[Federal Register Volume 87, Number 155 (Friday, August 12, 2022)]
[Proposed Rules]
[Pages 49930-49973]
[FR Doc No: 2022-16711]

Vol. 87

Friday,

No. 155

August 12, 2022

Part II

 Securities and Exchange Commission

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17 CFR Part 240

Exemption for Certain Exchange Members; Proposed Rule

Federal Register / Vol. 87, No. 155 / Friday, August 12, 2022 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-95388; File No. S7-05-15]
RIN 3235-AN17

Exemption for Certain Exchange Members

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is re-
proposing amendments to a rule under the Securities Exchange Act of
1934 (``Act'' or ``Exchange Act'') that exempts certain registered
brokers or dealers from membership in a registered national securities
association (``Association''). The re-proposed amendments would replace
the rule's de minimis allowance, including the exclusion therefrom 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 re-proposed amendments would
create exemptions for such a registered broker or dealer that effects
transactions off 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: Comments should be received on or before September 27, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.html); or
     Send an email to [email protected]. Please include
File Number S7-05-15 on the subject line; or

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-15. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (http://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Operating conditions may limit access to the
Commission's public reference room. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Michael Bradley, Assistant Director,
at<PHONE_NUMBER>; David Michehl, Special Counsel, at<PHONE_NUMBER>;
Nicholas Shwayri, Special Counsel, at<PHONE_NUMBER>; Vince Vuong,
Special Counsel, at<PHONE_NUMBER>; or Mark Sater, Attorney-Advisor, at
(202) 551-4729, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
    A. Current Regulatory Framework
    B. Need for Amendment
    C. 2015 Proposal
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
    C. No Floor-Member Hedging Exemption
IV. Effective Date and Implementation
V. General Requests for Comments
VI. 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
    a. Costs of Joining an Association
    b. Cost of Maintaining an Association Membership
    c. Costs of TRACE Reporting for Non-FINRA Member Firms That
Trade U.S. Treasury Securities
    d. Costs of Joining Additional Exchanges Under the Rule as
Amended
    e. Policies and Procedures Related to the Narrowed Criteria for
Exemption From Association Membership
    f. Indirect 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
    E. Request for Comment on Economic Analysis
VII. 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
    H. Request for Comments
VIII. Consideration of Impact on Economy
IX. Regulatory Flexibility Act Certification
X. Statutory Authority

I. Introduction

    Section 15(b)(8) of the Act \1\ 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.\2\ Section 15(b)(9) of the Act \3\
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. Pursuant to the authority
conferred by Section 15(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 a member of
a national securities exchange, carries no customer accounts, and 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'').\4\ 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'').\5\ Accordingly, a registered dealer
can rely on Rule 15b9-1 to remain exempt from Association membership
while engaging in unlimited proprietary trading of securities on any
national securities exchange of which it is not a member or in the off-
exchange market,\6\ so long as it 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.
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    \1\ 15 U.S.C. 78o(b)(8).
    \2\ Section 15(b)(8) applies to any security other than
commercial paper, bankers' acceptances, or commercial bills. Id.
    \3\ 15 U.S.C. 78o(b)(9).
    \4\ 17 CFR 240.15b9-1(a).
    \5\ 17 CFR 240.15b9-1(b). The current rule also states that the
de minimis allowance does not apply to income derived from
transactions through the Intermarket Trading System, and defines the
term ``Intermarket Trading System'' for purposes of the rule. 17 CFR
240.15b9-1(b)(2) and (c).
    \6\ ``Off-exchange'' as used herein means any securities
transaction that is covered by Section 15(b)(8) of the Exchange Act
that is not effected, directly or indirectly, on a national
securities exchange. See 17 CFR 240.600(b)(45) (defining ``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.
The Commission previously proposed to amend Rule 15b9-1 in 2015. See
Securities Exchange Act Release No. 74581 (March 25, 2015), 80 FR
18036 (April 2, 2015) (``2015 Proposing Release'' or ``2015
Proposal''). There, the Commission defined the term ``off-exchange''
differently, such that it applied only to transactions in exchange-
listed securities that were not effected, directly or indirectly, on
a national securities exchange. Id. at 80 FR 18037, n. 3. Here, the
definition of ``off-exchange'' encompasses transactions that are not
effected, directly or indirectly, on a national securities exchange
in both exchange-listed securities and securities that are not
listed on a national securities exchange, such as U.S. Treasury
securities and OTC equity securities, in order to more closely align
the definition with the full scope of securities transactions that
are covered by Section 15(b)(8) of the Exchange Act.
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    The securities markets have evolved dramatically in the forty-plus
years since the Commission adopted Rule 15b9-1. During that span, the
securities markets have transformed from being floor-based to being
mostly electronic, and registered dealers have emerged that engage in
significant, computer-based, cross-market proprietary trading activity.
Several proprietary trading firms that are registered dealers and
exchange members are not members of an Association, in reliance on Rule
15b9-1. These firms may effect significant securities transaction
volume elsewhere than on an exchange of which they are a member but are
not subject to Association oversight.
    Self-regulatory organization (``SRO'') \7\ regulation of each
broker or dealer is dependent upon the broker or dealer's individual
SRO membership status. Each SRO that operates an exchange has
responsibility for overseeing trading that occurs on the exchange it
operates. Because of this, SROs that operate an exchange 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
trading that occurs elsewhere than an exchange to which a broker or
dealer belongs as a member.\8\ Individual exchanges have expertise in
regulating their markets and historically have monitored market
activity specific to their own exchanges or have outsourced that
function to a third party. The Financial Industry Regulatory Authority,
Inc. (``FINRA''), the only Association currently, historically has
overseen cross-exchange and off-exchange securities trading
activity.\9\ But brokers and dealers that are not FINRA members are not
subject to FINRA's rules.\10\
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    \7\ An SRO is defined, in relevant part, as ``any national
securities exchange, registered securities association, or
registered clearing agency. . . .'' 15 U.S.C. 78c(a)(26).
    \8\ See Sections 15(b)(8), 15A, 17(d), 19(g) of the Act. 15
U.S.C. 78o(b)(8); 15 U.S.C. 78o-3; 15 U.S.C. 78q(d); 15 U.S.C.
78s(g). 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. 15 U.S.C. 78q(d); 15
U.S.C. 78s(g). Section 17(d)(1) of the Act provides that the
Commission, in allocating authority among SROs pursuant to Section
17(d)(1), shall ``take into consideration the regulatory
capabilities and procedures of the self-regulatory organizations,
availability of staff, convenience of location, unnecessary
regulatory duplication, and such other factors as the Commission may
consider germane to the protection of investors, cooperation and
coordination among self-regulatory organizations, and the
development of a national market system . . .'' 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. 15 U.S.C. 78o-3.
And as described above, section 15(b)(8) of the Exchange 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.
15 U.S.C. 78o(b)(8).
    \9\ 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.
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    As a result, when broker-dealer firms that are not FINRA members
effect securities transactions otherwise than on an exchange of which
they are a member, such as off-exchange or on exchanges where they are
not a member (collectively referred to herein as ``off-member-
exchange''),\11\ these firms are not all subject to the same set of
exchange rules and interpretations of those rules, which can vary
between exchanges. As discussed below,\12\ there are regulatory service
agreements (``RSAs'') among exchange SROs and FINRA, which have
provided benefits to SROs such as lower regulatory costs and have been
a component of FINRA's cross-market regulatory program. Importantly,
FINRA has the expertise regarding off-exchange trading, but under these
RSAs, for non-FINRA members that trade off-exchange and are members of
different exchanges, FINRA applies the rules of the different exchanges
using the exchanges' interpretations of those rules. 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. 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.
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    \11\ To be consistent with Rule 15b9-1, 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.
    \12\ See Section II.B infra.
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    In addition, SROs retain responsibility for regulatory oversight
under the RSAs; however, RSAs are voluntary, privately negotiated
agreements that can expire or be terminated, and accordingly, these
agreements may not in the future provide the stability of FINRA
oversight. Further, the Commission, of course, may bring enforcement
actions, including pursuant to referrals made by SROs, to

