dealer'' are measured. See supra note 186 and accompanying text.
---------------------------------------------------------------------------

    The Commission is aware that some non-FINRA member firms trade U.S. 
Treasury securities. Covered ATSs report the U.S. Treasury securities 
trading activity of non-FINRA member firms to TRACE. The Commission 
estimates that, in 2022, seven of the 64 non-FINRA member firms had $6 
trillion in U.S. Treasury securities volume reported to TRACE by 
covered ATSs. This accounts for approximately 3.67% of U.S. Treasury 
volume as reported to TRACE throughout the year. In April 2023, there 
were five non-FINRA member firms with approximately $302 billion in 
U.S. Treasury securities volume executed on covered ATSs or 
approximately 2.65% of total U.S. Treasury securities transaction 
volume reported to TRACE that month.
    FINRA members are required to report transactions in TRACE-eligible 
securities. Market participants can gain real-time access to TRACE 
through market vendors, for most TRACE-eligible securities, with a few 
exceptions including U.S. Treasury securities.\259\ However, FINRA does 
make public aggregate U.S. Treasury securities data on a daily 
basis.\260\ Non-FINRA member firms are not required to report their 
trading activity to TRACE, but if their transactions involve FINRA 
members or covered depository institutions, the FINRA members or 
covered depository institutions would report. With respect to trading 
activity in U.S. Treasury securities markets on a covered ATS, non-
FINRA member counterparties are identified in TRACE.\261\ With respect 
to trading activity in other TRACE-eligible securities, non-FINRA 
member counterparties are not identified in TRACE.\262\ Therefore, the 
Commission is unable to estimate the level of trading activity of non-
FINRA member firms for other fixed income securities.
---------------------------------------------------------------------------

    \259\ See Stephanie Dumont & Ola Persson, TRACE at 20--
Reflecting on Advances in Transparency in Fixed Income (FINRA.org), 
Jun. 28, 2022, available at https://www.finra.org/media-center/blog/trace-at-20-reflecting-advances-transparency-fixed-income (last 
visited July 20, 2023). See also FINRA Rule 6750(c).
    \260\ See supra note 122 and accompanying text.
    \261\ See supra note 124 and accompanying text.
    \262\ FINRA stated that it does not have visibility into the 
activity of PTFs in non-U.S. Treasury security fixed-income 
products. See FINRA Letter at 9.
---------------------------------------------------------------------------

    In September 2022, of the 73 non-FINRA member firms, 53 initiated 
equity orders that were not executed on an exchange, accounting for 
$440 billion (approximately 5.1%) in off-exchange traded dollar volume 
in listed equities.\263\ In April 2023, of the 64 non-FINRA member 
firms, 45 initiated equity orders that were not executed on an 
exchange, accounting for $405 billion (approximately 5.6%) in off-
exchange traded dollar volume in listed equities.
---------------------------------------------------------------------------

    \263\ See supra section II.B for further discussion of trading 
activities of non-FINRA member firms.
---------------------------------------------------------------------------

    There is significant diversity in the business models of non-FINRA 
member firms. Some non-FINRA member firms may limit their equity 
trading to a single exchange, while others trade on multiple venues 
including off-exchange venues such as ATSs. Some firms are significant 
contributors to both off-exchange and exchange volume. Because CAT 
requires reporting of all NMS stock trades, including off-exchange 
trades, FINRA and the Commission are able to quantify the aggregate 
off-exchange activity of non-FINRA member firms in NMS stocks.
    Off-exchange equity trading occurs across many trading venues. In 
the fourth quarter of 2022, 32 ATSs actively traded NMS stocks, 
comprising 10.5% of NMS stock share volume. Furthermore, 214 named 
\264\ broker-dealers transacted a further 32.4% of NMS stock share 
volume off-exchange without the involvement of an ATS. Although many 
market participants provide liquidity within this market, non-FINRA 
member firms are particularly active within ATSs.\265\
---------------------------------------------------------------------------

    \264\ ATSs report counterparties that are not FINRA members, 
allowing such activity to be identified in CAT data.
    \265\ See Table 1 for information on trading activities on ATSs.
---------------------------------------------------------------------------

    While some non-FINRA member firms trade actively cross-exchange 
and/or off-exchange, some of these firms also supply and demand 
liquidity actively on multiple equity and options exchanges. Table 1 
below shows the executed dollar volume in listed equities by trading 
venue type during September 2022 and April 2023 for the non-FINRA 
member firms. Table 2

[[Page 61873]]

below shows the executed dollar volume, number of trades, and number of 
contracts in options during September 2022 and April 2023 for the non-
FINRA member firms.

                       Table 1--Non-FINRA Members NMS Equity Trading Volume by Venue Type
----------------------------------------------------------------------------------------------------------------
                                                                       Traded dollar volume
                                                 ---------------------------------------------------------------
                                                             Sept 2022                      April 2023
                                                 ---------------------------------------------------------------
                                                   Billions ($)     % of total     Billions ($)     % of total
----------------------------------------------------------------------------------------------------------------
I. All Non-FINRA Member Firms \1\
Trading Venue:
    Off-Exchange: ATS...........................          369.59            12.6          352.38            14.6
    Off-Exchange: Non-ATS.......................           70.63             2.4           52.41             2.2
    On-Exchange: Exchange Member \2\............        2,183.14            74.4        1,746.53            72.4
    On-Exchange: Not Exchange Member............          311.62            10.6          261.91            10.9
                                                 ---------------------------------------------------------------
        Total...................................        2,934.98           100.0        2,413.23           100.0
II. Largest Non-FINRA Member Firms \3\
Trading Venue:
    Off-Exchange: ATS...........................          333.48            14.6          322.16            16.1
    Off-Exchange: Non-ATS.......................           57.60             2.5           41.62             2.1
    On-Exchange: Exchange Member \2\............        1,639.34            71.9        1,415.99            70.8
    On-Exchange: Not Exchange Member............          248.40            10.9          219.46            11.0
                                                 ---------------------------------------------------------------
        Total...................................        2,278.82           100.0        1,999.22           100.0
----------------------------------------------------------------------------------------------------------------
Data Source: CAT.
\1\ Non-FINRA Member firms that initiated NMS equity orders that were executed either on or off-exchange. There
  were 53 firms in September 2022 and 45 firms in April 2023.
\2\ Exchange Member refers to trades executed on an exchange where the non-FINRA member is a registered member.
\3\ The largest 12 non-FINRA member firms ranked by equity off-exchange traded dollar volume.


                         Table 2--Non-FINRA Members Options Trading Volume by Venue Type
----------------------------------------------------------------------------------------------------------------
                                                                       Traded dollar volume
                                                 ---------------------------------------------------------------
                                                             Sept 2022                      April 2023
                                                 ---------------------------------------------------------------
                                                   Billions ($)     % of total     Billions ($)     % of total
----------------------------------------------------------------------------------------------------------------
                                          Panel A: Option Dollar Volume
----------------------------------------------------------------------------------------------------------------
I. All Non-FINRA Member Firms \1\
Trading Venue:
    On-Exchange: Exchange Member \2\............           50.01            93.8           44.62            94.4
    On-Exchange: Cross-Exchange \3\.............            3.31             6.2            2.65             5.6
                                                 ---------------------------------------------------------------
        Total...................................           53.33           100.0           47.27             100
II. Largest Non-FINRA Member Firms \4\
Trading Venue:
    On-Exchange: Exchange Member \2\............           45.56            94.2           40.43            94.3
    On-Exchange: Cross-Exchange \3\.............            2.80             5.8            2.44             5.7
                                                 ---------------------------------------------------------------
        Total...................................           48.37          100.00           42.87             100
----------------------------------------------------------------------------------------------------------------
                                                                              Trades
                                                 ---------------------------------------------------------------
                                                             Sept 2022
                                                            April 2023
                                                 ---------------------------------------------------------------
                                                     Millions       % of total       Millions       % of total
----------------------------------------------------------------------------------------------------------------
                                        Panel B: Number of Option Trades
----------------------------------------------------------------------------------------------------------------
I. All Non-FINRA Member Firms \1\
Trading Venue:
    On-Exchange: Exchange Member \2\............           18.41            94.8           19.60            95.4
    On-Exchange: Cross-Exchange \3\.............            1.00             5.2            0.95             4.6
                                                 ---------------------------------------------------------------
        Total...................................           19.41             100           20.55             100
II. Largest Non-FINRA Member Firms \4\
Trading Venue:
    On-Exchange: Exchange Member \2\............           16.41            95.4           17.09            95.8

[[Page 61874]]

 
    On-Exchange: Cross-Exchange \3\.............            0.79             4.6            0.75             4.2
                                                 ---------------------------------------------------------------
        Total...................................           17.20             100           17.84             100
----------------------------------------------------------------------------------------------------------------
                                                                             Contracts
                                                 ---------------------------------------------------------------
                                                             Sept 2022
                                                            April 2023
                                                 ---------------------------------------------------------------
                                                     Millions       % of total       Millions       % of total
----------------------------------------------------------------------------------------------------------------
                                       Panel C: Number of Option Contracts
----------------------------------------------------------------------------------------------------------------
I. All Non-FINRA Member Firms \1\
Trading Venue:
    On-Exchange: Exchange Member \2\............          147.31            94.5          179.13            95.6
    On-Exchange: Cross-Exchange \3\.............            8.58             5.5            8.20             4.4
                                                 ---------------------------------------------------------------
        Total...................................          155.88           100.0          187.34           100.0
II. Largest Non-FINRA Member Firms \4\
Trading Venue:
    On-Exchange: Exchange Member \2\............          129.67            95.1          158.01            96.0
    On-Exchange: Cross-Exchange \3\.............            6.66             4.9            6.62             4.0
                                                 ---------------------------------------------------------------
        Total...................................          136.33           100.0          164.64           100.0
----------------------------------------------------------------------------------------------------------------
Data Source: CAT.
\1\ Non-FINRA Member firms that initiated options orders that were executed. There were 53 firms in September
  2022 and 45 firms in April 2023. While these are the same numbers of non-FINRA member firms that initiated NMS
  equity orders as reflected in Table 1, they are not all the same firms as there is not 100% overlap. Some
  firms that initiated NMS equity orders did not initiate options orders. Some firms that initiated options
  orders did not initiate NMS equity orders. The number of firms in these two groups is the same.
\2\ Exchange Member refers to trades executed on an exchange where the non-FINRA member is a registered member.
\3\ Cross-Exchange refers to trades executed on an exchange where the non-FINRA member is not registered member.
\4\ The largest 12 non-FINRA member firms ranked by equity off-exchange traded dollar volume. Nine of the
  largest 12 firms in September 2022 and eleven of the largest 12 firms in April 2023 initiated options orders
  that were executed.

    Table 1 shows that in April 2023 non-FINRA member firms executed 
approximately 72.4% of their NMS equity trading volume on exchanges 
where the firm was a registered member. However, they also transacted 
on exchanges where the firm was not a member in addition to trading 
off-exchange. Table 2 shows data for non-FINRA member firms that also 
executed trades in the options market and their total dollar, trades, 
and contract volume. In September 2022, 53 non-FINRA member firms and 
nine of the 12 largest firms \266\ executed trades on options 
exchanges. Seven of the nine largest firms executed trades on five or 
more options exchanges. In April 2023, 45 non-FINRA member firms and 
eleven of the 12 largest firms executed trades on options exchanges.
---------------------------------------------------------------------------

    \266\ The largest non-FINRA member firms are ranked by equity 
off-exchange traded dollar volume. Nine of the largest 12 firms in 
September 2022 and eleven of the largest 12 firms in April 2023 
initiated options orders that were executed.
---------------------------------------------------------------------------

    Table 2 indicates that a larger share of options trading by non-
FINRA members (relative to equities trading) takes place on exchanges 
wherein the firm is a registered member, ranging from 94%-96%. 
Therefore, about 5% of non-FINRA member options trading occurs on 
exchanges where the firm is not a member, the volume of which accounts 
for around 1% of overall options trading volume.\267\
---------------------------------------------------------------------------

    \267\ See note 269, infra.
---------------------------------------------------------------------------

    One commenter indicated that because non-FINRA members' off-member-
exchange transactions represent a relatively small proportion of total 
options market volume, mandating FINRA membership will not promote 
regulatory efficiency, since (in the commenter's assessment) the costs 
of Association membership will exceed any benefits provided by FINRA 
oversight of ``a relatively small amount of trading activity, 
especially if this activity is already being conducted through a FINRA 
broker-dealer.'' \268\ The Commission, however, believes that the 
benefits stemming from Association oversight of these flows are not 
trivial and justify their accompanying costs. More specifically, while 
the Commission agrees that off-member-exchange options volume is not 
large relative to the size of the overall options market, it is 
nonetheless economically large, representing between $133 to $165 
million of daily options dollar volume.\269\
---------------------------------------------------------------------------

    \268\ The commenter stated that the proposed rule would not 
promote regulatory efficiency, since the costs of FINRA membership 
would be disproportionate to gains from membership. See CTC Letter 
at 4. Consideration of costs and benefits of the amendments are 
presented in section V.C.
    \269\ More specifically, in September 2022, 53 of the 73 non-
FINRA member firms initiated options orders that were executed off-
member-exchange, valued at $3.31 billion and equal to about 0.3% of 
total options market volume. In April 2023, 45 of the 64 non-FINRA 
member firms initiated options orders that were executed off-member-
exchange, valued at $2.65 billion, approximately 0.4% of total 
options market volume. See supra Table 2 for additional detail. One 
commenter raised a similar concern regarding the equities market. 
See STA Letter at 3. As equities trading represents a much larger 
portion (more than 25%) of non-FINRA member volume relative to 
options trading, the Commission views an even greater need for FINRA 
supervision in equities markets.
---------------------------------------------------------------------------

2. Current Market Oversight
    The surveillance and regulation of each broker or dealer is 
partially dependent upon its individual SRO

[[Page 61875]]

membership status. Each SRO is required to examine for and enforce 
compliance by its members and associated persons with the Exchange Act, 
the rules and regulations thereunder, and the SRO's own rules, 
including, for exchange SROs, the rules on the trading that occurs on 
the exchange. Exchange SROs generally possess expertise in supervising 
members who specialize in trading on their exchange and in using the 
order types that may be unique or specialized on the exchange. This 
expertise complements the expertise of an Association in supervising 
off-member-exchange trading activity.\270\
---------------------------------------------------------------------------

    \270\ See supra section II, discussing the requirement for SROs 
to examine for and enforce compliance with the Exchange Act, and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    In the markets for NMS equities and listed options, while all 
exchanges are SROs and have access to CAT data covering trading 
activity by their members both on and off exchanges, nearly all cross-
market and off-exchange equity activity and much options activity of 
non-FINRA member broker-dealers is surveilled by FINRA through RSAs 
with exchange SROs. However, RSAs are voluntary, privately negotiated 
agreements that can expire or be terminated, and accordingly, these 
agreements may not in the future provide the consistency and stability 
of direct FINRA oversight. U.S. Treasury security trading and other 
fixed income trading,\271\ however, is not covered by CAT; instead 
transactions in these securities are only reported to FINRA's TRACE 
database when there is a FINRA member or covered depository institution 
that is party to the trade or the trade occurs on an ATS because such 
reporting results from a FINRA rule.\272\ Where no FINRA member or 
covered depository institution is party to the transaction, and the 
transaction does not take place on an ATS, it goes unreported to 
TRACE.\273\
---------------------------------------------------------------------------

    \271\ Municipal bond trades are not reported to TRACE. See supra 
note 240.
    \272\ All ATSs are operated by FINRA member firms.
    \273\ These reporting gaps were noted by FINRA, which indicated 
that it could not identify non-FINRA member firm transactions in 
U.S. Treasury securities that do not occur on a covered ATS. 
Similarly, FINRA stated that it has no visibility into the activity 
of non-member firms in transactions of non-U.S. Treasury fixed 
income securities. See FINRA Letter at 9. Beginning in Sept. 2022, 
FINRA began collecting transactions by certain banks in government 
securities. See supra note 123.
---------------------------------------------------------------------------

    Some exchanges serve as DEA for certain of their members.\274\ 
Financial and operational requirements share many commonalities across 
SROs, such as net capital requirements and books and records 
requirements. Because many brokers and dealers are members of multiple 
SROs with similar requirements, one SRO is appointed as the broker's or 
dealer's DEA to examine common members for compliance with the 
financial responsibility requirements imposed by the Act, or by 
Commission or SRO rules.\275\ The exchange serving as DEA has 
regulatory responsibility for their common members' compliance with the 
applicable financial responsibility rules.\276\ However, the non-DEA 
exchange maintains responsibility for compliance with its own rules and 
provisions of the Federal securities laws governing matters other than 
financial responsibility, including sales practices and trading 
activities and practices, although the SROs may also allocate other 
regulatory responsibilities.
---------------------------------------------------------------------------

