SEC Proposes Broker-Dealers in Off-Exchange Market to Become Members of National Securities Association

Proposed change to rule 15b9-1 requires off-exchange broker-dealers to fall under SEC and FINRA regulations. 

The proposed amendment enhances regulatory oversight of active proprietary trading firms, and more specifically high frequency traders. Targeting to restrict the exemption to broker-dealers with a business focused on an exchange floor.


Proposed New Rule: a broker-dealer would be exempt from having to become a member of a national securities association if it is a member of a national securities exchange, carries no customer accounts, and trades solely on an exchange of which it is a member (subject to the following exceptions). Public comments open through 6/1/2015 –  link below.

Two exceptions are provided for a broker-dealer trading solely on an exchange of which it is a member

  • A dealer that conducts business on the floor of a national securities exchange could effect transactions off the exchange, for the dealer’s own account with or through another registered broker-dealer, that are solely for the purpose of hedging the risks of its floor-based activities.
    • A dealer seeking this exception must establish, maintain and enforce written policies and procedures 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.
    • A dealer must preserve a copy of its policies and procedures for three years after the date the policies and procedures are replaced with updated policies and procedures.
  • A broker-dealer could effect transactions off the exchange that result from orders that are routed by the national securities exchange of which it is a member, to prevent trade-throughs on that national securities exchange consistent with the provisions of Rule 611 Regulation NMS.

nasdaq exchangeBackground: Presently rule 15b9-1 exempts broker-dealers from statutory requirements to become a member of a National Securities Association. The rule was originally intended to allow exchange-based specialists and floor members to conduct limited activities off the exchange of which they’re a member without being required to become a member.  With the emergence of cross-market proprietary trading firms engaged in high frequency trading strategies, the SEC sees a greater need to regulate. The SEC states in their Mar 25, 2015 press release, “Although the business of these firms is not focused on an exchange floor, and they are responsible for a substantial percentage of the trading volume in the off- exchange market, many are not members of a national securities association because they have been able to rely on the broad proprietary trading exemption in Rule 15b9-1.”

SEC – Public Comment deadline: The SEC is open for public comment on the proposed rule amendment for 60 days, ending 06/01/2015.  Submit a formal comment on the Federal Register.


Download Federal Register Report Released by SEC regarding the Proposed Action

Federal Register _ Exemption for Certain Exchange Members


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