enforce compliance with the Exchange Act and applicable rules. But as
is also discussed below,\13\ the Exchange Act requires a robust layer
of SRO oversight over broker-dealers in addition to the Commission's
regulatory role. In light of the extent to which off-member-exchange
proprietary trading occurs today, the Commission believes that the SRO
layer of oversight should be enhanced by ensuring, as mandated by
Section 15(b)(8) of the Act, that an Association generally has direct,
membership-based oversight over broker-dealers that effect securities
transactions elsewhere than on an exchange where they are a member and
the jurisdiction to directly enforce their compliance with Federal
securities laws, Commission rules, and Association rules.
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    \13\ See sections II.A and II.B infra.
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    The Commission adopted Rule 15b9-1 several decades ago so that an
exchange member's limited 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.\14\ The Commission deemed it an appropriate exercise of its
statutory authority to subject such an exchange member to exchange-only
SRO oversight. But as stated above and described below, the securities
markets have transformed dramatically and have evolved to include
significant, cross-market electronic proprietary trading as a primary
business model, and firms engaging in such trading activity that are
exempt from Association membership, including important transaction
reporting requirements, by virtue of Rule 15b9-1. In this regard, the
Commission previously proposed to amend Rule 15b9-1 in 2015.\15\ After
the 2015 Proposal, FINRA established a transaction reporting regime
under which broker-dealers that are FINRA members must report U.S.
Treasury securities transactions. Some broker-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. Moreover, 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.\16\
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    \14\ See infra note 60 and accompanying text (discussing the
adoption of Rule 15b8-1, which was later renumbered to Rule 15b9-1).
    \15\ See 2015 Proposing Release, supra note 6.
    \16\ See FINRA Rule 6730--Transaction Reporting, Supplementary
Material .07--ATS Identification of Non-FINRA Member Counterparties
for Transactions in U.S. Treasury Securities.
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    The evolution of the markets--since Rule 15b9-1 was adopted and
since the Commission's proposed changes to Rule 15b9-1 in 2015--
presents a need to realign Rule 15b9-1 with the current market so that
the regulatory scheme more appropriately effectuates Exchange Act
principles regarding 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. Accordingly, the Commission is
re-proposing amendments to Rule 15b9-1 that would rescind the de
minimis allowance and proprietary trading exclusion, which generally
would require Association membership, pursuant to Section 15(b)(8) of
the Act, for any registered broker or dealer that effects securities
transactions elsewhere than on a national securities exchange of which
it is a member, subject to narrowed exemptions from Section 15(b)(8)'s
Association membership requirement that are applicable to 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.\17\
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    \17\ This proposal re-proposes, with certain modifications, the
amendments to Rule 15b9-1 that the Commission proposed in 2015. See
2015 Proposal, supra note 6. The 2015 Proposal contains additional
background information regarding the regulatory history in this area
and Rule 15b9-1. See 2015 Proposal, supra note 6, 80 FR at 18036-45.
Comments received in response to the 2015 Proposing Release are
available at https://www.sec.gov/comments/s7-05-15/s70515.shtml.
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II. Background