    \274\ See supra note 13.
    \275\ See supra note 13. 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 which FINRA does act as DEA, and the DEA stipulates 
which SRO has responsibility to supervise the firm but does not 
allow for less supervision.
    \276\ Under the amendments, non-FINRA member firms that join 
FINRA may or may not be assigned to FINRA for DEA supervision. See 
supra section III.A.
---------------------------------------------------------------------------

    All registered brokers and dealers are required to join an 
Association unless they effect transactions in securities solely on a 
national securities exchange of which they are a member or are exempt 
from the membership requirement pursuant to Rule 15b9-1. The vast 
majority of broker-dealers join an Association and, because FINRA is 
the only Association, broker-dealers are subject to relatively uniform 
regulatory requirements and levels of surveillance and supervision for 
their activities overseen by FINRA. Supervision by FINRA covers a 
market that is fragmented across many trading venues, including the 
more opaque off-exchange market.\277\ Additionally, FINRA oversees its 
members' activity in equity, fixed income, and derivative markets and 
thus has the ability to surveil asset classes that may be outside the 
expertise of certain exchange SROs (e.g., options exchanges may lack 
expertise in fixed income securities).\278\
---------------------------------------------------------------------------

    \277\ Comprehensive reporting requirements for all member firms 
that trade equities off-exchange give FINRA information on market 
activity levels and market conditions off-exchange. Because most 
off-exchange equity trading venues do not publicly disseminate 
information on the liquidity available in their systems, 
comprehensive information from all participants through CAT allows 
FINRA to analyze and surveil the off-exchange market. See supra note 
17.
    \278\ For example, FINRA has extensive specific rules and 
dedicated staff applicable to fixed income markets. See FINRA.org, 
Key Topics: Fixed Income, available at https://www.finra.org/rules-guidance/key-topics/fixed-income.
---------------------------------------------------------------------------

    The existing Association, FINRA, serves crucial functions in the 
current regulatory structure.\279\ The Exchange Act's statutory 
framework generally places responsibility for off-member-exchange 
trading with an Association.\280\ Accordingly, FINRA has established a 
regulatory regime for FINRA members, including FINRA members conducting 
business in the off-member-exchange market for various asset classes, 
and developed surveillance technology and specialized regulatory 
personnel to provide surveillance, supervision, and enforcement of 
activity occurring off-member-exchange. Consequently, the current 
regulatory structure achieves off-member-exchange supervision through 
the surveillance actions of FINRA of the market generally and its 
examination of its members.
---------------------------------------------------------------------------

    \279\ See supra section II for further discussion of the role of 
Associations in market oversight.
    \280\ See supra note 26.
---------------------------------------------------------------------------

    Additionally, despite the fact that FINRA does not have 
jurisdiction over non-FINRA member firms or provide regulatory 
oversight services to non-FINRA member firms that are not covered by 
RSAs, FINRA surveils 100% of the equities and options markets with CAT 
data as well as other data sources.\281\ Moreover, where it identifies 
potential concerns relating non-FINRA member firms' activities, FINRA 
refers cases for enforcement to the SRO with jurisdiction or to the 
Commission. If FINRA is performing regulatory services for an exchange 
SRO pursuant to an RSA, FINRA may, on behalf of the exchange SRO, 
investigate and bring an enforcement action against an exchange SRO 
member that is not a FINRA member, assuming that those services are 
covered by the RSA.\282\ However, each RSA is independently negotiated 
and thus not standardized. Therefore, FINRA's ability to provide 
oversight can vary based on the nature of its RSA with the exchange 
SRO. Additionally, the ultimate responsibility for that regulatory 
oversight under an RSA still rests with the exchange SRO, not with 
FINRA.\283\ SROs may also use 17d-2 plans which allow SROs with common 
members to designate a single SRO to

[[Page 61876]]

examine common members. However, 17d-2 plans do not confer jurisdiction 
to FINRA as they apply only to common firms of which each SRO would 
already have jurisdiction.\284\ Exchange SROs may not be efficient, 
relative to FINRA, at monitoring off-member-exchange activity.
---------------------------------------------------------------------------

    \281\ CAT data is available to all SROs. FINRA utilizes other 
data sources for their surveillance as well as CAT data.
    \282\ In most but not all cases, FINRA is empowered to take such 
actions.
    \283\ See supra note 84.
    \284\ See supra note 13.
---------------------------------------------------------------------------

    Some non-FINRA member firms trade significantly in the course of 
their normal business activities on exchanges of which they are not 
members. This activity is not limited to equities and options; non-
FINRA member firms play a large role in U.S. Treasury securities 
markets as well.\285\ In 2022, there were seven non-FINRA member firms 
that together traded more than $6 trillion in U.S. Treasury securities 
volume on covered ATSs, which accounted for 3.67% of total U.S. 
Treasury securities trading volume \286\ reported to TRACE. The 
Commission estimates that in April 2023, five non-FINRA member firms 
totaled $302 billion in U.S. Treasury securities volume executed on 
covered ATSs, accounting for 2.65% of total U.S. Treasury securities 
transaction volume reported to TRACE that month.
---------------------------------------------------------------------------

    \285\ See supra section V.A.1 and accompanying text for more 
information on trading in U.S. Treasury securities markets.
    \286\ The Commission estimates from 2023 TRACE data that in Apr. 
2023 there were 916 total firms that traded U.S. Treasury 
securities.
---------------------------------------------------------------------------

    This is very different from when Rule 15b9-1 was first adopted, 
when firms' exchange activity typically was a floor business conducted 
on a single national securities exchange.\287\ While the Act provides 
for regulation of exchange trading by the exchanges themselves, it 
additionally grants regulatory oversight of off-exchange trading by an 
Association.\288\ FINRA, currently the sole Association, has specific 
tools and expertise to provide oversight to off-exchange activity. 
However, FINRA's regulatory jurisdiction is limited to its membership.
---------------------------------------------------------------------------

    \287\ See 2022 Re-Proposal, supra note 1, 87 FR 49932; see also 
Qualifications and Fees Release, supra note 33.
    \288\ See supra note 66.
---------------------------------------------------------------------------

    Some commenters have suggested that the current regulatory 
structure already subjects non-FINRA member firms to robust SRO 
oversight because exchange SROs have access to both on- and off-member-
exchange equity and options trading data of their members via CAT.\289\ 
Indeed, SRO rules require their members to report CAT data daily.\290\ 
One commenter noted that this has helped dramatically improve the 
ability of regulators to identify violative activity which is initiated 
off-member-exchange, across both the equity and options markets.\291\
---------------------------------------------------------------------------

    \289\ See, e.g., Cboe Letter at 2; ABCV Letter at 3; CTC Letter 
at 3; Group One Letter at 1; MMI Letter at 2; PEAK6 Letter at 2.
    \290\ These data record the origination, receipt, execution, 
routing, modification, or cancellation of every order a member firm 
handles for NMS stocks and options, with the exception of primary 
market transactions. See generally FINRA Rule 6800 Series and 17 CFR 
242.613.
    \291\ See STA Letter at 2.
---------------------------------------------------------------------------

    Some commenters also stated that option exchange SROs have 
specialized expertise that makes them well suited for effectively 
overseeing options trading.\292\ In addition, one commenter stated that 
there are existing mechanisms for SROs to coordinate surveillance of 
cross-exchange options trading, such as the ISG and its subgroups.\293\ 
The commenter further stated that the ISG ``provides a nonexclusive 
forum for discussions and referrals to occur and/or to coordinate on 
matters of joint interest to its members, while preserving each SRO's 
independent decision-making and enforcement authority.'' However, with 
regard to off-member-exchange activity, which in the case of options 
firms, also includes equity trading activity, SRO oversight is based on 
RSAs, which are subject to certain limitations. For example, RSAs can 
expire or be terminated.\294\
---------------------------------------------------------------------------

    \292\ See ABCV Letter at 3; Cboe Letter at 6; FIA PTG Letter at 
2. Commenters also stated that options exchanges surveil the 
equities trading of their members. However, non-FINRA members 
conduct 15 to 17 percent of equity trades off-exchange, instances 
where FINRA surveillance is more efficient than exchange SROs. See 
supra Table 1.
    \293\ See Nasdaq Letter at 3.
    \294\ See supra notes 237-238.
---------------------------------------------------------------------------

    Some commenters stated that non-FINRA member off-member-exchange 
activity is frequently conducted through FINRA member broker-
dealers,\295\ and is therefore already accessible to FINRA 
surveillance. However, trading through FINRA members does not confer 
direct authority to FINRA over these non-members. This is relevant 
given that FINRA stated that it identified non-member firms as 
potential respondents in five percent of its 2020 and 2021 market 
regulation investigations.\296\ In addition, FINRA stated that ``for 
certain products and exchanges, some non-member firm conduct may not 
fully be subject to exchange rules that provide for important 
protections in connection with the execution of customer orders (e.g., 
not all exchanges have comparable best execution rules).'' \297\
---------------------------------------------------------------------------

    \295\ See Cboe Letter at 3; CTC Letter at 5; Group One Letter at 
2; PEAK6 Letter at 4.
    \296\ See FINRA Letter at 5.
    \297\ See id. at 7-8.
---------------------------------------------------------------------------

    Non-FINRA member firms that are exempt from the Exchange Act's 
Association membership requirement are not required to pay the costs of 
Association membership, which might be significant, especially for 
firms with substantial trading activity (e.g., they would incur TAF and 
other expenses if they chose to join FINRA in response to the 
amendments). Fees associated with FINRA membership include the annual 
Gross Income Assessment (GIA), the annual personnel assessment, and the 
TAF and section 3 fees.\298\ FINRA members pay the TAF for all sales 
transactions of covered securities that are not performed in the firm's 
capacity as a registered specialist or market maker upon an 
exchange.\299\ In particular, transactions in U.S. Treasury securities 
are not part of the ``covered securities'' for the purpose of TAF fee. 
FINRA members also must pay Transaction Reporting Fees for TRACE 
reportable securities, with the exception of U.S. Treasury securities.
---------------------------------------------------------------------------

    \298\ See infra section V.C.2.b. for more information on these 
fees.
    \299\ Covered securities include all equity, options, and U.S. 
Treasury securities. For an explanation of what is included and 
exempt from the TAF, see FINRA Rules and Guidance, available at 
https://www.finra.org/rules-guidance/rulebooks/corporate-organization/section-1-member-regulatory-fees. After the 2022 Re-
proposal, FINRA proposed an amendment that would exempt from the TAF 
transactions executed by proprietary trading firms on an exchange of 
which the firm is a member. See TAF Amendment, supra note 146.
---------------------------------------------------------------------------

    The FINRA section 3 fee is the second of two primary FINRA fees 
(the other being TAF) that are assessed upon each transaction by or 
through a FINRA member. Under section 31 of the Act,\300\ 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 off-exchange trade, when 
possible. When the sell side of a transaction is a non-FINRA member 
firm and the seller engages the services of a clearing broker that is a 
member firm, FINRA can assess the section 3 fee against the member firm 
clearing broker.\301\ When the seller is a non-FINRA member firm that 
self-clears, FINRA has no authority to assess the section 3 fee against 
the seller. In such case, FINRA would seek to assess the fee against 
the buyer, if the buyer

[[Page 61877]]

includes a member firm counterparty or a member firm acting as clearing 
broker for a non-FINRA member firm buy side counterparty. Any broker-
dealer that carries customer accounts is required to be a member of an 
Association and thus bear the aforementioned fees. These costs may be 
passed on in part or in whole to the investing public or the non-FINRA 
member counterparty.
---------------------------------------------------------------------------

    \300\ 15 U.S.C. 78ee.
    \301\ The seller's clearing broker may pass that fee on to the 
non-FINRA member firm.
---------------------------------------------------------------------------

3. Current Competition To Provide Liquidity
    The market for liquidity provision on equity and options exchanges 
is competitive. In September 2022 across all exchanges, each equity 
security had a registered market maker providing liquidity, and some 
had as many as 48 registered market makers. The median equity security 
had 4 registered market makers and twenty-five percent of equity 
securities had 5 or more registered market makers. Sixty percent of 
equity securities have at least two registered market makers and forty 
percent had one registered market maker. In addition to these 
registered market makers, the Commission believes that other market 
participants effectively provide liquidity in equity securities through 
their trading activities. In the options market, each exchange had as 
many as 24 market makers providing liquidity. The average number of 
market makers per options security across exchanges is approximately 
5.9. While counting the number of market makers does not necessarily 
indicate whether each market maker is an active competitor, it does 
provide a good indication as to the number of firms in the business of 
providing liquidity, and the Commission believes that many market 
makers do actively compete, both with other registered market makers 
and market participants generally, to provide liquidity.
    As stated above, non-FINRA member firms do not have the same 
regulatory costs as FINRA member firms, which may give non-FINRA member 
firms a competitive advantage in providing liquidity in equities, 
options, and fixed income markets.\302\ As such, non-FINRA member firms 
may be able to provide liquidity at a lower cost than FINRA member 
firms given that non-FINRA member firms have a lower variable cost, all 
else equal, for trading compared to FINRA member firms.
---------------------------------------------------------------------------

    \302\ One commenter agreed that the amendments ``will safeguard 
against certain market participants, in this case high-frequency 
trading firms, from retaining a competitive advantage in the market 
due to outdated regulations.'' See Better Markets Letter at 8.
---------------------------------------------------------------------------

    The Commission believes that non-FINRA member firms are active 
participants in the market to provide liquidity in off-exchange 
markets. The Commission estimates that non-FINRA member firms account 
for between 5.1% and 5.6% of off-exchange dollar volume in equities 
from September 2022 through April 2023. Additionally, nearly 16.8% of 
all non-FINRA member equity trading activity occurs in off-exchange 
markets. Approximately 5.0% of non-FINRA member options trading 
activity involves a non-member exchange. In U.S. Treasury securities 
markets, non-FINRA broker-dealer trading activity that is reported by 
covered ATSs accounts for 3.67% of all transaction volume.

B. Effects on Efficiency, Competition, and Capital Formation

    In addition to the specific, individual benefits and costs 
discussed below, the Commission expects the amendments might have 
varying effects on efficiency, competition, and capital formation. 
These potential effects are described in this section. The amendments 
will likely result in improved efficiency of capital allocation. To the 
extent that liquidity provision changes as a result of the amendments, 
market efficiency might be impacted. Additionally, the amendments will 
have mixed effects on competition to provide liquidity, as current non-
FINRA member firms might be less likely to provide liquidity but 
current FINRA members may be more likely to provide liquidity. The 
Commission believes that the amendments would not likely have a 
meaningful effect on capital formation.
1. Firm Response and Effect on Market Activity and Efficiency
    Although non-FINRA member firms could achieve compliance with the 
amendments in multiple ways, each route might involve changes to firms' 
business models. Some non-FINRA member firms might limit their trading 
to exchanges of which they are members, and the Commission believes 
that some may not trade off-member-exchange other than to comply with 
Rule 611 of Regulation NMS or the Options Linkage Plan,\303\ or to 
execute the stock leg of a stock-option order.\304\ These firms would 
remain exempt from the requirement to become a member of an 
Association, if they comply with section 15(b)(8) of the Act or the 
rule as amended.\305\ Other firms would no longer be exempt, and would 
need to take action to comply with the amended rule. Under the amended 
rule, a non-FINRA member firm that trades equities, options, or fixed 
income securities off-exchange, or upon exchanges of which it is not a 
member, can comply in at least four ways. The first option would be to 
join an Association. The second option would be to join all exchanges 
upon which the non-FINRA member firm wishes to trade, and to cease any 
off-exchange trading, other than off-member-exchange trading consistent 
with the routing exemption and stock-option order exemption. Third, a 
non-FINRA member firm could comply by trading solely upon those 
exchanges of which it is already a member, consistent with the 
statutory exemption in section 15(b)(8).\306\ Finally, a non-FINRA 
member firm could cease trading securities entirely.
---------------------------------------------------------------------------

    \303\ See supra section III.B.1.
    \304\ See supra section III.B.2.
    \305\ Changes to the exclusion are discussed in section III.B, 
supra.
    \306\ 15 U.S.C. 78o(b)(8).
---------------------------------------------------------------------------

    The changes non-FINRA member firms make to their business model to 
comply with the amendments may affect competition in the equity, 
options, and fixed income securities markets, particularly for off-
member-exchange liquidity provision.\307\ The Commission believes that 
the amendments will result in a more level regulatory playing field 
between current FINRA and non-FINRA members, as well as enhanced 
oversight and transparency of the markets in which these firms compete. 
In response, it is possible that current FINRA member firms might 
choose to commit additional capital to liquidity provision when the 
trading environment has more uniform regulatory requirements. If this 
results in an increased overall commitment of liquidity both to 
exchanges and the off-exchange market, there are likely to be positive 
effects on capital market efficiency, 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 off-exchange trades are 
typically priced with reference to quoted exchange prices.
---------------------------------------------------------------------------