A. Current Regulatory Framework

    Self-regulation is a longstanding, key component of U.S. securities
industry regulation.\18\ All broker-dealers are required to be members
of an SRO, which sets standards, conducts examinations, and enforces
rules regarding its members.\19\ The Exchange Act sets forth a
framework for broker-dealer regulation that, in addition to Commission
oversight, requires this layer of SRO oversight, pursuant to which SROs
act as front-line regulators of their broker-dealer members.\20\
Although the Exchange Act provides a limited and targeted exception to
Association membership requirements for broker-dealers, its approach to
effecting supervision is relatively uniform: broker-dealers must be
members of the SROs that regulate the venues upon which they
transact.\21\ A related, overarching principle in the Exchange Act is
that the SRO best positioned to conduct regulatory oversight should
assume that responsibility.\22\ Correspondingly, SRO oversight of an
exchange's members and their trading on the exchange is primarily the
responsibility of the exchange, whereas SRO oversight of other trading
activity, such as off-exchange trading,\23\ is primarily the
responsibility of an Association.\24\
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    \18\ See Securities Exchange Act Release No. 50700 (November 18,
2004), 69 FR 71256 (December 8, 2004) (``Concept Release Concerning
Self-Regulation'').
    \19\ Id. (citing Section 15(b)(8) of the Act (15 U.S.C.
78o15(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 at 71257-58.
    \20\ 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.,
15 U.S.C. 78o, 17 CFR 240.15a-6--240.15b11-1, and 17 CFR 240.17a-1--
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., 15 U.S.C. 78s(d) and 15 U.S.C. 78s(e).
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),
19(g)(1), and 15A(b)(2) of the Act (15 U.S.C. 78f(b)(1), 78s(g)(1),
78o-3(b)(2)); 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).
    \21\ See 2015 Proposal, supra note 6, 80 FR at 18039.
    \22\ See supra note 8.
    \23\ See supra note 6.
    \24\ 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 Exchange Act.
References herein to ``broker'' or ``dealer'' or ``broker-dealer''
are to a broker or dealer that is registered with the Commission
pursuant to section 15 of the Exchange Act.
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    This framework is embodied by several Exchange Act statutory
provisions. When the Exchange Act was adopted in 1934, the exchanges
were the only SROs and were charged with regulating the activities of
their broker-dealer members. Congress soon recognized, however, that
the benefit of exchange regulation could be undermined by the absence
of a

complementary regulatory framework for the off-exchange market.
Consequently, in 1938, the Maloney Act established the concept of and
regulatory framework for Associations under Section 15A of the Exchange
Act. The Maloney Act states in its preamble that its purpose is ``[t]o
provide for the establishment of a mechanism of regulation among over-
the-counter brokers and dealers operating in interstate and foreign
commerce or through the mails, to prevent acts and practices
inconsistent with just and equitable principles of trade, and for other
purposes.'' \25\ In 1964, Congress passed Section 15(b)(8) of the
Exchange Act, which currently requires that a registered broker or
dealer join an Association unless it effects transactions solely on an
exchange of which it is a member.\26\
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    \25\ See Public Law 75-719, 52 Stat. 1070 (1938).
    \26\ As discussed in greater detail in the 2015 Proposal,
section 15(b)(8) as originally enacted, and Rule 15b9-1 as
originally adopted by the Commission (which was Rule 15b8-1 at that
time and later re-designated as Rule 15b9-1) provided for direct
Commission oversight of broker-dealers that effected transactions
off-exchange as an alternative to joining an Association. In 1983,
Congress amended the Act to eliminate the direct oversight of
broker-dealers by the Commission and affirmed the benefits of self-
regulation of broker-dealers directly by an Association. See 2015
Proposal, 63 FR at 18039-41; see also 15 U.S.C. 78o(b)(8), as
amended by Public Law 98-38, 97 Stat. 205, 206 (1983); H.R. Rep. No.
98-106, at 597 (1983) (citing a preference for self-regulation over
direct regulation by the Commission and noting, among other benefits
of self-regulation, that the National Association of Securities
Dealers (``NASD''), FINRA's predecessor, had available a broader and
more effective range of disciplinary sanctions to employ against
broker-dealers than had the Commission).
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    Additional statutory provisions contemplate coordination of broker-
dealer oversight among SROs. Section 19(g)(1) of the Exchange Act
requires every SRO 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, unless the SRO is relieved of this
responsibility pursuant to Section 17(d) or Section 19(g)(2) of the
Act.\27\ With respect to a broker or dealer that is a member of more
than one SRO (``common member''), Section 17(d)(1) 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.\28\ Without this relief, the
statutory obligation of each SRO would result in duplicative
examinations and oversight of common members.\29\ Section 17(d)(1) of
the Act provides that the Commission, in allocating authority among
SROs, shall ``take into consideration the regulatory capabilities and
procedures of the self-regulatory organizations, availability of staff,
convenience of location, unnecessary regulatory duplication, and such
other factors as the Commission may consider germane to the protection
of investors, cooperation and coordination among self-regulatory
organizations, and the development of a national market system . . .
.'' \30\ Among the SROs to which oversight responsibility is allocated
pursuant to 17d-2 plans, FINRA, as the only registered Association
currently, has coordinated with exchanges in the exercise of SRO
oversight over broker-dealers that are common members of FINRA and the
exchanges on which they trade securities.\31\
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    \27\ 15 U.S.C. 78q(d) and 78s(g)(2).
    \28\ 15 U.S.C. 78q(d)(1).
    \29\ In the Exchange Act Amendments of 1975 (Pub. L. 94-29, 89
Stat. 97 (1975), the ``1975 Amendments''), Congress recognized that,
at the time, the allocation of self-regulatory responsibilities
among SROs resulted in some cases in duplicative regulation of firms
that were members of multiple SROs and varying standards, both in
substance and enforcement, among SROs. S. Doc. No. 93-13 at 164-165
(1973). As a result, Congress adopted Section 17(d) of the Act,
which provides the Commission with the authority to allocate
regulatory responsibilities among SROs with respect to matters as to
which, in the absence of such allocation, such SROs would share
authority. 15 U.S.C. 78q(d).
    \30\ 15 U.S.C. 78q(d)(1). To implement section 17(d)(1), the
Commission adopted Rules 17d-1 and 17d-2 under the Act. 17 CFR
240.17d-1 and 17 CFR 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 Exchange Act Release No. 12352 (April 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 Exchange Act Release No. 12935 (October 28, 1976), 41 FR 49091
(November 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.
Under paragraph (c) of Rule 17d-2, the Commission may declare such a
plan effective if, after appropriate notice and opportunity for
comment, it finds that the plan is necessary or appropriate in the
public interest and for the protection of investors, to foster
cooperation and coordination among SROs, or to remove impediments to
and foster the development of a national market system and a
national clearance and settlement system and in conformity with the
factors set forth in Section 17(d) of the Act. Id. 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.
    \31\ 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''). Staff reports 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.
---------------------------------------------------------------------------

    FINRA, however, is primarily responsible for exercising SRO
oversight over broker-dealers' off-member-exchange securities trading
activities, such as when broker-dealers effect securities transactions
across markets that include exchanges where they are not a member or
the off-exchange market.\32\ In particular, FINRA regulates off-
exchange trading of equities, fixed income (including U.S. Treasury)
securities, and other products, and investigates and brings enforcement
actions against members for violations of its rules, the rules of the
Municipal Securities Rulemaking Board, and the Exchange Act and the
Commission rules thereunder.\33\ FINRA also conducts the vast majority
of broker and dealer examinations,\34\ and mandates broker and dealer
disclosures.\35\ FINRA also has developed rules and guidance tailored
to trading activity,\36\ and has developed surveillance technology and
specialized regulatory personnel to provide surveillance, supervision,
and enforcement of FINRA rules and the federal securities laws
applicable to activity occurring off-exchange.\37\

Further, FINRA has a detailed set of member conduct rules that apply to
all activities of a FINRA member firm, whether on- or off-exchange.\38\
---------------------------------------------------------------------------

    \32\ See Public Law 75-719, 52 Stat. 1070 (1938). Although FINRA
is the sole Association, the statute does not limit the number of
Associations.
    \33\ 15 U.S.C. 78o-3.
    \34\ Routine broker and dealer examinations are conducted by the
exchange SROs as well, and the Commission staff oversees the
examination efforts of all SROs. In addition, the Commission staff
also conducts risk-based examinations of brokers and dealers.
    \35\ 15 U.S.C. 78o-3. See, e.g., FINRA Rules 3130 (Annual
Certification of Compliance and Supervisory Processes), 4120
(Regulatory Notification and Business Curtailment), 4530 (Reporting
Requirements), 4540 (Reporting Requirements for Clearing Firms),
4560 (Short-Interest Reporting), and 6439 (Requirements for Member
Inter-Dealer Quotation Systems).
    \36\ See, e.g., FINRA Rules 5240 (Anti-Intimidation/
Coordination), 5250 (Payments for Market Making), 5210.02
(Publication of Transactions and Quotations--Self-Trades), and 6140
(Other Trading Practices). Exchanges have similar rules. See, e.g.,
NYSE Rules 4560 and 6140; Nasdaq Rules 5240 and 5250.
    \37\ See FINRA.org, FINRA 2021 Annual Financial Report,
available at https://www.finra.org/sites/default/files/2022-06/2021-FINRA-Financial-Annual-Report.pdf (last visited July 22, 2022).
    \38\ See FINRA Rule 2000 Series--Duties and Conflicts.
---------------------------------------------------------------------------

    In addition, FINRA has rules that support a comprehensive public
transparency regime with respect to off-exchange securities
transactions. One element of this regime is the requirement that FINRA
members report to FINRA all OTC Equity Security trades \39\ and off-
exchange NMS stock trades,\40\ in connection with which FINRA has
developed a detailed set of trade reporting rules.\41\ This transaction
information then becomes publicly available.\42\ FINRA also maintains
the Trade Reporting and Compliance Engine (``TRACE'') reporting system
for fixed income securities.\43\ FINRA introduced TRACE reporting
requirements for U.S. Treasury securities transactions in 2017, which
has enhanced the regulatory audit trail in that market.\44\ FINRA
publishes weekly aggregated transaction information and statistics on
U.S. Treasury securities on its website.\45\
---------------------------------------------------------------------------