    \307\ This sentiment was echoed by one commenter who stated that 
FINRA registration ``represents a significant barrier to entry'' for 
market making firms. See Group One Letter at 3. Some proprietary 
trading firms, however, are already members of FINRA. As a result, 
FINRA has experience addressing these issues regarding registration 
barriers by facilitating new members' registration processes. 
Additionally, the rule amendments would provide FINRA and the 
Commission with greater visibility into the activities of these 
firms.
---------------------------------------------------------------------------

    The amendments may result in improved efficiency of capital 
allocation

[[Page 61878]]

by the financial industry.\308\ While the Commission acknowledges that 
FINRA membership could act as an entry deterrent to new proprietary 
trading firms, there are benefits to ensuring a certain level of 
oversight for proprietary trading firms. The Commission believes that 
the adopted amendments to Rule 15b9-1 are consistent with the Exchange 
Act's statutory framework for complementary exchange SRO and 
Association oversight of broker-dealer trading activity and thus to the 
extent such firms are required to register with FINRA as a result of 
the amendments, the Commission believes that the costs are justified by 
the benefits of regulatory oversight.
---------------------------------------------------------------------------

    \308\ Direct capital formation is the assignment of financial 
resources to meet the funding requirements of a profitable capital 
project, is in this case, the provision of liquidity to financial 
markets.
---------------------------------------------------------------------------

    While the amendments might reduce the capital commitment of non-
FINRA member firms to liquidity provision, the Commission believes 
these effects are not likely to be significant because the market to 
provide liquidity is very competitive. These markets are served by a 
number of liquidity providers with different business strategies and a 
strategic change by relatively few competitors is unlikely to disturb 
liquidity provision overall. Additionally, any subsequent removal of 
liquidity from the market may improve execution quality on off-exchange 
markets.\309\ Some institutional investors transacting in off-exchange 
markets might seek institutional investor counterparties and avoid 
transacting with proprietary trading firms. To this extent, the removal 
of non-FINRA member firm liquidity might be seen as improving liquidity 
quality within ATSs by some institutional investors.\310\
---------------------------------------------------------------------------

    \309\ Non-FINRA member firms may also reduce their off-exchange 
trading outside of ATSs, such as on single-dealer platforms, as part 
of an effort to avoid being required to join FINRA. However, non-
FINRA member firms currently can only take (not make) liquidity on 
these platforms. It is possible that additional off-exchange 
liquidity may be available outside of ATSs for other market 
participants as a result of the amendments to Rule 15b9-1 due to a 
reduction in non-FINRA member firm trading on single-dealer 
platforms.
    \310\ 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. The 
Commission understands that some ATSs segment orders so that 
institutional investors do not trade with PTFs. See, e.g., Hitesh 
Mittal, Are You Playing in a Toxic Dark Pool? A Guide to Preventing 
Information Leakage, J. Trading, Summer 2008, at 20 (ITG white 
paper), available at https://jot.pm-research.com/content/3/3/20. 
Other industry participants describe a more benign role for 
automated trading firms as liquidity providers in ATSs. See Terry 
Flanagan, High-Speed Traders Go Dark, Markets Media Commentary 
(2012), available at https://www.marketsmedia.com/high-speed-traders-go-dark/.
---------------------------------------------------------------------------

    It is also possible that reducing the activity of non-FINRA member 
firms within ATSs might result in more ATS liquidity if non-FINRA 
member firms are acting as net takers of liquidity within these 
systems.\311\ At a minimum, liquidity levels in ATSs may change. In 
addition, these firms may reduce their off-exchange trading outside of 
ATSs such as on single-dealer platforms. If this occurs, 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 off-exchange trading does 
not migrate to exchanges.\312\ The Commission acknowledges that non-
FINRA member firms, in response to the amendments, may become less 
willing to compete to provide liquidity off-member-exchange, decreasing 
liquidity off-exchange and on exchanges where such firms are not 
members. For example, non-FINRA member firms may choose to cease their 
off-member-exchange activity rather than join an Association--although 
it is likely that firms that trade heavily off-member-exchange may find 
it more costly to cease their off-member-exchange activity than to join 
an Association.\313\ In addition, non-FINRA member firms that choose to 
join an Association may reduce their off-member-exchange trading 
because joining an Association would increase variable costs to trade 
in the off-member-exchange market, as these trades would incur section 
3 and possibly additional fees, although some section 3 fees may 
already be passed on from FINRA member firms to non-FINRA member 
firms.\314\ An increase in costs would reduce the profitability of off-
member-exchange trading and thus potentially reduce aggregate off-
member-exchange trading.
---------------------------------------------------------------------------

    \311\ There is some evidence that some proprietary trading firms 
are net takers rather than net suppliers 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 Allen Carrion, Very fast money: High-
frequency trading on the NASDAQ, 16 J. Fin. Mkts. 680 (2013). 
Another study finds that electronic trading firms act as net 
liquidity suppliers during periods of extreme price movements. See 
Jonathan Brogaard, Allen Carrion, Thibaut Moyaert, Ryan Riordan, 
Andriy Shkilko & Konstantin Sokolov, High Frequency Trading and 
Extreme Price Movements, 128 J. Fin. Econ. 253 (2018).
    \312\ Several commenters expressed concerns that the amendments 
would negatively impact market liquidity in this respect. See Cboe 
Letter at 7; PEAK6 Letter at 4; ABCV Letter at 3.
    \313\ Firms with very low ATS activity are unlikely to directly 
connect to an ATS, instead accessing ATSs through a FINRA-member 
firm. For firms with very limited off-member-exchange activity, 
ceasing off-member-exchange activity is likely to be less costly 
than joining an Association. The costs of joining FINRA are 
discussed in detail in infra section V.C.2; for firms with very 
limited off-member-exchange activity, it is unlikely that the 
profits generated from this activity would offset FINRA membership 
costs. However, for firms that generate profits from off-member-
exchange activities that exceed FINRA membership costs, it may be 
less costly to join FINRA than to cease their off-member-exchange 
activity.
    \314\ After the 2015 Proposal and again following the 2022 Re-
proposal, FINRA evaluated the structure of the TAF to assure that it 
appropriately considered the business model of certain non-FINRA 
member firms that might have joined FINRA as a result of the 
proposed amendments. FINRA has proposed an amendment that would 
exempt from the TAF transactions executed by proprietary trading 
firms on an exchange of which the firm is a member. See TAF 
Amendment, supra note 146. The Commission's analysis of TAF is based 
on the proposed 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, infra. Firms would also face additional fixed costs both to 
establish and maintain Association membership; those costs are 
discussed in section V.C.2, infra.
---------------------------------------------------------------------------

    The Commission believes that required membership in an Association, 
consistent with section 15(b)(8) of the Act and amended Rule 15b9-1, 
could facilitate an appropriate level of oversight. The Commission also 
recognizes that the loss of liquidity provision in off-member-exchange 
trading might impose costs on investors in the form of higher trading 
costs than they would otherwise realize. These effects may differ 
across asset classes. In the case of non-FINRA member broker-dealers 
trading U.S. Treasury securities, costs to join an Association include 
the costs of establishing TRACE reporting. Depending on the firm's 
activity level in that market, firms might be more likely to withdraw 
from that market if their anticipated profit levels from U.S. Treasury 
securities trading do not justify the additional reporting 
requirements. The impact on liquidity in U.S. Treasury securities 
markets is not likely to significantly impact investor costs to trade 
these securities because U.S. Treasury securities are generally very 
liquid and competition to provide this liquidity is robust. If some 
non-FINRA member broker-dealers stop competing in the market to provide 
this liquidity, other broker-dealers are likely to increase their 
activity in this market, but the Commission acknowledges that if 
competition to provide liquidity decreases, investor costs to trade 
U.S. Treasury securities could increase.
    Several commenters expressed liquidity concerns with regard to 
options markets.\315\ One commenter stated that FINRA membership costs

[[Page 61879]]

might have ``the potential for impaired liquidity, especially during 
times of market stress.'' \316\ Another commenter indicated that the 
FINRA TAF fee structure is disproportionally burdensome for proprietary 
trading firms and risks stifling liquidity in options markets.\317\ The 
commenter also stated that there are fewer incentives to provide the 
same liquidity under FINRA's proposed fee structure as there are under 
Cboe's regulatory fee structure.\318\ The Commission, however, believes 
that options market liquidity provision will not be impaired even if 
these amendments cause options market makers to exit. The Commission 
observes that bid-ask spreads have remained consistent since 2015 even 
though, over that same period of time, options market makers have 
entered and exited the market through varying market conditions.\319\
---------------------------------------------------------------------------

    \315\ See, e.g., MMI Letter at 1; ABCV Letter at 3; PEAK6 Letter 
at 5.
    \316\ See ABCV Letter at 3.
    \317\ See PEAK6 Letter at 5. According to the commenter, FINRA 
fees are partially based on the number of transactions in order to 
provide protection that is proportional to the number of customer 
orders of a broker-dealer. This is theoretically at odds with the 
business model of proprietary traders, which do not have customers. 
For this reason, the commenter asserts that FINRA fees are 
``imbalanced,'' i.e., disproportionately costly to proprietary 
trading firms relative to the benefits provided by FINRA oversight 
of these firms.
    \318\ Id.
    \319\ See infra note 330 and discussion in infra section V.B.2.
---------------------------------------------------------------------------

    Changes in business models for non-FINRA member firms may affect 
market quality on exchanges as well. In addition to trading extensively 
in the off-exchange market, many non-FINRA member firms are among the 
most active participants on exchanges. Business model changes by these 
firms in response to the amendments might lead to less exchange 
liquidity for several reasons. First, non-FINRA member firms that 
choose not to join an Association will no longer be able to rely on the 
rule and trade indirectly on exchanges of which they are not members, 
unless they comply with the routing or stock-options order 
exemptions.\320\ Second, non-FINRA member firms that do not join an 
Association will no longer be able to access off-member-exchange 
liquidity to unwind positions acquired on exchanges, which might reduce 
their willingness to provide liquidity on exchanges.\321\ Third, non-
FINRA member firms that choose to join an Association might be subject 
to additional variable costs (primarily regulatory fees) on their 
exchange-based trading as well as on their off-member-exchange 
trading.\322\ These firms might respond by trading less actively on 
exchanges. Finally, non-FINRA member firms might choose to cease 
trading 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 off-exchange transactions 
(including many retail executions) are derivatively priced with 
reference to prevailing exchange prices. Overall, however, the 
Commission believes that the amendments will most likely not result in 
a disturbance of liquidity provision due to the robust competitive 
conditions of the current market landscape.
---------------------------------------------------------------------------

    \320\ Currently, a non-FINRA 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 elimination of the exclusion for 
proprietary trading, this activity would not be consistent with the 
amendments, unless the activity complies with the routing or stock-
option order exemptions. See supra sections III.B.1 and III.B.2.
    \321\ These firms could unwind positions on exchanges of which 
they are a member, but the cost to do so may be higher than if all 
liquidity sources, including off-exchange liquidity, were available.
    \322\ It is possible non-FINRA 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.
---------------------------------------------------------------------------

2. Effect on Competition To Provide Liquidity
    The amendments might impact competition to provide liquidity by 
increasing the regulatory cost for current non-FINRA member firms. Non-
FINRA member firms do not bear the costs associated with FINRA 
membership. As such, FINRA member firms bear a number of costs not 
borne by non-FINRA member firms including a number of regulatory fees 
and indirect costs that are assessed or imposed upon member firms.\323\ 
These costs are a part of equity, options, and fixed income markets and 
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 could be assigned to non-FINRA member 
firms' off-exchange securities sales. There are indirect costs of 
disparate regulatory regimes as well.\324\ Under the amendments current 
non-FINRA members that choose to join FINRA will become subject to the 
regulatory costs associated with FINRA membership, including TAF, GIA 
and section 3 fees. These changes to regulatory costs for non-FINRA 
member firms might change competitive forces in the market for 
providing liquidity as the current non-FINRA member broker-dealers have 
lower regulatory costs, which might make it less costly for non-FINRA 
member broker-dealers to provide liquidity.\325\ To the extent that 
non-FINRA member firms do have lower costs for providing liquidity than 
FINRA member firms, the amendments might eliminate such an advantage, 
and lead to a reduction in liquidity provided by current non-FINRA 
member firms.
---------------------------------------------------------------------------

    \323\ Exchange membership also imposes costs on broker-dealers. 
Some non-FINRA member firms are members of many exchanges, but not 
FINRA, while some FINRA-member firms are members of many exchanges 
as well as FINRA. To the extent that a broker-dealer can avoid FINRA 
membership, its fee burden might be lower than a broker-dealer that 
cannot or does not avoid FINRA membership. The Commission believes 
that many non-FINRA member firms would retain their exchange 
membership when the amendments are adopted in order to maintain the 
benefits of being a member of the exchange. Therefore, the 
Commission only considers the additional cost to the firms that are 
specific to joining FINRA. The exchange SRO fees are not considered 
as they are not expected to change. However, a firm may decide to 
drop its membership on exchanges where it no longer wishes to trade 
after joining FINRA, because maintaining exchange memberships is 
costly and firms are unlikely to maintain membership on exchanges 
where they do not plan to have activity. See infra section V.C.2, 
for more information on the fees associated with FINRA membership.
    \324\ See section V.C.2.f, infra.
    \325\ See section V.B.1, supra for discussion of competitive 
effects and investor costs.
---------------------------------------------------------------------------

    However, to the extent that these negative effects on liquidity 
occur, the Commission believes they will be minor in light of several 
factors. First, while non-FINRA members have been able to avoid direct 
costs associated with Association membership, in reality, they may have 
already been bearing a portion of these costs, as FINRA member firms 
may pass through their fees to non-FINRA member counterparties. In 
addition, following the implementation of the amendments, current FINRA 
members will be operating on a more level regulatory cost playing 
field, which may expand their own provision of liquidity and perhaps 
balance out any reduction in liquidity from current non-FINRA members. 
Finally, the provision of liquidity appears to be somewhat resilient to 
changing market conditions, and more specifically, appears to have been 
unaffected by the exit of numerous non-member firms since the 2015 
Proposal, as discussed below.
    Several commenters expressed concern about decreased competition 
among options market makers.\326\ One commenter specifically noted that 
``[s]maller options market makers may not have the economies of scale 
to

[[Page 61880]]

adequately absorb [FINRA registration] costs, which could lead to 
consolidation and decreased competition.'' \327\ On the other hand, 
another commenter suggested that the amendments might increase 
competition and that they ``will safeguard against certain market 
participants, in this case high frequency trading firms, from retaining 
a competitive advantage in the market due to outdated regulations.'' 
\328\
---------------------------------------------------------------------------

    \326\ See ABCV Letter at 3-4; Cboe Letter at 7; Group One Letter 
at 3; Nasdaq Letter at 3.
    \327\ See Cboe Letter at 7.
    \328\ See Better Markets Letter at 8.
---------------------------------------------------------------------------

    Despite a recent decline in the number of non-FINRA member options 
liquidity providers, the Commission does not believe that the 
amendments will negatively impact options market liquidity provision. 
Since the 2015 Proposal, the number of non-FINRA member firms has 
declined from 125 to 64. One commenter pointed out that while some non-
members may have since become FINRA members or have been acquired by 
other market makers, most of the decline in option market making non-
members are firms that have ceased trading securities.\329\ However, 
despite this decline in the number of firms, options market liquidity 
has remained robust. One academic study shows that options bid-ask 
spreads have remained flat since 2015.\330\ NYSE Data Insights 
similarly suggests that options quoted spreads have remained flat or 
slightly declined in recent years as overall option trading volumes 
have continued to hit record highs.\331\ While a decrease in the number 
of competitors can lead to a decline in competition, these data do not 
appear to suggest that options market liquidity conditions have 
weakened with the increased industry consolidation.
---------------------------------------------------------------------------

    \329\ See STA Letter at 3-4.
    \330\ See Figure 1 of Jefferson Duarte, et al., Very Noisy 
Option Prices and Inferences Regarding the Volatility Premium, J. 
Fin., Forthcoming.
    \331\ See NYSE Data Insights, 2021 Options Year in Review, 
available at https://www.nyse.com/data-insights/2021-options-year-in-review.
---------------------------------------------------------------------------

    The Commission does not believe that the costs imposed by these 
amendments will be large enough to undermine options market liquidity 
provision or the overall degree of competition in the market. The 
Commission cannot rule out the possibility, however, that the addition 
of FINRA costs will serve as catalyst for one or more small non-member 
options market makers to exit the market,\332\ although FINRA's 
exemption of TAF fees for non-member firms,\333\ which several 
commenters supported, should reduce the likelihood that firms will 
choose to exit in response to the rule. To the extent that options 
market makers exit, competition to provide liquidity in options markets 
may be adversely impacted.
---------------------------------------------------------------------------

    \332\ These broker-dealers could also choose to remain exempt by 
joining any remaining exchanges on which they currently trade but 
are not members. Additionally, they could remain exempt by retaining 
their current exchange memberships and only discontinue trading on 
the exchanges for which they currently do not carry membership.
    \333\ The TAF exemption will be for trading on exchanges at 
which the proprietary firm is a member. See supra note 162 and 
accompanying text.
---------------------------------------------------------------------------