    \39\ See FINRA Rule 6420(f) (defining ``OTC Equity Security'' to
mean any equity security that is not an ``NMS stock'' as that term
is defined in Rule 600(b) of SEC Regulation NMS; provided, however,
that the term ``OTC Equity Security'' shall not include any
Restricted Equity Security). See also FINRA Rule 6420(k) (defining
``Restricted Equity Security'' to mean any equity security that
meets the definition of ``restricted security'' as contained in
Securities Act Rule 144(a)(3)); 17 CFR 242.600(b) (defining ``NMS
stock'' as any NMS security other than an option, and defining ``NMS
security'' as any security or class of securities for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options). FINRA members are required to report transactions (other
than transactions executed on or through an exchange) in OTC Equity
Securities and Restricted Equity Securities to FINRA's OTC Reporting
Facility (``ORF''). See FINRA Rules 6410 and 6610; see also FINRA
Rule 6420(n) (defining ``OTC Reporting Facility'' as the service
provided by FINRA that accommodates reporting for trades in OTC
Equity Securities executed other than on or through an exchange and
for trades in Restricted Equity Securities effected under Securities
Act Rule 144A and dissemination of last sale reports).
    \40\ See FINRA Rule 6110 and the FINRA Rule 6000 Series
generally--Quotation, Order, and Transaction Reporting Facilities.
FINRA operates two Trade Reporting Facilities (``TRFs''), one
jointly with Nasdaq and another with the NYSE. The TRFs are FINRA
facilities for FINRA members to report NMS stock transactions
effected otherwise than on an exchange. See Exchange Act Release No.
54084 (June 30, 2006), 71 FR 38935 (July 10, 2006) (order approving
the Nasdaq TRF); Exchange Act Release No. 55325 (February 21, 2007),
72 FR 8820 (February 27, 2007) (notice of filing and immediate
effectiveness of a proposed rule change to establish the NYSE TRF).
In addition, 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 Exchange Act Release No. 46249 (July 24, 2002), 67 FR
49821 (July 31, 2002) (order approving the ADF); see also Exchange
Act Release No. 71467 (February 3, 2014), 79 FR 7485 (February 7,
2014) (order approving a proposed rule change to update the rules
governing the ADF).
    \41\ See FINRA Rule 6000 Series--Quotation, Order, and
Transaction Reporting Facilities, supra note 40; and FINRA Rule 7000
Series--Clearing, Transaction and Order Data Requirements, and
Facility Charges.
    \42\ Pursuant to effective national market system plans which
are also effective transaction reporting plans (as both terms are
defined in 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 and section VIII.B of the
Nasdaq UTP Plan. In addition, currently, Nasdaq UTP Plan Level 1
subscribers can obtain the OTC Equity Security transaction
information that is reported to FINRA's ORF and disseminated under
the FINRA--Trade Data Dissemination Service (TDDS). See UTPPlan.com,
UTP Plan Administration Data Request Form, available at https://www.utpplan.com/DOC/UTP_Data_Feed_Request.pdf (last visited July 22,
2022) (stating that direct access subscribers may request FINRA OTC
Data (FINRA OTC Equity Securities Rule 6400) as part of the Nasdaq
UTP Plan Level 1 service).
    \43\ See FINRA Rule 6700 Series.
    \44\ See Securities Exchange Act Release No. 79116 (October 18,
2016), 81 FR 73167 (October 24, 2016) (File No. SR-FINRA-2016-027).
    \45\ See FINRA.org, Treasury Aggregate Statistics, available at
https://www.finra.org/finra-data/browse-catalog/treasury-weekly-aggregates (last visited July 22, 2022). The information is
aggregated by security subtype: Bills, Floating Rate Notes (FRN),
Nominal Coupons and Treasury Inflation-Protected Securities (TIPS).
The data is further grouped into ``ATS and Interdealer,'' ``Dealer-
to-Customer,'' and ``Total'' categories. For Nominal Coupons and
TIPS, the report also shows remaining maturity and on-the-run/off-
the-run groupings. See also FINRA Rule 6750--Dissemination of
Transaction Information, Supplementary Material .01(b). FINRA
recently proposed to publish aggregated U.S. Treasury securities
transaction information and statistics more frequently, such as on a
daily basis. See Securities Exchange Act Release No. 95165 (June 27,
2022), 87 FR 39573 (July 1, 2022) (File No. SR-FINRA-2022-017).
---------------------------------------------------------------------------

    In contrast to FINRA, the regulatory focus of national securities
exchanges, which are also SROs, is generally on trading by their
members on their respective exchanges.\46\ Exchanges generally monitor
market activity specific to their own exchanges and have expertise in
regulating unique aspects of their markets.\47\ For example, exchange
rules typically regulate, among other things, the opening and closing
of trading on the exchange; \48\ exchange order types and order
handling; \49\ member application processes and ongoing member
requirements; \50\ listings; \51\ investigations, complaints,
disciplinary action and the related appeals process; \52\ as well as
member conduct generally.\53\ In many cases, exchange rules are similar
to FINRA rules or incorporate FINRA rules by reference.\54\
---------------------------------------------------------------------------

    \46\ Congress saw the codification of regulations requiring the
registration of off-exchange brokers and dealers as ``an essential
supplement to regulation of the exchanges.'' H.R. Rep. No. 74-2601,
at 4 (1936). In addition, in advance of the 1975 Amendments,
Congress contemplated reforms to the regulatory structure of the
securities markets in which an Association's role would be expanded,
while exchanges would focus their regulatory activities on their
respective markets: ``the time has come to begin planning a
framework which will guide the development of the self-regulatory
system in the future. In the revised system, a single nationwide
entity [an Association] would be responsible for regulation of the
retail end of the securities business, including such matters as
financial responsibility and selling practices, while each exchange
would concentrate on regulating the use of its own trading
facilities . . . the regulatory activities of the NASD (the only
organization presently registered as a national securities
association) would encompass many of the present regulatory
activities of the NYSE and other exchanges over retail activities of
their members. This `expanded' NASD would have direct
responsibility, subject to SEC oversight, for enforcing SEC rules
and its own rules . . .'' S. Doc. No. 93-13 at 16, 169 (1973). See
also 2015 Proposing Release, supra note 6, 80 FR 18039 at note 28
and accompanying text. In 2007, the Commission approved changes that
consolidated the member firm regulatory functions of the NASD, an
Association, and NYSE Regulation, Inc., and changed the name of the
combined entity to FINRA. See Exchange Act Release No. 56145 (July
26, 2007), 72 FR 42169 (August 1, 2007).
    \47\ See Cross-Market Regulatory Coordination Staff Paper, supra
note 31.
    \48\ See, e.g., NYSE Rule 7.35 Series--Auctions.
    \49\ See, e.g., Nasdaq Rule 4702--Order Types and Nasdaq Rule
4703--Order Attributes.
    \50\ See, e.g., Cboe Rulebook Chapter 3--TPH Membership,
Registration, and Participants.
    \51\ See, e.g., IEX Rulebook Chapter 14--IEX Listing Rules.
    \52\ Typically, exchange rules regarding investigations,
complaints, disciplinary actions, and appeals apply to the conduct
of members (and associated persons) for violations of exchange rules
and federal securities laws and regulations that the exchange has
jurisdiction to enforce. See, e.g., Cboe Rule 13.1; IEX Rule
9.110(a); MIAX Chapter X, Rule 1000; Nasdaq Rule General 5, 9110(d);
and Nasdaq PHLX Rule General 5, Section 1.
    \53\ See, e.g., NYSE Rules 2010--7470--Conduct Rules.
    \54\ See, e.g., NYSE Rules 4110 and 4140, and FINRA Rules 4110
and 4140; and Nasdaq General 9 (Regulation) (incorporating by
reference various FINRA rules).
---------------------------------------------------------------------------

    In addition, exchanges have entered into 17d-2 plans that allocate
to FINRA examination and enforcement responsibility relating to
compliance by common members with Federal securities laws, Commission
rules, and common exchange and FINRA rules, allowing the exchanges to
focus on trading on their own markets. For example, under a 17d-2 plan
for the allocation of regulatory responsibility relating to Regulation
NMS rules, FINRA is responsible for overseeing and enforcing compliance
with certain Regulation NMS rules by common members of FINRA and any
exchange participant in the agreement, while each exchange retains
responsibility for surveillance and enforcement with respect to trading
activities or practices

involving its own marketplace.\55\ Most exchanges and FINRA also have
entered into RSAs, which are privately negotiated agreements between
two SROs whereby one SRO agrees to perform regulatory services on
behalf of another SRO in exchange for compensation.\56\
---------------------------------------------------------------------------

    \55\ See, e.g., Exchange Act Release Nos. 63220 (November 2,
2010), 75 FR 68632 (November 8, 2010) and 63430 (December 3, 2010),
75 FR 76758 (December 9, 2010). In addition, generally, FINRA is the
DEA for financial responsibility rules for exchange members that
also are members of FINRA. See infra notes 227-228 and accompanying
text (discussing DEAs). See also Cross-Market Regulatory
Coordination Staff Paper, supra note 31 (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.'').
    \56\ See Cross-Market Regulatory Coordination Staff Paper, supra
note 31.
---------------------------------------------------------------------------

    In addition to regulatory coordination that occurs through 17d-2
plans and RSAs, SROs also coordinate regulatory efforts through forums
provided by the Intermarket Surveillance Group (``ISG''). The ISG,
created in 1981, is an international group of exchanges, market
centers, and regulators that perform market surveillance in their
respective jurisdictions.\57\ The ISG's focus is regulatory information
sharing and coordination for both domestic and foreign regulators.\58\
Pursuant to its charter, one of the ISG's purposes is ``the
coordination and development of programs and procedures designed to
assist in identifying possible fraudulent and manipulative acts and
practices across markets, where possible, particularly between markets
which trade the same or related or derivative Financial
Instruments[.]'' \59\
---------------------------------------------------------------------------

    \57\ See id.
    \58\ See id.
    \59\ See id.
---------------------------------------------------------------------------

B. Need for Amendment

    The Commission originally adopted Rule 15b8-1 in 1965 (renumbered
to Rule 15b9-1 in 1983 and generally referred to herein as Rule 15b9-1)
to allow exchange specialists and other floor members to receive a
portion of the commissions paid on occasional off-exchange transactions
referred to other broker-dealers, up to a nominal amount.\60\ The
original version of Rule 15b9-1 included the de minimis allowance but
not the proprietary trading exclusion. The Commission adopted the
proprietary trading exclusion in 1976 to accommodate regional exchange
specialists that, as part of their floor-based business, might have
needed to lay off positions and hedge risk on the primary listing
exchange through a member of that exchange.\61\ These exchange
specialists and floor brokers typically were members of a single
exchange, and the circumstances under which they would trade
proprietarily off-exchange were quite limited.\62\ Taken together, the
historical purpose of Rule 15b9-1's de minimis allowance and
proprietary trading exclusion was to accommodate limited broker-dealer
trading activities that were ancillary to a floor-based business on a
single exchange while preserving the traditional role of the exchange
as the entity best suited to regulate member conduct on the exchange.
---------------------------------------------------------------------------

    \60\ See Qualifications and Fees Relating to Brokers or Dealers
Who Are Not Members of National Security [sic] Association, Exchange
Act Release No. 7697 (September 7, 1965), 30 FR 11673 (September 11,
1965) (``Qualifications and Fees Release''). The Commission stated:
``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.
    \61\ See Extension of Temporary Rules 23a-1(T) and 23a-2(T);
Adoption of Amendments to SECO Rules, Securities Exchange Act
Release No. 12160 (March 3, 1976), 41 FR 10599 (March 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 noted 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 new Intermarket
Trading System linkage, and eliminated references to, and
requirements under, the SECO Program. See SECO Programs; Direct
Regulation of Certain Broker-Dealers; Elimination, Exchange Act
Release No. 20409 (November 22, 1983), 48 FR 53688 (November 29,
1983) (``SECO Programs Release'').
    \62\ In the Special Study of the Securities Markets in 1963, the
Commission described how regional exchange specialists reduced their
exposure, including by offsetting positions on other exchanges. The
Commission noted that ``[s]pecialists on the Boston, Philadelphia-
Baltimore-Washington, Pittsburgh, and Montreal stock exchange are in
communication with each other by direct wires linking their floors
and each may trade on the other exchanges at member rates'' and
``[s]pecialists who are sole members [of an exchange] also offset
[their positions] with over-the-counter houses dealing in listed
securities. Many of the offsetting transactions are done on the
primary market, the NYSE, with the [specialist] buying or selling on
that exchange as his needs dictate.'' Report of Special Study of
Securities Markets of the Securities and Exchange Commission, H.R.
Doc. No. 88-95, at 935 (1963) (``Special Study''). The Commission
believes that the business of regional exchange specialists was
substantially the same when the proprietary trading exclusion in
Rule 15b9-1 was adopted in 1976.
---------------------------------------------------------------------------