    The impact on equity liquidity due to non-FINRA members joining 
FINRA in response to the amendments is uncertain. The existing 
differential regulatory cost burdens of FINRA member firms and non-
FINRA member firms may have consequences with respect to market quality 
both for exchange-based and off-exchange trading. For example, because 
non-FINRA member firms, all else equal, currently face lower variable 
costs of trading compared to member firms, non-FINRA member firms may 
be able to provide liquidity at a lower cost than 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-FINRA 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 may 
execute at an inferior price.\334\ If depth at the 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 the 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.
---------------------------------------------------------------------------

    \334\ This 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 exist at the best price.
---------------------------------------------------------------------------

3. Competitive Effects on Off-Exchange Market Regulation
    Currently, FINRA is the only Association.\335\ It is possible, 
however, for new Associations to enter the regulatory oversight market 
and compete with FINRA. The amendments to Rule 15b9-1 might create 
incentives for a new Association (or Associations) to form. The large 
non-FINRA member firms have commonalities in business models; for 
example, they typically do not carry customer accounts. They might 
consider forming a new Association together, which would allow the 
member of the new Association to be subject to rules and regulations 
that better fit their business practices. This might allow the new 
Association to more efficiently provide oversight for current non-FINRA 
member firms. For example, because these firms collectively conduct a 
significant portion of off-exchange volume, the creation of a new 
Association tailored to these firms may be economically viable.
---------------------------------------------------------------------------

    \335\ See supra note 9 and accompanying text.
---------------------------------------------------------------------------

    To be registered as a new Association, in addition to requirements 
that parallel the requirements to be a national securities exchange, a 
new 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.\336\ Any new Association 
would have to be approved by the Commission. Additionally, a new 
Association must permit any registered broker or dealer that meets a 
new Association's qualification standards to become a member.\337\ It 
also 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.\338\ A new 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.\339\
---------------------------------------------------------------------------

    \336\ See 15 U.S.C. 78o-3.
    \337\ See 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 ``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.''
    \338\ See 15 U.S.C. 78o-3(b)(11).
    \339\ See 15 U.S.C. 78o-3(b)(2).
---------------------------------------------------------------------------

    The ability to form an Association is characterized by barriers to 
entry. The amendments include a 365-day implementation period, which 
might provide a significant time constraint to form a new Association. 
A new

[[Page 61881]]

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 
might also incur substantial costs, including personnel, training, 
travel, and other costs to provide for effective surveillance and 
supervision of the off-exchange equity, cross-exchange options, and 
U.S. Treasury securities markets. Indeed, the only existing 
Association, FINRA, has resources that enable it to surveil and oversee 
the off-exchange market.\340\ Additionally, while some costs may be 
lower because CAT already collects information and makes it available 
to query, a new Association would still have to build its own 
infrastructure, surveillance logics, and analytical tools, which may 
create a substantial cost for a new Association.\341\
---------------------------------------------------------------------------

    \340\ See supra note 9.
    \341\ See CAT NMS Plan Approval Order, supra note 15, 81 FR 
84836-39, for a discussion on the benefits provided by CAT with 
regard to surveillance by SROs.
---------------------------------------------------------------------------

    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 will 
have incentives to reduce fees to attract members. This might result in 
cost savings to brokers and dealers. Second, a new Association might 
innovate to develop different surveillance and supervision methods that 
could be more efficient than FINRA's methods.
    Competition among Associations might also entail substantial costs. 
If the market for Associations is characterized by economies of scale, 
aggregate costs for the same level of regulation might be higher in a 
market with two Associations than in a market with a single 
Association. These additional costs would ultimately be borne by the 
broker and dealer members of either Association, and could be passed on 
to investors. Second, Associations might compete on the basis of 
providing ``light touch'' regulation, in essence surveilling less and 
providing less supervision. As a result, the quality of market 
supervision might decrease, although the Commission does itself oversee 
self-regulatory organizations, such as Associations, and accordingly, 
would not permit a ``race to the bottom.'' \342\ Furthermore, some of 
the benefits of the amendments will be diminished if current non-FINRA 
member firms created a new Association as opposed to joining FINRA. For 
example, the new Association will not have the experience or expertise 
of FINRA in overseeing off-member-exchange market activity. 
Additionally, the members of a new Association will not be required to 
report their U.S. Treasury securities market trading activity to TRACE 
if they are not FINRA members.
---------------------------------------------------------------------------

    \342\ See sections 19(g) and (h) of the Exchange Act, 15 U.S.C. 
78s(g) and (h).
---------------------------------------------------------------------------

    The amendments may increase 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. The amendments 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-FINRA member firms). If these firms join the only 
existing Association, FINRA, any newly formed Association might have 
increased difficulty attracting the members needed to support the high 
fixed costs associated with forming an Association because every broker 
or 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 amendments result in 
more firms becoming members of FINRA, a new Association might face 
increased difficulties attracting members in the future. If the new 
Association is introduced after implementation of the rule, these 
stated effects might become more likely as the current non-FINRA member 
firms would have already joined FINRA. 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 
might lower the costs of forming an Association and alter the barriers 
to entry.\343\
---------------------------------------------------------------------------

    \343\ Some limitations on Association membership or operations 
would require exemptive relief for the Association to register with 
the Commission.
---------------------------------------------------------------------------

C. Consideration of Costs and Benefits

    This section discusses costs and benefits of the amendments. While 
the Commission has attempted, where possible, to provide estimated 
quantifiable ranges, both costs and benefits are difficult to quantify 
for the amendments for a number of reasons.
    The overall benefits of the amendments relate to more stable and 
uniform surveillance of off-member-exchange activity by the direct, 
membership-based Association oversight to oversee such activity. As 
such, the benefits the Commission anticipates from the amendments are 
largely qualitative and by their nature difficult to measure 
quantitatively.
    The amendments will induce initial, ongoing, and indirect costs 
which would be similarly difficult to measure for a variety of reasons. 
First, market participants are heterogeneous in their type, existing 
exchange memberships, and activity level in the off-member-exchange 
market. Consequently, compliance costs will vary across firms in a 
number of dimensions. Second, estimating costs is complicated by the 
fact that non-FINRA 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 but the Commission lacks data to 
identify those firms with certainty.\344\ At the other end of the 
spectrum, the minority of non-FINRA member firms that are large and 
contribute significantly to both member exchange and off-member-
exchange trading are unlikely to remain exempt.\345\ For the 64 non-
FINRA member firms, the Commission believes that most will lose their 
exempt status, and, while most firms will likely join FINRA, some firms 
may seek other ways to comply with the amendments (e.g., remaining 
exempt by expanding their exchange memberships to cover all of the 
exchanges on which they currently trade or reducing their trading 
activity to the exchanges on which they currently trade).\346\
---------------------------------------------------------------------------

    \344\ Non-FINRA member firms that provide liquidity on multiple 
exchanges and trade heavily off-member-exchange are unlikely to be 
small in terms of net capital and are not low trading volume firms 
by definition. However, as discussed in supra section V.A.1, many 
non-FINRA member firms are members of a single exchange. Such firms 
are more likely to have limited exposure to off-member-exchange 
markets. Such firms will 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 stock-option order 
exemption to continue their limited off-member-exchange trading 
related to their exchange-based brokerage activities.
    \345\ The diversity of non-FINRA member firms is discussed in 
supra section V.A.1.
    \346\ See supra section V.B.1., which discusses how firms might 
change their business models in response to the rule.

---------------------------------------------------------------------------

[[Page 61882]]

1. Benefits
    As discussed above,\347\ some of the firms relying on the Rule 
15b9-1 exemption are significant participants in both on and off-
member-exchange markets.\348\ For example, in September of 2022, $440 
billion in listed equities was traded off-exchange by non-FINRA member 
firms, and $311 billion in listed equities was traded on an exchange to 
which the firm did not belong.\349\ Thus, a substantial amount of off-
exchange volume is conducted outside of the regulatory jurisdiction of 
FINRA, which under the Exchange Act has primary responsibility for 
overseeing off-exchange activity. Although FINRA has the ability to 
surveil 100% of cross-market and off-exchange equity trading activity 
via CAT, it does not have jurisdiction for firms that are not FINRA 
members. Association membership will supplement the existing oversight 
of the exchanges, to the extent a firm remains an exchange member, and 
provide consistent and ongoing application of rules, which vary between 
exchanges. Regarding off-member-exchange trading, under the current 
regulatory structure using RSAs, FINRA applies the rules of the 
different exchanges and the exchanges' interpretations of those rules 
to such trading. This can result in different interpretations and FINRA 
registration would promote consistent interpretations and efficiencies 
in enforcement and regulation with respect to this growing part of the 
market.\350\ As discussed above,\351\ the Commission believes the 
inclusion of more non-FINRA member firms in an Association \352\ will 
improve such Association's ability to supervise off-member-exchange 
trading activity, particularly in U.S. Treasury securities markets. 
This would enhance FINRA's ability and--through the information FINRA 
shares with the Commission--the Commission's ability to effectively 
oversee regulation of trading on equity, fixed income, and option 
markets.
---------------------------------------------------------------------------

    \347\ See supra section I.
    \348\ See supra section V.A.1.
    \349\ See supra Table 1.
    \350\ Exchange SRO rules would continue to apply to broker-
dealer firms that are exchange members and become FINRA members as a 
result of the amendments to Rule 15b9-1. The Commission believes 
that Rule 17d-1 DEA designations and Rule 17d-2 plans will likely be 
utilized in areas of overlapping rules to mitigate duplicative 
application of exchange SRO and FINRA oversight, in the same fashion 
as they already are utilized for the many broker-dealer firms that 
are exchange members and FINRA members.
    \351\ See supra section I.
    \352\ This discussion presumes that the most likely response by 
non-members to the amendments will be to join FINRA, rather than 
choosing another option, such as remaining exempt from Association 
membership by joining every exchange on which the broker-dealer 
trades, ceasing trading operations, or forming a new Association.
---------------------------------------------------------------------------

    Some commenters expressed concern that there are no clear benefits 
resulting from the amendments because they believe that exchange SROs 
provide sufficient regulatory functions.\353\ The Commission, however, 
believes that the amendments to Rule 15b9-1 would improve supervision 
of non-FINRA member firms by leveraging FINRA's experience and 
investigative tools, particularly those targeted at off-member-exchange 
markets. FINRA, currently the only Association, has considerable 
experience and expertise from overseeing a large number of brokers and 
dealers that trade off-exchange or across exchanges. This makes FINRA's 
potential regulation of non-FINRA member firms with off-exchange or 
cross-market trading activity particularly efficient. FINRA stated that 
``[d]irect FINRA jurisdiction would yield a number of benefits 
including ensuring that PTFs are subject to FINRA rules and providing 
for more consistent regulatory treatment across entities engaging in 
similar trading activity, which would result in more thorough oversight 
and stronger cross-market and cross-product surveillance.'' \354\
---------------------------------------------------------------------------

    \353\ See, e.g., ABCV Letter at 2; Cboe Letter at 7; FIA PTG 
Letter at 2; Group One Letter at 1; MMI Letter at 3; Nasdaq Letter 
at 4.
    \354\ See FINRA Letter at 7.
---------------------------------------------------------------------------

    In addition, the amendments, as adopted, would enhance the 
supervision and enforcement for equities and options beyond the 
benefits from the CAT NMS Plan.\355\ While CAT improves data 
accessibility for all SROs, it does not address FINRA's lack of 
jurisdiction over non-FINRA member firms with off-member-exchange 
trading activity. Several commenters believed that reporting of non-
FINRA member identifying information and activity pursuant to the CAT 
NMS Plan would eliminate the need for firms to join FINRA and would 
provide FINRA a near complete picture of off-member-exchange trading 
activity.\356\ However, FINRA stated that even with non-FINRA member 
firm trading activity information, ``FINRA does not have the 
independent ability to examine for, investigate, or enforce potential 
violations of the federal securities laws or FINRA rules with respect 
to non-member firms it identifies through surveillance or other 
means.'' \357\ The Commission agrees that, although FINRA now has 
additional information with respect to non-FINRA member firm activity, 
it still lacks jurisdiction over non-FINRA member firms, and the 
amendments would provide such jurisdiction, thereby leading to expanded 
supervision and enforcement of existing FINRA rules and 
regulations.\358\ In particular, off-member-exchange trading by current 
non-FINRA members will receive more efficient oversight following 
implementation of the amendments.\359\
---------------------------------------------------------------------------

    \355\ See CAT NMS Approval Order, supra note 341.
    \356\ See, e.g., Cboe Letter at 2; ABCV Letter at 3; CTC Letter 
at 3; Group One Letter at 1; PEAK6 Letter at 2; STA Letter at 2.
    \357\ See FINRA Letter at 6. FINRA also stated that it 
identified non-member firms as potential respondents in five percent 
of its market regulation investigations conducted in 2020 and 2021.
    \358\ See supra section III.A.
    \359\ Currently, oversight of off-member exchange trading is 
coordinated through RSAs, which are subject to certain limitations. 
See supra note 294.
---------------------------------------------------------------------------

    Some commenters stated that Association membership should not be 
mandated for options market makers because FINRA regulation is focused 
on protecting customers and options market makers do not carry customer 
accounts.\360\ However, non-FINRA member firms play a significant role 
in the execution of retail customer orders routed to them by 
introducing broker-dealers. Commission data indicate that two of the 
three largest options consolidators, which handled approximately 43% of 
wholesaled retail customer options orders in 2022, are presently not 
FINRA members.\361\ Further, FINRA stated that ``for certain products 
and exchanges, some non-member firm conduct may not fully be subject to 
exchange rules that provide for important protections in connection 
with the execution of customer orders (e.g., not all exchanges have 
comparable best execution rules).'' \362\
---------------------------------------------------------------------------

    \360\ See, e.g., ABCV Letter at 2; PEAK6 Letter at 2; Group One 
Letter at 1-2; STA Letter at 3-4.
    \361\ Based on 2022 filings under 17 CFR 242.606 (``Rule 606'').
    \362\ See FINRA Letter at 7-8.
---------------------------------------------------------------------------

    Commenters also stated that FINRA membership was unwarranted for 
options market makers since off-member-exchange trading represents only 
a very small share of the overall trading activity of these firms.\363\ 
However, Commission analysis reveals that the overall level of off-
member-exchange options activity by non-FINRA member firms involves 
non-trivial trading volume, exceeding $130 million per day, and 
therefore warrants Association oversight or exemption via mandated 
membership on all exchanges on which the broker-dealer trades.\364\ In 
addition, options market makers

[[Page 61883]]

comprise the majority of the twelve non-FINRA firms among which off-
exchange equity volume is concentrated. Therefore, mandating 
Association membership for non-FINRA member options market makers will 
also result in enhanced oversight of the off-exchange equity trading of 
these firms, which is currently covered by RSAs.
---------------------------------------------------------------------------

    \363\ See Nasdaq Letter at 3; PEAK6 Letter at 2.
    \364\ See supra note 269.
---------------------------------------------------------------------------

    Some commenters stated that off-member-exchange activity was 
frequently carried out for general hedging purposes, which, they 
stated, is trading activity that does not justify mandatory FINRA 
oversight and its associated costs,\365\ especially if this activity 
serves to facilitate options market making.\366\ While the Commission 
is cognizant of the critical role played by market makers, it 
nevertheless believes that such trading activity is not immune to 
violative behavior and therefore does not justify exemption from the 
amendments.\367\
---------------------------------------------------------------------------

    \365\ See Cboe Letter at 3; Nasdaq Letter at 4; CTC Letter at 5; 
PEAK6 Letter at 4.
    \366\ See Cboe Letter at 3; ABCV Letter at 4, PEAK6 Letter at 4.
    \367\ One commenter stated that a general hedging exemption 
would ``increase fraudulent activity in the market by obfuscating 
risk activities in the options market.'' See letter from Cullin 
Coyle (Oct. 31, 2022).
---------------------------------------------------------------------------

    The benefits of the adopted amendments will be pronounced in the 
U.S. Treasury securities markets. A significant amount of volume in 
U.S. Treasury securities markets comes from broker-dealers that are 
likely to be required to become FINRA members as a result of the 
amendments.\368\ If these broker-dealers become FINRA members, they 
will be required to comply with FINRA rules, including TRACE reporting 
requirements. This will have a positive impact on market quality by 
increasing coverage of data reported to TRACE for trades not occurring 
on a covered ATS.\369\ The amendments will also provide additional 
market oversight by bringing non-FINRA member trading in the Treasury 
markets under FINRA jurisdiction.\370\ Non-FINRA member firms do not 
report to TRACE, and they are only specifically identified by MPID in 
TRACE when their U.S. Treasury securities trades occur on a covered 
ATS; they are not identified by MPID for other trades of U.S. Treasury 
securities that do not occur on covered ATSs, such as direct dealer-to-
dealer transactions.\371\ Thus, the amendments will improve the quality 
and complete the coverage of TRACE data to include all non-FINRA member 
firm transactions and increase regulatory transparency into the U.S. 
Treasury securities markets.\372\ One commenter suggested that current 
TRACE reporting captures effectively all non-FINRA member U.S. Treasury 
securities transactions and that no present gap in U.S. Treasury 
securities transaction reporting exists.\373\ The Commission believes 
that, while the majority of U.S. Treasury securities transactions are 
already reported to TRACE,\374\ there are coverage gaps--even as the 
Commission cannot estimate the actual amount of U.S. Treasury 
securities trading activity not currently reported to TRACE.\375\
---------------------------------------------------------------------------