    Since that time, the securities markets have undergone a
substantial transformation that has been driven primarily by rapid and
ongoing evolution of technologies for generating, routing, and
executing orders, and the impact of regulatory changes.\63\ Today,
trading in the U.S. securities markets is highly automated, dispersed
among myriad trading centers, and substantially more complex.\64\
Trading is spread among a number of highly automated trading centers--
24 registered exchanges,\65\ 33 ATSs that trade NMS stocks,\66\ at
least 2 ATSs that trade U.S. Treasury securities,\67\ and nearly 200
OTC market-makers \68\--and the routing and re-routing of orders to
multiple venues is common. Moreover, new types of proprietary trading
firms have emerged, including those that engage in so-called high-
frequency trading strategies. These firms 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.\69\
---------------------------------------------------------------------------

    \63\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594 (January 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.'').
    \64\ See Equity Market Structure Concept Release, supra note 63.
See also 2015 Proposing Release, supra note 6.
    \65\ There are 8 registered exchanges that only trade equities
and 8 registered exchanges that only trade options. In addition,
there are 8 registered exchanges that trade both equities and
options.
    \66\ See 17 CFR 242.300 (defining the terms ``alternative
trading system'' and ``NMS Stock ATS''). This data was compiled from
Forms ATS-N filed with the Commission as of July 22, 2022, available
at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
    \67\ See U.S. Dep't of the Treasury et al., Joint Staff Report:
The U.S. Treasury Market on October 15, 2014 (July 13, 2015) (the
``Joint Staff Report''). The Joint Staff Report noted that SEC rules
applicable to ATSs do not apply to ATSs through which only
government securities are traded, although such venues may
voluntarily adopt such standards. Since the Joint Staff Report was
issued, however, the Commission has proposed to amend Regulation ATS
to include ATSs through which only government securities are traded.
See Securities Exchange Act Release No. 94062 (January 26, 2022), 87
FR 15496 (March 18, 2022).
    \68\ Nearly 200 brokers or dealers (excluding ATSs) have
identified themselves to FINRA as market centers that must provide
monthly reports on order execution quality under Rule 605 of
Regulation NMS (list available at http://www.finra.org/industry/market-centers).
    \69\ 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 63, 75 FR at
3606. See also Staff of the Division of Trading and Markets,
``Equity Market Structure Literature Review, Part II: High Frequency
Trading,'' at 4-5 (March 18, 2014) (available at http://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf).
---------------------------------------------------------------------------

    In fact, the large-scale proprietary trading that occurs in the
securities markets today is not confined to equities and options. For
example, there is significant automated proprietary trading in U.S.
Treasury securities, which are not traded on any national securities
exchange.\70\ As noted in the Joint Staff Report, proprietary trading
firms, or principal trading firms (``PTF(s)'') as they are also called,
account for a majority of trading and market depth in the electronic
interdealer U.S. Treasury securities market.\71\ The Joint Staff Report
called for certain U.S. Treasury securities market reforms such as an
assessment of the public reporting on U.S. Treasury securities market
venue policies and services and a review of possible post-trade
transaction reporting by government securities broker-dealers and
banks. In 2016, an inter-agency working group comprising staff of the
Treasury Department, Commission, Commodity Futures Trading Commission,
Federal Reserve Bank of New York, and Board of Governors of the Federal
Reserve System stated that it ``will continue to assess effective means
to ensure that the collection of data regarding Treasury cash
securities market transactions is comprehensive and includes
information from institutions that are that not FINRA members.'' \72\
Subsequently, FINRA introduced TRACE reporting for U.S. Treasury
securities in 2017.\73\
---------------------------------------------------------------------------

    \70\ 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 (September 28, 2020), 85 FR 87106, 87108 (December 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.
    \71\ See Joint Staff Report, supra note 67, at 36. In addition,
in 2020, staff at the Board of Governors of the Federal Reserve
published a paper estimating that PTFs account for 61% of the
trading activity on interdealer broker platforms. See FEDS Notes,
``Principal Trading Firm Activity in Treasury Cash Markets,'' James
Collin Harkrader and Michael Puglia (Aug. 4, 2020) (citing data
presented at the 2019 U.S. Treasury Market Conference showing that
PTFs averaged approximately 61% of total trading volume on
electronic interdealer broker platforms).
    \72\ See press release, U.S. Dep't of the Treasury et al.,
Statement Regarding Progress on the Review of the U.S. Treasury
Market Structure since the July 2015 Joint Staff Report (August 2,
2016) available at https://www.sec.gov/news/pressrelease/2016-155.html.
    \73\ See supra note 44.
---------------------------------------------------------------------------

    The Commission estimates that, as of the end of 2021, there were 66
firms that were Commission-registered broker-dealers and exchange
members but not FINRA members, and that there were 65 such firms as of
April 2022.\74\ Many of these firms were members of just one exchange
while others were members of multiple exchanges.\75\ Specifically, as
of April 2022, 21 of the 65 identified firms were single exchange
members; 10 of the firms were members of two exchanges; 13 of the firms
were members of more than two but 10 or fewer exchanges; and the
remainder were members of more than 10 exchanges.\76\
---------------------------------------------------------------------------