    \368\ The Commission estimates that seven such firms accounted 
for $6 trillion in U.S. Treasury securities volume executed on 
covered ATSs in 2022 that was reported to TRACE, which was more than 
3.67% of the total U.S. Treasury securities volume traded in 2022 
that was reported to TRACE, and that five such firms' U.S. Treasury 
securities volume executed on covered ATSs in Apr. 2023 that was 
reported to TRACE accounted for approximately 2.65% of total U.S. 
Treasury securities volume in Apr. 2023 that was reported to TRACE. 
See supra section II.B.
    \369\ Or trades not involving certain depository institutions, 
which are mandated to report U.S. Treasury securities trades to 
TRACE. See supra note 123.
    \370\ FINRA agreed that the benefits of additional U.S. Treasury 
securities market oversight are likely to be substantial and 
reported that non-FINRA member broker-dealer firms and non-broker-
dealer firms were identified in 17% of the FINRA surveillance alerts 
generated by its Treasuries manipulation patterns in 2020 and 2021. 
See FINRA Letter at 10; see also supra note 119.
    \371\ FINRA stated that ``non-member firms' activity accounts 
for a very significant portion of trading in Treasuries 
securities.'' See FINRA Letter at 9.
    \372\ One commenter stated that the amendments ``will help to 
enhance transparency in the Treasury markets by increasing the 
percentage of transactions being reported to the TRACE reporting 
system.'' See Better Markets Letter at 10.
    \373\ See FIA PTG Letter at 3. The commenter also stated that to 
the extent that any reporting gaps in U.S. Treasuries exist, it 
would be preferable to implement a more targeted solution requiring 
non-members to report these transactions via account ownership 
identifiers rather than mandating FINRA membership. See FIA PTG 
Letter at 3.
    \374\ See id.
    \375\ See supra note 55.
---------------------------------------------------------------------------

    The Commission believes that the amendments could provide more 
substantial benefits to the market for other TRACE-reported (e.g., non-
U.S. Treasury securities fixed income) securities, since transactions 
by non-FINRA members in these securities are completely hidden from 
FINRA oversight.\376\ Moreover, unlike U.S. Treasury securities, 
transactions data on several non-U.S. Treasury TRACE-reported 
securities, including corporate bonds and agency debt securities, are 
disseminated immediately to the public.\377\ This immediate 
dissemination has allowed non-FINRA member firms to observe other 
firms' anonymized trades in non-U.S. Treasury fixed income securities 
\378\ without facing the burden of reporting their own trades, 
potentially providing non-FINRA members a competitive advantage, the 
cost of which is borne by the investing public through reduced price 
discovery. Therefore, an increase in FINRA membership due to the 
amendments could be particularly beneficial to the transparency of 
these markets, although the trading volume in these securities by non-
FINRA members, and thus the full extent of these benefits, remains 
uncertain since non-FINRA members do not have to report their trades in 
these securities.
---------------------------------------------------------------------------

    \376\ See supra section V.A.1. Non-U.S. Treasury fixed income 
securities that are TRACE-reported include corporate debt, agency 
debt, and asset backed securities (such as student and auto loans). 
See FINRA, Frequently Asked Questions (FAQ) about the Trade 
Reporting and Compliance Engine (TRACE), available at https://www.finra.org/filing-reporting/trace/faq#Reporting. In May 2023, 
average daily trading volume reported to TRACE for non-convertible 
corporate debt was $39.9 billion; agency debt, $3.7 billion; asset 
back securities, $1.2 billion. See FINRA, TRACE Volume Reports--
Total Trades, available at https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-volume-total-trades. These are 
predominantly over-the-counter markets. For example, for information 
about corporate bond trading see Maureen O'Hara and Xing (Alex) Zhou 
Corporate Bond Trading: Finding the Customers' Yachts J. Portfolio 
Management (2022). For a recent study on fixed income markets, see 
Understanding Fixed Income Markets in 2023 available at https://www.sifma.org/resources/research/understanding-fixed-income-markets-in-2023/.
    \377\ See supra note 259 for information on the difference 
between the dissemination of TRACE for U.S. Treasury securities and 
TRACE for other TRACE eligible securities. See also FINRA, TRACE 
Reporting Timeframes and Transparency Protocols, available at 
https://www.finra.org/filing-reporting/trade-reporting-and-compliance-engine-trace/trace-reporting-timeframes.
    \378\ FINRA publishes aggregate TRACE U.S. Treasury security 
data. See About TRACE Treasury Aggregate Statistics, available at 
https://www.finra.org/filing-reporting/trace/data/trace-treasury-aggregates/about.
---------------------------------------------------------------------------

    While current members of an Association would not be directly 
affected by this rule, they will benefit by having a more level playing 
field in reporting trades in the U.S. Treasury securities markets. With 
more uniform regulatory requirements, firms might compete more 
equitably to supply liquidity both on exchanges and in the off-exchange 
market.
    Two commenters raised concerns about exchanges acting as SROs and 
potential conflict of interest in regulating effectively versus 
catering to the exchange's customers.\379\ In this scenario, switching 
from exchange SROs to FINRA serving as DEA should reduce concerns held 
by these commenters regarding conflict of interest.
---------------------------------------------------------------------------

    \379\ See letters from: Joseph Crowe (Aug. 12, 2022) and Joe 
Edwards (Aug. 12, 2022).
---------------------------------------------------------------------------

    Although fewer firms will be able to rely on the narrower 
exemptions, the narrower exemptions will continue to provide the 
existing benefits for non-FINRA members as well as other market

[[Page 61884]]

participants. These exemptions will continue to provide the current 
cost savings for non-FINRA members as they will continue to not be 
required to join FINRA and thus avoid the costs of doing so. 
Additionally, the routing exemption will facilitate regulatory 
compliance designed to improve market quality.\380\ The Commission also 
believes that the stock-option order exemption will facilitate 
liquidity in both stock and options markets, which is likely to improve 
market quality.\381\
---------------------------------------------------------------------------

    \380\ See supra section III.B.1 for more information on the 
purpose of the routing exemption.
    \381\ See supra section III.B.2 for more information on the 
stock-option order exemption.
---------------------------------------------------------------------------

2. Costs
    The amendments, by narrowing the existing exemption, would result 
in brokers and dealers that no longer qualify for the exemption having 
to comply with section 15(b)(8) of the Exchange Act by either limiting 
their trading to exchanges of which they are members, joining an 
Association, or abiding by one of the stated exemptions. Under the 
amendments, therefore, non-FINRA member firms that choose to continue 
any off-member-exchange activity will be faced with choices that would 
involve corresponding costs. For example, non-FINRA member firms might 
incur costs related to membership in an Association or costs 
necessitated by additional exchange memberships. Additionally, some 
non-FINRA member firms might incur the costs of losing the benefits of 
trading in the off-member-exchange market if they decide not to join an 
Association. There might also be indirect costs associated with the 
amendments, depending on whether a non-FINRA member chooses to join an 
Association or not.
    Most of the direct costs incurred in joining an Association and 
maintaining membership therein are dependent on firm characteristics 
and activity level. Furthermore, some non-FINRA member firms might 
comply by ceasing their off-member-exchange trading activity, avoiding 
many of these costs but forgoing the opportunity to trade profitably in 
some venues. The Commission estimates that, if all 12 of the non-FINRA 
member firms that had the most significant off-member-exchange trading 
volume in equities in April 2023 were to join FINRA, the median initial 
cost \382\ of the amendments for these firms would be about $95,000 and 
the median ongoing annual costs would be about $1.07 million. The 
Commission estimates that, if all 64 non-FINRA member firms as of April 
2023 were to join FINRA, the median initial costs would be about 
$95,000 and median ongoing annual costs would be about $103,416.\383\ 
Some commenters stated that the costs of FINRA registration are 
substantial and are likely to have a profound economic impact on small 
non-FINRA member firms.\384\ While the Commission agrees that the costs 
of FINRA membership are significant, the aggregate costs for the subset 
of 12 largest non-FINRA member firms represent the majority 
(approximately 76%) of the aggregate ongoing costs potentially stemming 
from the amendments, and these large non-member firms are more readily 
able to bear such costs through economies of scale and greater economic 
profits. The Commission believes that smaller non-FINRA member firms as 
well as new entrants will experience much lower costs. In particular, 
the initial costs for such firms will be close to the lower estimates 
discussed below, because these costs are largely dependent on the size 
and complexity of the firms. Additionally, because smaller firms and 
new entrants have lower trading activity, the ongoing costs will also 
be significantly lower as ongoing costs are highly impacted by said 
trading activity. Finally, any non-FINRA member could choose to avoid 
these costs and remain exempt from Association membership by joining 
all exchanges on which they trade but do not currently carry 
membership.
---------------------------------------------------------------------------

    \382\ Initial costs include the FINRA membership application fee 
and fees associated with employing outside counsel to assist with 
the application, See Table 3, infra.
    \383\ See Table 3 and Table 4, infra, for a breakdown of these 
costs. The Commission estimates that the total aggregate initial and 
ongoing annual cost of the amendments across the 12 largest non-
FINRA member firms (all 64 non-FINRA member firms) is approximately 
$31 million ($45 million), not inclusive of potential TRACE 
reporting costs set forth in section V.C.2.c, infra. Firms with no 
trading volume in April 2023 are included in these estimates. See 
supra section II.B. They are unlikely to join FINRA because 
generally firms that do not effect transactions in, or induce or 
attempt to induce the purchase or sale of, any security other than 
transactions they effect in securities solely on a national 
securities exchange of which they are members are not required to 
join FINRA under section 15(b)(8) of the Act. Therefore, these firms 
are less likely to incur initial and/or ongoing FINRA membership 
costs, and by including them in the costs estimates, the Commission 
likely has overestimated significantly the total initial and ongoing 
annual costs.
    \384\ See, e.g., Nasdaq Letter at 4; Cboe Letter at 7.
---------------------------------------------------------------------------

a. Costs of Joining an Association
    Based on discussions with FINRA,\385\ and industry participants, 
the direct compliance costs on non-FINRA member firms of joining FINRA 
are composed of FINRA membership application fees and any legal or 
consulting costs necessary for effectively completing the application 
to become a member of FINRA (e.g., ensuring compliance with FINRA rules 
including drafting policies and procedures as may be required).
---------------------------------------------------------------------------

    \385\ See also FINRA Letter at 5-7.
---------------------------------------------------------------------------

    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.\386\ The initial membership fee for FINRA is $7,500 for firms 
with ten or fewer representatives registered with FINRA, $12,500 for 
firms with 11 to 100 representatives registered with FINRA, and $20,000 
for firms with 101 to 150 representatives registered with FINRA.\387\ 
Based on its knowledge of the size and business models of non-FINRA 
member firms, the Commission believes that the median application fee 
would be $12,500 and that most non-FINRA member firms would not incur 
FINRA application fees exceeding $20,000.\388\
---------------------------------------------------------------------------

    \386\ See FINRA By-Laws, Schedule A, section 4.
    \387\ Id.
    \388\ Based on 2022 FOCUS data, no non-FINRA member firm has 
more than 150 registered representatives. FINRA stated that ``FINRA 
believes that most non-member firms would not incur application fees 
exceeding $12,500.'' See FINRA Letter at 12.
---------------------------------------------------------------------------

    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 be a member of 
FINRA. Some firms might choose to perform this legal work internally 
while others may use outside counsel for the initial membership 
application. In making this choice, non-FINRA member 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 or the 
Commission. Based on conversations with industry participants that 
assist with FINRA membership, for non-FINRA member firms that choose to 
employ outside counsel to assist with their FINRA membership 
application, the cost of such counsel ranges from approximately $40,000 
to $125,000, with a midpoint of $82,500. FINRA stated in a comment 
letter that ``FINRA anticipates being able to process most of these new 
membership applications pursuant to the expedited process within 60 
days after submission of the application.'' \389\ Factors affecting the 
specific costs and anticipated timeframe

[[Page 61885]]

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.
---------------------------------------------------------------------------

    \389\ See id. at 12-13.

              Table 3--Median Firm Implementation Costs \1\
------------------------------------------------------------------------
                             Cost                                Median
------------------------------------------------------------------------
Application to join FINRA....................................    $12,500
Legal consulting.............................................     82,500
                                                              ----------
    Total....................................................     95,000
------------------------------------------------------------------------
\1\ Medians are used where possible. Cost estimates are reported as
  ranges for legal consulting and compliance work; for these estimates,
  the midpoint is used.

b. Costs of Maintaining an Association Membership
    With respect to ongoing costs, 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 GIA; and the TAF and section 3 
fees, among others.\390\
---------------------------------------------------------------------------

    \390\ There are additional fees associated with maintaining a 
FINRA membership (e.g., CAT fees). There are also additional 
continuing education and testing requirements, which will impose 
costs upon firms joining FINRA. Additionally, there are de minimis 
fees (branch registration fee and system processing fee, among 
others). See FINRA By-Laws, Schedule A. The Commission also believes 
that non-FINRA member firms would not need to register additional 
associated persons because the exchange SRO rules are already 
comprehensive in this regard. See infra section V.C.2.d. These 
additional fees are not quantified since their estimation requires 
unavailable specialized firm data. Nonetheless, the Commission 
believes that the fees specified in Table 4 represent the vast 
majority of ongoing FINRA membership costs.
---------------------------------------------------------------------------

    With certain assumptions, the Commission attempted to estimate 
direct compliance costs that a non-FINRA member firm is likely to face 
to comply with the amendments. The estimates apply primarily to the 12 
non-FINRA member firms that have significant off-member-exchange 
trading activities in equities; smaller firms will face lower costs 
compared to these 12 firms because they have less revenue and trading 
volume that would be subject to GIA, TAF, and section 3 fees. However, 
non-FINRA member firms may already indirectly bear some of these costs, 
as they may be passed through by FINRA member counterparties or 
executing brokers. Ongoing annual cost estimates are broken down in 
Table 4.
    The annual GIA generally requires members to pay a percentage of 
the member firm's total annual revenue based on a graduated scale.\391\ 
The magnitude of the annual GIA is based on the total annual revenue, 
excluding commodities income, reported by the member firm on its FOCUS 
Form Part II or IIA.\392\ Based on 2022 FOCUS Form data from the 12 
aforementioned non-FINRA member firms, the Commission has determined 
that the average annual total revenue of non-FINRA member firms is 
approximately $1.2 billion, with a median of $491 million.\393\ FINRA's 
graduated GIA scale results in a median GIA of $327,870 for the 12 
large non-FINRA member firms and a median GIA of $33,655.65 for all 64 
non-FINRA member firms as of April 2023.\394\
---------------------------------------------------------------------------

    \391\ See FINRA By-Laws, Schedule A. For example, FINRA imposes 
a 2023 GIA as follows: (1) $1,200 on a member firm's annual gross 
revenue up to $1 million; (2) a charge of 0.1511% on a member firm's 
annual gross revenue between $1 million and $25 million; (3) a 
charge of 0.3232% 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.
    \392\ See FINRA By-Laws, Schedule A, section 2. See also FOCUS 
Report Form X-17A-5, Part II and IIA.
    \393\ Based on 2022 Quarterly Part II/IIA FOCUS data.
    \394\ ($1,200 for the first $1 million of revenue) + (0.1511% x 
annual revenue greater than $1 million up to $25 million) + (0.3232% 
x annual revenue greater than $25 million up to $50 million) + 
(0.0644% of annual revenue greater than $50 million up top $100 
million) + (0.0454% of annual revenue greater than $100 million to 
$5 billion) + (0.0494% of annual revenue greater than $5 billion up 
to $25 billion) + (0.1063% of annual revenue greater than $25 
billion). Although the average annual total revenue exceeds the 
median annual total revenue, there are a number of firms that have 
low GIA, which causes the midpoint of GIA to exceed the average GIA. 
Non-FINRA member firms vary in size. GIA for the 12 largest firms 
used in these calculations, is anticipated to be far larger than for 
the remaining smaller non-FINRA member firms. See FINRA By-Laws, 
Schedule A, section 1(c). The total ongoing annual GIA cost for the 
12 largest non-FINRA member firms (all 64 non-FINRA member firms) is 
approximately $8 million ($11.5 million).
---------------------------------------------------------------------------

    The magnitude of the TAF depends on the transaction volume of a 
FINRA member that is covered by the TAF as described in the FINRA By-
Laws.\395\ The Commission estimates that off-member-exchange equity and 
options trading by the 12 large non-FINRA member firms would generate a 
median incurred TAF of around $119,255.85 with an average TAF of 
$304,994.44.\396\ The Commission believes that the TAF for non-FINRA 
member firms not among the 12 identified large non-FINRA member firms 
would be far lower because the median non-FINRA member firm has far 
lower trading volume than the typical firm of the 12 identified in the 
data.\397\ Specifically, the Commission estimates that the median 
(average) annual TAF for all 64 non-FINRA member firms would be 
$6,746.92 ($68,433.18).\398\
---------------------------------------------------------------------------

    \395\ See FINRA By-Laws, Schedule A, section 1(b).
    \396\ Insofar as options trading is concerned, the estimated TAF 
includes trading activity on an exchange where a firm is not a 
member. If a firm's equity or options trading activity is on an 
exchange where it is a member, it does not incur the TAF, and if a 
firm's activity is on an exchange where it is not a member the 
activity incurs the TAF unless it is covered by an exemption in 
FINRA's By-Laws. See infra note 403 and accompanying test; see also 
FINRA By-Laws, Schedule A, section (1)(b)(2)(F). The Commission does 
not have information on what proportion of non-FINRA member firm 
activity on any exchange where such a firm is not a member would 
qualify for exemption from the TAF under FINRA By-Laws. To the 
extent that such activity would qualify for a TAF exemption, the TAF 
estimates set forth herein may overestimate the actual TAF that 
firms would incur if they join FINRA. In addition, firms that join 
FINRA may be able to reduce their TAF cost by joining additional 
exchanges. Estimates of the TAF are based on the off-member-exchange 
sell volume reported to CAT for non-FINRA member firms. The 
estimated TAF is equal to estimated off-exchange equity sell volume 
x $0.000145 and options contract volume x $0.00244. The $0 minimum 
is associated with firms that have almost no off-member-exchange 
volume.
    \397\ See supra section III.A.
    \398\ The total ongoing annual TAF cost for the 12 largest non-
FINRA member firms (all 64 non-FINRA member firms) is approximately 
$3.7 million ($4.4 million).
---------------------------------------------------------------------------

    Some off-member-exchange trading by non-FINRA member firms may no 
longer be profitable when TAF is incurred. Several commenters expressed 
concerns that TAF costs would be significant.\399\ Consequently, non-
FINRA member firms may reduce their trading both on exchanges and off-
exchange after joining an Association.\400\ In May of 2015, FINRA 
issued a Regulatory Notice proposing to amend the TAF such that it 
would not apply to transactions by a proprietary trading firm effected 
on exchanges of which the firm is a member, to coincide with originally 
proposed changes to Rule 15b9-1. FINRA re-opened the comment period on 
its Regulatory Notice in December 2022, after the 2022 Re-
Proposal.\401\ And in June 2023, FINRA filed its TAF Amendment.\402\ 
FINRA's TAF Amendment will exempt proprietary trading firms when they 
trade securities on exchanges of which they are a member, which several

[[Page 61886]]

commenters supported.\403\ This change to the TAF will likely lower the 
cost for non-FINRA member firms to join an Association.\404\
---------------------------------------------------------------------------

    \399\ See, e.g., CTC Letter at 4; FIA PTG Letter at 4; PEAK6 
Letter at 4; STA Letter at 4.
    \400\ See supra section V.B.1 for more information on how firms 
may change their trading practices in response to the rule.
    \401\ See supra note 161.
    \402\ See supra note 146; see also supra note 162 and 
accompanying text.
    \403\ See, e.g., MMI Letter at 3; PEAK6 Letter at 4; STA Letter 
at 4.
    \404\ In the 2015 Proposing Release, supra note 1, the 
Commission solicited comment on the effect of the proposed TAF 
amendments, including the effect should the TAF be assessed to non-
FINRA member firms that choose to become FINRA members. With regard 
to the TAF, one commenter stated that ``[t]he potentially most 
significant impact from a transaction cost perspective is FINRA's 
Trading Activity Fee.'' See FIA PTG at 4. The Commission believes 
that proposed changes to TAF fees to exempt on-member-exchange 
trading activity might reduce the associated fees by as much as 75% 
(95%) for some firms trading in equity (options) markets. Based on 
discussions with FINRA, TAF relief could amount to nearly $9 million 
for some current non-member firms.
---------------------------------------------------------------------------

    In addition to the TAF, non-FINRA member firms that choose to join 
FINRA may incur additional section 3 fees. Using data on off-exchange 
equities trading during April 2023, the Commission estimated that 
section 3 fees incurred by the 12 large non-FINRA member firms due to 
their off-exchange trading would have a median incurred section 3 fee 
of $564,217.42 annually, with an average incurred section 3 fee of 
$1,455,114.27.\405\ The median (average) section 3 fee for all 64 non-
FINRA member firms as of April 2023 is estimated to be $3,013.56 
($303,595.36).\406\ Some of these fees may already be paid by non-FINRA 
member firms that engage the services of a member firm clearing broker. 
However, FINRA lacks the authority to assess section 3 fees against 
non-FINRA member firms, in which case FINRA may assess the fee to the 
member firm counterparty to the transaction. In these cases, the FINRA-
member may pass-through a portion of the fee to the non-FINRA member 
counterparty or executing broker. While these fees would represent a 
cost to non-FINRA member firms, the cost would 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-FINRA member firm.\407\
---------------------------------------------------------------------------

    \405\ Section 3 fees are estimated using non-FINRA member firm 
off-exchange sell dollar volume calculated in CAT. The section 3 fee 
obligation is calculated as: Non-FINRA member firm Sell Dollar 
Volume x $8.00/$1,000,000. The $8.00/$1,000,000 is the FINRA fee 
rate for Fiscal Year 2023. See FINRA By-Laws of the Corporation, 
Schedule A to the By-Laws of the Corporation, section 3--Regulatory 
Transaction Fee. See also Securities Exchange Act Release No. 96724 
(Jan. 23, 2023) and press release, Commission, Fee Rate Advisory #2 
for Fiscal Year 2023 (Jan. 23, 2023), available at https://www.sec.gov/news/press-release/2023-15.
    \406\ The total ongoing annual section 3 cost for the 12 largest 
non-FINRA member firms (all 64 non-FINRA member firms) is 
approximately $17.5 million ($19.5 million).
    \407\ Currently, when the sell side of an off-exchange 
transaction is a non-FINRA member firm, FINRA may assess the section 
3 fees on the buy side counterparty. See the discussion of section 3 
fees in section V.A.2, supra, for more information.
---------------------------------------------------------------------------

    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-FINRA member firms may choose to 
conduct ongoing compliance activities in-house while others may seek to 
outsource this work.\408\ Based on discussions with industry 
participants, the Commission estimated that the ongoing compliance cost 
for firms that outsource this work would range from $24,000 to $96,000 
per year, with a median of $60,000.\409\ In the case of some non-FINRA 
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.
---------------------------------------------------------------------------

    \408\ Ongoing compliance activities may include core accounting 
functions, updating policies and procedures, and updating forms 
filed with regulators.
    \409\ For firms that choose to do this work in-house, the 
Commission estimates that the costs of ongoing compliance may be 
less than $96,000. This figure assumes non-FINRA 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.
---------------------------------------------------------------------------

    FINRA members may also be required to pay the Personnel Assessment 
fee.\410\ The annual Personnel Assessment fee ranges from $160 to $180 
per employee and applies to principals or representatives in the FINRA 
member's organization. Using FOCUS data, the Commission estimates that 
the average non-FINRA member firm would incur a Personnel Assessment 
fee of no more than $2,400, and the median non-FINRA member firm would 
incur a Personnel Assessment fee of $0.\411\ The Commission further 
estimates that the maximum Personnel Assessment fee incurred by one of 
these non-FINRA member firms would be $22,250.
---------------------------------------------------------------------------

    \410\ See FINRA By-Laws, Schedule A, section 1(e).
    \411\ Based on 2022 FOCUS data, the number of registered 
representatives of non-FINRA member firms that connect directly to 
ATSs ranges from 0-163, with an average of 29 and a median of 0.
---------------------------------------------------------------------------

    The Commission estimates that the median ongoing cost for the 
identified largest 12 non-FINRA member firms would be $1,071,344 and 
the median ongoing cost for all 64 non-FINRA member firms would be 
$103,416. However, as discussed above, these costs could vary. The 
section 3 fees which make up a large portion of these costs are likely 
to be overestimated for reasons stated above. However, FINRA members 
currently pay section 3 fees and TAF when transacting on the buy-side 
with non-FINRA members. To the extent that these costs are currently 
passed on to non-FINRA members, both section 3 fees and TAF are likely 
to be overestimated.\412\
---------------------------------------------------------------------------

    \412\ Furthermore, to the extent that section 3 fees and TAF are 
not currently being passed on to non-members, the implementation of 
the amendments will result in a reduction of such fees for current 
members transacting on the buy-side that have been paying these fees 
in lieu of their non-member counterparties.

              Table 4--Median Firm Ongoing Annual Costs \1\
------------------------------------------------------------------------
                                       Median  (12
               Cost                   largest  non-    Median  (all  non-
                                      member  firms)     member  firms)
------------------------------------------------------------------------
Gross Income Assessment...........        $327,870.00         $33,655.65
Trading Activity Fee..............         119,255.85           6,746.92
Personnel Assessment..............                  0                  0
Section 3 Fee.....................         564,217.42           3,013.56
Compliance Work...................             60,000             60,000
                                   -------------------------------------
    Total.........................          1,071,344            103,416
------------------------------------------------------------------------
\1\ Non-FINRA members are recognized as of April 2023. See supra note
  394 and accompanying text. The TAF cost also represents a transfer
  from current non-FINRA member firms to current member firms. The TAF
  is calculated using off-exchange sell volume from CAT. 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. Median Personnel Assessment Fees are
  estimated to be zero based on analysis using FOCUS data. See supra
  note 410.


[[Page 61887]]

    In addition to the cost estimates discussed above, the Commission 
recognizes that both non-FINRA member firms and SROs would incur other 
direct and indirect costs because of the increased regulatory 
requirements of the amendments. Specifically, there would be compliance 
costs associated with regulation by FINRA. However, non-FINRA 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-FINRA member firms may pay to their current DEA. Alternatively, 
one commenter stated that if FINRA is not assigned as their DEA, then 
existing DEA fees paid to an SRO might be duplicative upon joining an 
Association.\413\ The Commission acknowledges the possibility of 
duplicate DEA fees in these circumstances but believes that Rule 17d-1 
could be utilized by FINRA and the exchange SROs to mitigate 
duplicative DEA financial responsibility oversight over their common 
members and Rule 17d-2 plans could similarly be utilized to mitigate 
the potential for duplicative SRO oversight over their common members 
in areas other than financial responsibility.\414\
---------------------------------------------------------------------------

    \413\ See Group One Letter at 3.
    \414\ For example, Rule 17d-1 authorizes the Commission to name 
a single SRO as the DEA to examine a common SRO member. 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. See supra section III.A.
---------------------------------------------------------------------------

    To the extent that they do not already do so, firms would face 
additional costs related to coming into compliance with Association 
rules. Additional costs would include actions that are required to 
accommodate normal supervision and examination by an Association. The 
Commission was not able to estimate these costs, although the costs 
would vary among non-FINRA member firms.
    Several commenters submitted estimates for the cost of becoming 
FINRA members.\415\ In addition, many commenters stated that FINRA fees 
would be substantial and constitute a considerable sum, believing that 
FINRA fees would be unduly burdensome and outweigh perceived 
benefits.\416\ Several commenters believed in particular that FINRA 
membership would be costly to proprietary trading firms with no 
customer business.\417\ One commenter stated that the Commission did 
not consider other costs associated with FINRA membership, including 
opportunity costs associated with FINRA examinations.\418\ The 
Commission evaluated the most significant costs of FINRA membership but 
acknowledges that being subject to regular examination by FINRA is an 
additional cost of FINRA membership. One commenter noted that 
additional regulatory costs associated with FINRA membership would be 
manageable compared to the cost of the TAF.\419\ As stated above, given 
that FINRA has amended the TAF, the ongoing costs could be lower than 
prior estimates. However, FINRA fees must be filed with the Commission 
and such fees must be consistent with the Exchange Act.
---------------------------------------------------------------------------

    \415\ See CTC Letter at 4 (``estimates the one-time costs to 
join FINRA, and the ongoing annual compliance costs for FINRA 
membership, to each be millions of dollars''), and FIA PTG Letter at 
4 (``it is very difficult to estimate the annual cost, but we would 
not be surprised if it is greater than $1,000,000 per year for some 
firms''). These estimates are higher than those presented by the 
Commission in Table 4, in part because these estimates do not 
incorporate FINRA's TAF relief amendment. As the estimates in Table 
4 are only for the 12 largest non-FINRA member firms, the cost for 
the average non-FINRA member firm is expected to be much lower.
    \416\ See, e.g., ABCV Letter at 2; Cboe Letter at 7; CTC Letter 
at 4; FIA PTG Letter at 4; Group One Letter at 3; Nasdaq Letter at 
2; STA Letter at 4; Virtu Letter at 5.
    \417\ See, e.g., ABCV Letter at 2; Cboe Letter at 7; CTC Letter 
at 4; FIA PTG Letter at 4; Group One Letter at 3; Nasdaq Letter at 
3; PEAK6 Letter at 4-5; STA Letter at 4.
    \418\ See MMI Letter at 3.
    \419\ See FIA PTG Letter at 4.
---------------------------------------------------------------------------

c. Costs of TRACE Reporting for Non-FINRA Member Firms That Trade U.S. 
Treasury Securities
    Additionally, to the extent that a firm trades fixed income 
securities, they will also have implementation and ongoing costs 
associated with TRACE reporting. The Commission believes that seven 
non-FINRA member firms have had significant trading activities in U.S. 
Treasury securities markets and, since they do not presently incur the 
costs of reporting U.S. Treasury (or non-U.S. Treasury) securities to 
TRACE, may currently have a competitive cost advantage over FINRA 
member broker-dealers. The Commission estimates that these non-member 
firms will each have an initial cost of $2,025, associated with setting 
up systems for TRACE reporting. This cost includes the Direct Circuit 
Connectivity Fee for TRACE reporting through Nasdaq, in which Nasdaq 
facilitates the reporting to TRACE. FINRA does not charge a Transaction 
Reporting Fee for trading activity in U.S. Treasury securities 
markets.\420\ The Commission estimates an aggregate ongoing cost for 
each firm of $125,100. There are three ways for firms to connect into 
TRACE. First, firms may directly report with the FIX protocol through 
Nasdaq, who is the vendor. Second, firms may use a third-party service 
bureau with FIX protocols to submit to TRACE. The costs of reporting 
via FIX protocols are outlined in Table 5. The Commission estimates the 
cost of third-party reporting to TRACE to be approximately $2,000 per 
month.\421\ Finally, firms with lower reporting requirements have the 
option of reporting using the Secure Web Interface known as FINRA TRAQS 
for a fee of $20 per month, which would allow these firms to avoid port 
fees and connection fees to Nasdaq's FIX reporting system. 
Additionally, costs for these firms might be significantly lower for 
firms with low volume, as the reporting cost is based on the volume. To 
the extent that non-FINRA member firms trade in other TRACE reportable 
securities, such firms would also have higher reporting costs. If those 
firms trade U.S. Treasury securities, their implementation costs are 
included in the Commission's estimates above and they will incur only 
the additional marginal costs caused by their volume in other TRACE-
reportable securities. However, to the extent that some non-FINRA 
member firms trade in other TRACE reportable securities but not U.S. 
Treasury securities, those firms will each incur implementation costs 
as described above. The Commission cannot estimate how many firms are 
in this group of non-FINRA member firms that trade TRACE-reportable 
securities but not U.S. Treasury securities because the Commission can 
identify non-FINRA member counterparties in TRACE only for U.S. 
Treasury securities transactions that occur on covered ATSs, as 
discussed previously.\422\
---------------------------------------------------------------------------

    \420\ TRACE charges a Transaction Reporting Fee for TRACE 
reported securities other than U.S. Treasury securities. The fee is 
as follows: $0.475/trade for trade size up to and including $200,000 
par value; $0.000002375 times the par value of the transaction 
(i.e., $0.002375/$1000) for trade size over $200,000 and up to and 
including $999,999.99 par value; $2.375/trade for trade size of 
$1,000,000 par value or more.
    \421\ See FINRA Rule 7730, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/7730. Firms may incur 
additional fees for trade cancellations or corrections.
    \422\ See supra section V.A.1.

       Table 5--Average Firm TRACE Reporting Implementation Costs
------------------------------------------------------------------------
                                                              Median or
                            Cost                             average \1\
------------------------------------------------------------------------
FIX Port Fee...............................................         $575
Direct Circuit Connectivity Fee for TRACE Reporting through        1,500
 Nasdaq....................................................

[[Page 61888]]

 
    Total..................................................        2,025
------------------------------------------------------------------------
\1\ Medians are used where possible. Direct Circuit Connection Fees can
  be found at http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.


       Table 6--Average Firm TRACE Reporting Ongoing Annual Costs
------------------------------------------------------------------------
                                                              Median or
                            Cost                             average \1\
------------------------------------------------------------------------
Systems Fees...............................................       $4,800
Data Fee...................................................       90,000
Nasdaq Connection Fee......................................       30,000
Rule 7730 Service Fee......................................          300
    Total..................................................      125,100
------------------------------------------------------------------------
\1\ The systems fee is calculated using Level II Full Service Web
  Browser Access fee for four datasets at $140 a month plus a
  subscription for four additional user IDs at $260 per month for a
  total of $400 per month multiplied by 12 months, for an annual systems
  fee of $4,800. Data Fees are calculated using $7,500 per month flat
  fee for the professional real time data display. Connectivity fee is
  calculated at $2,500 a month for an annual cost of $30,000. Fees can
  be found at https://www.finra.org/rules-guidance/rulebooks/finra-rules/7730 7730. Nasdaq FIX connection fees can be found at http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.

d. Costs of Joining Additional Exchanges Under the Rule as Amended
    Under the amendments, non-FINRA 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 certain off-exchange 
activity, some non-FINRA member firms might choose to join additional 
exchanges to be excluded from the requirement to become a member of an 
Association. Alternatively, these firms might 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. The compliance 
burden on non-FINRA member firms for joining an additional exchange is 
likely to be significantly less than that of joining FINRA as those 
non-FINRA 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. However, the aggregate cost of joining multiple exchanges would 
likely be more costly than the cost of joining FINRA.
    In addition to the registration costs, non-FINRA member firms 
joining additional exchanges as a result of the amendments will incur 
membership and related fees. To the extent that non-FINRA member firms 
choose to become members of additional exchanges, the fees associated 
with such memberships will vary depending on the type of access sought 
and the exchanges of which non-FINRA member firms choose to become 
members.
    The exchange membership fees that apply to non-FINRA member firms 
joining such exchanges will be those fees that apply to either 
introducing brokers or dealers or proprietary trading firms. This 
assumption is consistent with the fact that any brokers or 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-FINRA member firms.
    Furthermore, because all non-FINRA member firms are members of at 
least one exchange,\423\ they will have already completed a Form U4, to 
register associated persons.\424\ Non-FINRA member firms will not need 
to register additional associated persons because the exchange SRO 
rules already require them to register associated persons. All 
exchanges can access the Form U4 filings within the CRD which is 
maintained by FINRA.
---------------------------------------------------------------------------

    \423\ For a broker or dealer to possibly be exempt from the 
requirement to be an Association member currently or under the 
amendments, the broker or dealer must be a member of at least one 
exchange.
    \424\ Form U4 is the Uniform Application for Securities Industry 
Registration or Transfer. Representatives of brokers and dealers, 
investment advisers, or issuers of securities use Form U4 to become 
registered in the appropriate jurisdictions and/or with SROs. All 
SROs currently use Form U4. See, e.g., Cboe BYX Rule 2.5 
Interpretations and Policies .01(c), and Nasdaq PHLX Rule General 3, 
section 7.
---------------------------------------------------------------------------

    The estimates of the cost of joining additional exchanges are based 
on a review of membership-related fee structures of all twenty-four 
national securities exchanges. The view that the potential burden of 
joining additional exchanges will likely be less than that of joining 
FINRA includes the assumption that the costs imposed on non-FINRA 
member firms by the amendments will be membership fees, and not costs 
relating to trading, such as trading permit fees and connectivity fees. 
The Commission recognizes that membership alone in an exchange 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 fees associated with 
trading on an exchange are not the result of the amendments because, 
under the amendments, a non-FINRA member firm might continue to trade 
through another broker or dealer on an exchange as long as that non-
FINRA member firm is a member of every exchange on which it trades or 
is a member of FINRA. In other words, the amendments themselves do not 
impose the cost of connectivity and related fees, but only the costs 
associated with membership on exchanges on which non-FINRA member firms 
could trade. To the extent, therefore, that non-FINRA member firms 
continue to trade through other brokers or dealers in a manner 
consistent with how they currently operate, the amendments impose only 
the costs associated with membership.
    The estimates of the cost of joining additional exchanges aggregate 
all 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, a range for both the 
initial fee and the annual fee across exchanges is obtained. 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.\425\
---------------------------------------------------------------------------

    \425\ IEX does not assess any initial fees. See IEX Exchange Fee 
Schedule, available at https://exchange.iex.io/resources/trading/fee-schedule/(last visited July 20, 2023) (omitting any mention of 
an initial membership fee). Other exchanges do have initial 
application fees. See, e.g., Nasdaq ISE Fee Schedule, Options 7, 
section 9, available at https://listingcenter.nasdaq.com/rulebook/ise/rules/ise-options-7 (last visited July 20, 2023) (assessing a 
one-time application fee of $3,500 for an ``Electronic Access 
Member''); Membership Application for New York Stock Exchange LLC 
and NYSE American LLC at 2 (Oct. 2019), available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Application_for_Membership.pdf (last visited July 20, 2023) 
(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 July 20, 2023) 
(discussing the Nasdaq Application Fee of $2,000); Cboe Fee Schedule 
at 10 (June 30, 2022), available at https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf (last visited July 20, 2023) 
(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.
---------------------------------------------------------------------------

    Regarding monthly or annual membership fees, most exchanges'

[[Page 61889]]

ongoing monthly or annual membership fees generally range from $1,500 
to $7,200.\426\ Again, these ongoing exchange membership costs are 
generally much lower than the annual costs estimated for being a member 
of FINRA.
---------------------------------------------------------------------------

    \426\ See, e.g., Cboe BYX Exchange, Inc. Fee Schedule (eff. Nov. 
1, 2022), available at https://www.cboe.com/us/equities/membership/fee_schedule/byx/ (last visited July 20, 2023) (noting an annual 
membership fee of $2,500); Cboe EDGA Exchange, Inc. Fee Schedule 
(eff. Nov. 30, 2022), https://www.cboe.com/us/equities/membership/fee_schedule/edga/ (last visited July 20, 2023) (same); NYSE 
Chicago, Inc. Fee Schedule (updated Jan. 3, 2023), available at 
https://www.nyse.com/publicdocs/nyse/NYSE_Chicago_Fee_Schedule.pdf 
(last visited July 20, 2023) (assessing an annual membership fee of 
$7,200); MIAX Fee Schedule at 20 (Sept. 1, 2022), available at 
https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_09012022.pdf (last visited July 20, 2023) 
(assessing a monthly trading permit fee for an ``Electronic Exchange 
Member'' of $1,500).
---------------------------------------------------------------------------

    The costs of the amendments associated with joining additional 
exchanges are included in the total cost estimates for joining an 
Association provided above in this section.\427\ This is because, in 
the event that a non-FINRA member firm chooses to join one or more 
exchanges and not become a FINRA member, that firm would not incur any 
of the costs for joining an Association. The Commission believes that a 
firm may make this choice when the costs of joining FINRA exceed the 
costs of joining additional exchanges to cover all of the exchanges on 
which they currently trade. Consequently, the costs for such firms are 
expected to be no higher than the costs they are estimated to incur in 
joining FINRA. Thus, all firms will either join FINRA and incur the 
costs described above or join one or more exchanges and instead incur 
costs no higher than those described above, so that the total 
Association costs can be taken as an upper bound on the total costs 
over both possibilities.
---------------------------------------------------------------------------

    \427\ See supra note 383.
---------------------------------------------------------------------------

e. Policies and Procedures Related to the Narrowed Criteria for 
Exemption From Association Membership
    Non-FINRA 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 routing or 
stock-option order exemptions. To rely on the stock-option order 
exemption, the amendments will require non-FINRA member firms to 
establish, maintain, and enforce policies and procedures as discussed 
above.\428\ The Commission estimates that firms would incur a burden of 
8 hours in initially preparing these policies and procedures.\429\ 
Furthermore, the burden of maintaining and enforcing such policies and 
procedures, including a review of such policies at least annually, will 
be approximately 48 hours.\430\ The Commission estimated an initial 
implementation cost of approximately $2,561 and an annual ongoing cost 
of approximately $15,708 for non-FINRA member firms that wish to 
utilize the exemptions and perform this work internally; for firms that 
outsource this work, costs are likely to be higher.\431\ Firms that 
choose to join FINRA will not incur these costs as the exemptions would 
not be relevant.
---------------------------------------------------------------------------

    \428\ See supra section III.B.2.
    \429\ This figure is based on the following: (Compliance Manager 
at 5 hours) + (Compliance Attorney at 2.5 hours) + (Director of 
Compliance at 0.5 hours) = 8 burden hours per dealer. See infra note 
446. 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 brokers and dealers, 
such as Regulation SBSR. See also infra note 447.
    \430\ This figure is based on the following: (Compliance Manager 
at 30 hours) + (Compliance Attorney at 12 hours) + (Director of 
Compliance at 6 hours) = 48 burden hours per broker or dealer. See 
infra note 448.
    \431\ For firms that perform this work internally, the initial 
cost estimate assumes 5 hours of work performed by a Compliance 
Manager at an hourly rate of $293, 2.5 hours performed by Compliance 
Attorneys at an hourly rate of $346, and 0.5 hour of work performed 
by the Director of Compliance at an hourly rate of $461. The annual 
cost estimate assumes 30 hours of work by a Compliance Manager at an 
hourly rate of $293, 12 hours by Compliance Attorneys at an hourly 
rate of $346, and 6 hours by the Director of Compliance at an hourly 
rate of $461. 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 inflation 
and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead.
---------------------------------------------------------------------------

f. Indirect Costs
    In addition to possibly incurring costs related to joining 
exchanges, non-FINRA member firms that choose not to join an 
Association will lose the benefits of trading in off-member-exchange 
markets. As mentioned above, non-FINRA member firms are significant 
participants in off-exchange activity. Much of this trading is 
attributed to 12 non-FINRA member firms, and the activity level across 
those firms varies widely. The Commission estimates that those 12 non-
FINRA member firms executed $391 billion in off-exchange equity volume 
in September 2022, while the remaining non-FINRA member firms executed 
$49 billion. The Commission cannot estimate the likelihood of these 
firms choosing to cease off-exchange activity rather than joining an 
Association. However, given the large volume in off-exchange equity 
volume traded by non-FINRA members, the Commission believes that the 
probability of non-FINRA members ceasing off-exchange activity is very 
small.
    Finally, those firms that choose not to join an Association would 
be limited in their ability to route their own transactions to comply 
with the requirements of Regulation NMS and the Options Linkage 
Plan.\432\ Their transactions will have to be routed by an exchange of 
which they are a member or routed by a broker-dealer exclusively to 
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 between the 
exchange and the non-FINRA member firm.\433\
---------------------------------------------------------------------------

    \432\ The exemption related to routing to comply with Regulation 
NMS and the Options Linkage Plan is discussed in supra section 
III.B.1.
    \433\ Firms 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 or the 
Options Linkage Plan provisions to prevent trade-throughs) routed 
using technology inferior to the technology of their firm of choice.
---------------------------------------------------------------------------

D. Alternatives

1. Include a Floor Member Hedging Exemption
    The Commission could provide an exemption from Association 
membership if a dealer that meets the criteria of paragraphs (a) and 
(b) of the rule, conducts business on the floor of a single exchange, 
and its trading elsewhere is proprietary and solely for the purpose of 
hedging its floor-based exchange trading activity on its member 
exchange. The hedging exemption might be limited to firms that trade on 
the floor of a national securities exchange. Specifically, the 
alternative would provide that a dealer that conducts business on the 
floor of only a single national securities exchange may affect 
transactions in securities otherwise than on that 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 
floor-based exchange activity, by reducing or otherwise mitigating the 
risks thereof. This alternative also could require a dealer seeking to 
rely on this exemption to establish, maintain, and enforce written 
policies and procedures

[[Page 61890]]

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, and 
to 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 believes that this alternative could provide a 
limited exemption from Association membership that is consistent with 
the original design of Rule 15b9-1's exclusion for proprietary trading. 
Today, few dealers limit their quoting and other non-hedging trading 
activities to a particular exchange. Under this alternative, the 
registered dealers among this group that limit their primary trading 
business to a single exchange floor may continue to hedge the risk of 
that business by effecting securities transactions on another exchange 
or in the off-exchange market that are solely for the purpose of 
hedging the dealers' on-exchange activity, without such transactions 
triggering a requirement to join an Association.
    The Commission also believes that this alternative approach, and in 
particular the limitation of its coverage to dealers that engage in 
floor trading and are a member of only a single exchange, could be 
consistent with the public interest and the protection of investors. A 
dealer's hedging activity resulting from its trading activity on 
multiple exchanges of which the dealer is a member presents cross-
market surveillance concerns as previously discussed, and therefore 
FINRA would be in the best position to conduct regulatory oversight to 
the extent that the dealer's hedging transactions take place elsewhere 
than on exchanges of which it is a member. By contrast, so long as a 
dealer's hedging activity results from floor trading activity that is 
confined to a single exchange of which the dealer is a member, that 
exchange could be able to adequately supervise the hedging activities 
of the dealer, consistent with the public interest and protection of 
investors.
    In addition, requiring written policies and procedures, as 
described above, would facilitate exchange supervision of dealers 
relying on such floor member hedging exemption, as it could provide an 
efficient and effective way for the relevant exchange to assess 
compliance with the proposed exemption. This could further serve the 
public interest and help protect investors.
    Because the alternative hedging exemption for floor traders is 
intended to allow a dealer to reduce or otherwise mitigate its risk, 
such as position risk, incurred in connection with its exchange-based 
dealer activities, it would be limited to transactions for the dealer's 
own account. In addition, because the dealer would not itself be a 
member of any other national securities exchange on which hedging 
transactions may be effected, or of an Association, such transactions 
would need to be conducted with or through another registered broker or 
dealer that is a member of such other national securities exchange or a 
member of an Association (or of both). However, the Commission believes 
that this alternative exemption would currently apply to very few and 
as little as zero non-FINRA member firms. Given that so few non-FINRA 
member firms would qualify for the exemption, the Commission believes 
that there is little value in including such an exemption.
2. Exchange Membership Alternative
    The amendments, 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.\434\ Further, under the 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.\435\ The Commission has 
also considered requiring brokers and dealers to become a member of 
every exchange on which they trade and to become a member of an 
Association to trade off-exchange (``Exchange Membership 
Alternative'').
---------------------------------------------------------------------------

    \434\ The amendments provide limited exemptions for order 
routing to satisfy certain provisions of Regulation NMS and the 
Options Linkage Plan and for executing the stock leg of a stock-
option order.
    \435\ In order to trade on exchanges of which it is not a 
member, the firm would have to trade with or through another broker 
or dealer that is a member of that exchange.
---------------------------------------------------------------------------

    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-FINRA 
member firm trades off-exchange is present when a member or non-FINRA 
member firm trades on an exchange of which it is not a member (through 
a member of that exchange). The Commission continues to believe that 
the amendments adequately address the issue of establishing effective 
oversight of off-exchange activity and that the more onerous Exchange 
Membership Alternative would not provide any additional regulatory 
benefit beyond the benefits the amendments provide for several reasons. 
First, while some exchanges may lack specialized regulatory personnel 
to directly surveil their members' trading off-exchange, 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 
already has the resources necessary to surveil the activity of a member 
firm trading on an exchange of which it is not a member. In addition, 
while some exchanges do not have a specialized rule set to govern their 
members' activity in the off-exchange market, FINRA's rules are often 
consistent with the trading rules of exchanges on which members 
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, not requiring 
that the member firm also become a member of that exchange would not 
prevent FINRA from exercising jurisdiction over the matter.
    The Exchange Membership Alternative might have required firms to 
become members of more SROs than required under the amendments, which 
would impose additional costs. In particular, some non-FINRA member 
firms that would become member firms under the amendments would also 
need to become members of additional exchanges or cease trading on 
those exchanges. In addition, some current member firms would also need 
to become members of additional exchanges.
3. 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-FINRA member 
firm is a member but removing the exception for proprietary trading 
conducted with or through another registered broker or dealer. As 
discussed above,\436\ the Commission continues to believe that the 
magnitude of the de minimis allowance is no longer economically 
meaningful.\437\ Furthermore, the

[[Page 61891]]

Commission continues to believe that the commission sharing 
arrangements discussed previously \438\ are rarely, if ever, used.
---------------------------------------------------------------------------

    \436\ See supra section III.A.
    \437\ FINRA agreed that the de minimis exception should be 
eliminated in part because ATSs are ``typically interposed between 
[non-members] and other ATS subscribers, non-member PTFs can engage 
in substantial OTC trading, including with orders from ATS 
subscribers or other broker-dealers, without technically triggering 
the gross income limitation.'' See FINRA Letter at 3.
    \438\ See supra note 33.
---------------------------------------------------------------------------

4. Eliminate the Rule 15b9-1 Exemption
    The Commission could eliminate Rule 15b9-1 altogether, leaving no 
exemption from section 15(b)(8) of the Act. This would cause all 
current non-FINRA member firms that effect off-member-exchange 
securities transactions to be required by section 15(b)(8) to join 
FINRA, which could improve FINRA's ability to surveil activity of 
member firms off-member-exchange, as well as investigate potentially 
violative behavior.\439\ This improvement in FINRA's abilities may not 
be large relative to the adopted amendments due to the fact that the 
adopted exemptions are narrow. However, eliminating the exemption for 
firms that would qualify for the routing exemption or the stock-option 
order exemption may prove to unnecessarily increase the costs for such 
firms. The Commission also believes that the routing exemption and 
stock-option order exemption will provide important avenues for 
providing liquidity and, therefore, eliminating the exemptions may 
drive these firms from the market and lead to a reduction in liquidity 
and market quality.
---------------------------------------------------------------------------

    \439\ One commenter suggested, as an alternative to the 
amendments, that the Commission could impose ``a more limited FINRA 
membership that would provide for limited oversight covering the 
reporting of over-the-counter transactions to FINRA and related 
surveillance'' if said exemption were to be eliminated. See Virtu 
Letter at 3.
---------------------------------------------------------------------------

5. Mandate TRACE U.S. Treasury Securities Reporting Without Requiring 
Association Membership
    In order to address the reporting gap within U.S. Treasury 
securities trading by non-FINRA members, the Commission could require 
that all last sale U.S. Treasury securities transaction data be 
reported to and disseminated by TRACE. Some commenters suggested that 
this reporting requirement could improve transparency in the U.S. 
Treasury securities markets without imposing costs of Association 
membership.\440\
---------------------------------------------------------------------------

    \440\ See CTC Letter at 3; FIA PTG Letter at 3; Virtu Letter at 
2.
---------------------------------------------------------------------------

    However, since U.S. Treasury securities trade predominantly off-
exchange, the Commission believes that U.S. Treasury securities markets 
will benefit from enhanced regulatory supervision that comes with 
Association membership.\441\ FINRA stated that although non-FINRA 
member broker-dealers and non-broker-dealer firms were identified in 17 
percent of the surveillance alerts generated by FINRA's Treasuries 
manipulation patterns in 2020 and 2021, FINRA has no authority to 
address any potential market misconduct by non-FINRA members in these 
instances.\442\ Accordingly, the Commission agrees that Association 
membership will benefit U.S. Treasury securities and other fixed income 
markets under these circumstances by providing more effective oversight 
relative to the alternative of simply mandating TRACE reporting.
---------------------------------------------------------------------------

    \441\ Although most trading in U.S. Treasury securities is 
reported to TRACE and therefore surveilled by FINRA, this 
surveillance is not equivalent to the more extensive oversight that 
FINRA has over its members. Therefore, when FINRA encounters 
potentially problematic conduct by firms that are not FINRA members, 
its ability to investigate potential violations of, or enforce 
compliance with Federal securities laws, Commission rules, or FINRA 
rules is limited. See discussion in supra section III.A.
    \442\ See FINRA Letter at 10; supra note 119; see also Better 
Markets Letter at 7.
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

    Certain provisions of the proposed amendments to Rule 15b9-1 
contain ``collection of information requirements'' within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA'').\443\ The Commission 
requested comment on the collection of information requirements in the 
2022 Re-Proposal and submitted relevant information to the Office of 
Management and Budget (``OMB'') for review in accordance with the PRA 
and its implementing regulations.\444\ The title of this new collection 
of information is ``Rule 15b9-1 Exemptions.'' 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 OMB control 
number. The Commission has received an OMB control number (3235-0743) 
for this collection of information. As discussed in section III.B, the 
amendments to Rule 15b9-1 require brokers or dealers relying on the 
stock-option order exemption to establish, maintain, and enforce 
certain written policies and procedures. Compliance with these 
collection of information requirements is mandatory for firms relying 
on the amended rule. The Commission received no comments on the 
estimates for the collection of information requirements included in 
the 2022 Re-Proposing Release.
---------------------------------------------------------------------------

    \443\ 44 U.S.C. 3501 et seq.
    \444\ 44 U.S.C. 3507; 5 CFR 1320.11.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The amendments to Rule 15b9-1 include a collection of information 
within the meaning of the PRA for brokers or dealers relying on the 
stock-option order exemption under the amended rule. The stock-option 
order exemption under the amendments to Rule 15b9-1 permits a 
qualifying broker or dealer to effect off-member-exchange securities 
transactions, with or through another broker or dealer, that are solely 
for the purpose of executing the stock leg of a stock-option order. 
Brokers or dealers relying on this exemption are required to establish, 
maintain, and enforce written policies and procedures reasonably 
designed to ensure and demonstrate that such transactions are solely 
for the purpose of executing the stock leg of a stock-option order. In 
addition, such brokers or dealers are 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 amended Rule 15b9-1 will 
be used by the Commission and SROs to understand how brokers and 
dealers relying on the exemption evaluate whether the off-member-
exchange securities transactions that they effect are solely for the 
purpose of executing the stock leg of a stock-option order and, more 
generally, how such brokers and dealers are complying with the 
requirements of the exemption and Rule 15b9-1. These policies and 
procedures will be used generally by the Commission as part of its 
ongoing efforts to examine and enforce compliance with the Federal 
securities laws, including section 15(b)(8) of the Act and Rule 15b9-1 
thereunder. In addition, SROs may use the information to monitor and 
enforce compliance by their members with applicable SRO rules and the 
Federal securities laws.

C. Respondents

    The Commission believes that a small number of brokers or dealers 
will rely on the stock-option order exemption. The Commission estimates 
that, based on publicly available information reviewed covering the end 
of April 2023, there are approximately 64 broker-dealers registered 
with the Commission that are members of an exchange but not members of 
an Association. The Commission believes that some, but not all, of 
these broker-dealers will likely

[[Page 61892]]

choose to avail themselves of the stock-option order exemption, because 
not all of them handle stock-option orders or, for those that do handle 
stock-option orders, they may effect the execution of stock leg 
components of those orders on an exchange where they are a member. The 
Commission estimates that 17 firms could potentially rely on the stock-
option order exemption and would therefore be required to comply with 
the policies and procedures requirement.\445\ The Commission believes 
that some of these 17 firms could want the ability to effect off-
member-exchange securities transactions that are not for the purpose of 
executing the stock leg of a stock-option order, and may, accordingly, 
choose to join an Association as a result of the amendments to Rule 
15b9-1.
---------------------------------------------------------------------------

    \445\ See supra section III.B.2.
---------------------------------------------------------------------------

D. Total Initial and Annual Reporting and Recordkeeping Burdens

    The Commission estimates that the one-time, initial burden for a 
broker or dealer to establish written policies and procedures as 
required under amended Rule 15b9-1 will be approximately 8 hours.\446\ 
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 policies and procedures in the amended 
rule are limited to those transactions that are solely for the purpose 
of executing the stock leg of a stock-option order. In addition, the 
Commission estimates that the annual burden of maintaining and 
enforcing such policies and procedures, including a review of such 
policies at least annually, will be approximately 48 hours for each 
broker or dealer.\447\ 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 
stock-leg transactions as they relate to the broker's or dealer's 
activities and maintaining copies of the policies and procedures for 
the period of time required by the amended rule.
---------------------------------------------------------------------------

    \446\ This figure is based on the following: (Compliance Manager 
at 5 hours) + (Compliance Attorney at 2.5 hours) + (Director of 
Compliance at 0.5 hour) = 8 burden hours per broker or dealer.
    \447\ This figure is based on the following: (Compliance Manager 
at 30 hours) + (Compliance Attorney at 12 hours) + (Director of 
Compliance at 6 hours) = 48 burden hours per broker or dealer.
---------------------------------------------------------------------------

    The Commission estimates that the initial, first year burden 
associated with amended Rule 15b9-1 will be 56 hours per broker or 
dealer, which corresponds to an initial aggregate burden of 952 
hours.\448\ The Commission estimates that the ongoing annualized burden 
associated with Rule 15b9-1 will be 48 hours per broker or dealer, 
which corresponds to an ongoing annualized aggregate burden of 816 
hours.\449\
---------------------------------------------------------------------------

    \448\ This figure is based on the following: ((8 burden hours 
per broker or dealer) + (48 burden hours per broker or dealer)) x 
(17 brokers and dealers) = 952 burden hours during the first year. 
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 Securities 
Exchange Act Release No. 74244 (Feb. 11, 2015) 80 FR 14564, 14683 
(Mar. 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 policies and procedures under amended Rule 
15b9-1 are much more limited in nature.
    \449\ This figure is based on the following: (48 burden hours 
per broker or dealer) x (17 brokers and dealers) = 816 ongoing, 
annualized aggregate burden hours.
---------------------------------------------------------------------------

E. Collection of Information is Mandatory

    All of the collection of information discussed above is 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.\450\
---------------------------------------------------------------------------

    \450\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing 
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------

G. Retention Period for Recordkeeping Requirements

    Brokers or dealers seeking to take advantage of the stock-option 
order exemption will be required to preserve a copy of their policies 
and procedures in a manner consistent with Rule 17a-4 \451\ until three 
years after the date the policies and procedures are replaced with 
updated policies and procedures.
---------------------------------------------------------------------------

    \451\ 17 CFR 240.17a-4. Registered brokers and dealers are 
already subject to existing recordkeeping and retention requirements 
under Rule 17a-4. However, amended Rule 15b9-1 contains a 
requirement that a broker or dealer relying on the stock-option 
order exemption 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. The burdens associated with this recordkeeping 
obligation have been accounted for in the burden estimates discussed 
above for amended Rule 15b9-1.
---------------------------------------------------------------------------

VII. Regulatory Flexibility Act Certification

    The RFA requires that Federal agencies, in promulgating rules, 
consider the impact of those rules on small entities.\452\ Section 3(a) 
of the RFA requires the Commission to undertake a regulatory 
flexibility analysis of the impact of the rule amendments on small 
entities unless the Commission certifies that the rule amendments would 
not have a significant economic impact on a substantial number of small 
entities.\453\ For purposes of Commission rulemaking in connection with 
the RFA,\454\ 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 17 CFR 240.17a-5(d) 
(``Rule 17a-5(d)''),\455\ or, if not required to file such statements, 
a broker or 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 (2) is not affiliated with any person (other than a natural person) 
that is not a small business or small organization.\456\
---------------------------------------------------------------------------

    \452\ 5 U.S.C. 601 et seq.
    \453\ 5 U.S.C. 605(b).
    \454\ Although 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 
rulemaking, are set forth in 17 CFR 240.0-10 (Rule 0-10 under the 
Exchange Act). See Securities Exchange Act Release No. 18451 (Jan. 
28, 1982), 47 FR 5215 (Feb. 4, 1982) (File No. AS-305).
    \455\ Rule 17a-5(d) under the Exchange Act.
    \456\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    In the 2022 Re-Proposal, after an examination of FOCUS data for the 
then-active broker-dealers registered with the Commission, the 
Commission certified, pursuant to section 605(b) of the RFA, that 
amended Rule 15b9-1 would not, if adopted, have a significant impact on 
a substantial number of small entities.\457\ One commenter disagreed 
with the Commission's certification, stating that there are 39 non-
FINRA members of Nasdaq exchanges, 13 of which are overseen by Nasdaq 
PHLX LLC as the DEA.\458\ The commenter further stated that certain of 
those members trade off-exchange and would not be eligible for the re-
proposed exemptions in amended Rule 15b9-1, and that the economic 
impact of the rule amendments on these members would

[[Page 61893]]

be significant based on the Commission's estimate of the costs of FINRA 
membership.\459\ However, the commenter did not specify whether any of 
its 39 non-FINRA members are small entities under RFA standards or 
identify those non-FINRA members. Specifically, the commenter did not 
assert that any of these non-FINRA members have total capital of less 
than $500,000 and are not affiliates of any person (other than a 
natural person) that is not a small business or small organization.
---------------------------------------------------------------------------

    \457\ See 5 U.S.C. 605(b). See also 2022 Re-Proposal, supra note 
1, 87 FR 49972-73.
    \458\ See Nasdaq Letter at 4.
    \459\ See id.
---------------------------------------------------------------------------

    The Commission re-examined recent FOCUS data for the approximately 
3,500 active broker-dealers registered with Commission as of April 
2023, including the 64 non-FINRA member broker-dealer firms that the 
Commission identified as of April 2023.\460\ Based on this re-
examination, the Commission estimates that not more than three of the 
non-FINRA member broker-dealer firms have total capital of less than 
$500,000 and are not affiliates of any person (other than a natural 
person) that is not a small business or small organization and would, 
as a result, be considered small entities under RFA standards. These 
three small firms could be significantly impacted by the adopted rule 
amendments because they could be required to become a member of FINRA 
under section 15(b)(8) of the Act, if they effect off-member-exchange 
securities transactions and do not qualify for one of the adopted 
exemptions.\461\
---------------------------------------------------------------------------

    \460\ See supra section II.B.
    \461\ See supra section III. The costs of FINRA membership are 
discussed in detail section V, supra. In addition, section V.D, 
supra, discusses the alternatives considered by the Commission. As 
discussed supra in section III.A, these three firms are not among 
the 12 largest non-FINRA member broker-dealer firms identified by 
the Commission as of April 2023, and so, as discussed in that 
section as well as section V.C.2 supra, their initial and ongoing 
FINRA membership costs, should they join FINRA, likely would be low, 
suggesting that, while they would be significantly impacted if they 
are required to join FINRA as a result of the adopted rule 
amendments, their trading businesses nevertheless might not be 
materially impeded by the costs of FINRA membership.
---------------------------------------------------------------------------

    Of the approximately 3,500 broker-dealers registered with the 
Commission, 786 qualify as small entities because they have total 
capital of less than $500,000 and are not affiliates of any person 
(other than a natural person) that is not a small business or small 
organization.\462\ Since three of these small broker-dealer entities 
were not FINRA members as of April 2023, the Commission estimates that 
approximately 783 of these small broker-dealer entities are already 
registered with FINRA. The activities of these 783 FINRA member broker-
dealers could be impacted by the amendments to Rule 15b9-1 because the 
amendments have changed the terms upon which they could deregister from 
FINRA. Specifically, they will not be able to deregister with FINRA 
unless they comply with Rule 15b9-1, as amended, which, compared to the 
pre-amendment rule, sets forth much narrower grounds upon which a 
broker-dealer may be exempt from FINRA membership. Because the 
Commission estimates that not more than three small entities will be 
significantly impacted by the amendments to Rule 15b9-1, compared to 
786 total small entities that could be impacted by the rule amendments, 
the Commission does not believe that a substantial number of small 
entities will be significantly impacted by the amendments to Rule 15b9-
1. Therefore, the Commission certifies that the amendments to Rule 
15b9-1 will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \462\ Data from FOCUS for Quarter 2 of 2023.
---------------------------------------------------------------------------

VIII. Other Matters

    If any of the provisions of this rule, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act, the Office of Information 
and Regulatory Affairs has designated these rules as not a major rule, 
as defined by 5 U.S.C. 804(2).

Statutory Authority

    The Commission is adopting the final amendments contained in this 
release under the authority set forth in the Exchange Act, 15 U.S.C. 
78a et seq., and particularly sections 3, 15, 15A, 17, 19, 23, and 36 
thereof.

List of Subjects in 17 CFR Part 240

    Brokers, Dealers, Registration, Securities.

Text of Amendments

    For the reasons set out in the preamble, the Commission is amending 
title 17, chapter II of the Code of Federal Regulations as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
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, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 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); and Pub. L. 
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise 
noted.
* * * * *

0
2. Section 240.15b9-1 is revised to read as follows:


Sec.  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 broker or dealer may effect transactions in securities 
otherwise than on a national securities exchange of which the broker or 
dealer is a member that result solely from orders that are routed by a 
national securities exchange of which the broker or dealer is a member 
to comply with Sec.  242.611 of this chapter or the Options Order 
Protection and Locked/Crossed Market Plan; or
    (2) A broker or dealer may effect transactions in securities 
otherwise than on a national securities exchange of which the broker or 
dealer is a member, with or through another registered broker or 
dealer, that are solely for the purpose of executing the stock leg of a 
stock-option order. A broker or dealer seeking to rely on this 
exception shall establish, maintain and enforce written policies and 
procedures reasonably designed to ensure and demonstrate that such 
transactions are solely for the purpose of executing the stock leg of a 
stock-option order. Such broker or dealer shall preserve a copy of its 
policies and procedures in a manner consistent with Sec.  240.17a-4 
until three years after the date the policies and procedures are 
replaced with updated policies and procedures.

    By the Commission.

    Dated: August 23, 2023.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18658 Filed 9-6-23; 8:45 am]
BILLING CODE 8011-01-P