    \74\ See FINRA.org, Non-Member List, available at https://nonmembers.finra.org/ReportableNonMembersList.txt or http://web.archive.org/web/20210722022409/https:/nonmembers.finra.org/ReportableNonMembersList.txt (last visited July 22, 2022). The
Commission notes that the figures set forth herein are impacted by
changes in FINRA membership. For example, a registered broker-dealer
that was not a FINRA member as of 2021 joined FINRA in early 2022
and is not included among the 65 firms identified as registered
broker-dealers and exchange members but not FINRA members as of
April 2022.
    \75\ Source: FINRA Central Registration Depository (CRD).
    \76\ Id.
---------------------------------------------------------------------------

    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.\77\ 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.
---------------------------------------------------------------------------

    \77\ Source: Consolidated Audit Trail.
---------------------------------------------------------------------------

    For example, of the estimated 66 broker-dealers that were exchange
members but not FINRA members as of the end of 2021, 47 initiated
orders in listed equities in September 2021 that were executed on or
off an exchange.\78\ These firms' September 2021 off-exchange listed
equities dollar volume executed was approximately $789 billion,\79\
which was approximately 9.8% of total off-exchange volume of listed
equities executed that month.\80\ Moreover, these firms' September 2021
listed equities dollar volume executed on exchanges of which they are
not a member was approximately $592 billion.\81\
---------------------------------------------------------------------------

    \78\ Id. A firm ``initiating'' an order is the firm that reports
the origination of the order as a New Order Event (MENO) to the
Consolidated Audit Trail. The other 19 firms did not initiate orders
in listed equities in September 2021.
    \79\ Id. Dollar volumes set forth in this section represent the
sum of bought and sold volume during the specified time period.
    \80\ Id. The Commission estimates that there was approximately
$8 trillion in total off-exchange transaction volume in listed
equities reported by buying and selling firms in September 2021.
    \81\ Id. The Commission also estimates that, in 2021, 50 of the
66 firms identified as registered broker-dealers and exchange
members but not FINRA members initiated options order executions
accounting for approximately 15-20% of daily options contract volume
traded. The Commission further estimates that 36 of these 50 firms
initiated executions on an exchange where they are not a member, and
that this transaction volume represented approximately 3% of these
36 firms' total options contract transaction volume reported in
2021, and approximately 1% of all options contract transaction
volume reported in 2021. Id.
---------------------------------------------------------------------------

    Of the estimated 65 broker-dealers that were exchange members but
not FINRA members as of April 2022, 43 initiated orders in listed
equities in April 2022 that were executed on or off an exchange.\82\
These firms' April 2022 off-exchange listed equities dollar volume
executed was approximately $441 billion,\83\ which was approximately
4.6% of total off-exchange volume of listed equities executed that
month.\84\ Moreover, these firms' April 2022 listed equities dollar
volume executed on exchanges of which they are not a member was
approximately $475 billion.\85\
---------------------------------------------------------------------------

    \82\ Id. The other 22 firms did not initiate orders in listed
equities in April 2022.
    \83\ Id.
    \84\ Id. The Commission estimates that there was approximately
$9.5 trillion in total off-exchange transaction volume in listed
equities reported by buying and selling firms in April 2022.
    \85\ Source: Consolidated Audit Trail. See also Table 1, Section
VI.A.1, infra, for additional detail regarding these firms' trading
activity during the noted time periods.

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

    There is also a high degree of concentration of this volume among a
subset of the identified firms. In this regard, the Commission
estimates that, as of September 2021, 13 of the 47 identified firms
that initiated orders in listed equities then accounted for
approximately 9.3% of total off-exchange listed equities volume
executed in September 2021 and 94% of the off-exchange listed equities
transaction volume attributable to the 47 identified firms that
month.\86\ Two of the 13 firms initiated $528 billion in off-exchange
listed equities executions in September 2021, which was 6.6% of total
off-exchange listed equities transaction volume that month and
approximately two-thirds of the off-exchange volume executions
attributable to the 47 identified firms.\87\ With respect to the 47
firms' listed equities transaction volume on exchanges of which they
are not a member, just one firm accounted for approximately 78% of the
$592 billion in volume attributable to the 47 identified firms in
September 2021; four firms (including the aforementioned one) accounted
for approximately 90% of that volume; and 18 firms (including the
aforementioned four firms) accounted for approximately 99% of that
volume.\88\
---------------------------------------------------------------------------

    \86\ Source: Consolidated Audit Trail.
    \87\ Id.
    \88\ Id.
---------------------------------------------------------------------------

    The Commission also estimates that, as of April 2022, 12 of the 43
identified firms that initiated orders in listed equities then
accounted for approximately 4.25% of total off-exchange listed equities
volume executed in April 2022 and 91.6% of the off-exchange listed
equities transaction volume attributable to the 43 identified firms
that month.\89\ One of the 12 firms initiated $241 billion in off-
exchange listed equities executions in April 2022, which was 2.54% of
total off-exchange listed equities transaction volume that month and
approximately one-half of the off-exchange volume executions
attributable to the 43 identified firms.\90\ With respect to the 43
firms' listed equities transaction volume on exchanges of which they
are not a member, just one firm accounted for approximately 72% of the
$475 billion in volume attributable to the 43 identified firms in April
2022; five firms (including the aforementioned one) accounted for
approximately 91% of that volume; and 18 firms (including the
aforementioned four firms) accounted for approximately 99% of that
volume.\91\
---------------------------------------------------------------------------

    \89\ Id.
    \90\ Id.
    \91\ Id.
---------------------------------------------------------------------------

    With respect to trading in U.S. Treasury securities, all of which
occurs off-exchange,\92\ the Commission estimates that four of the 66
broker-dealers that were exchange members but not FINRA members
accounted for over $7 trillion in U.S. Treasury securities volume
executed on ``covered ATSs'' in 2021 that was reported to TRACE,\93\
which was over 2% of total U.S Treasury securities volume traded in
2021 that was reported to TRACE.\94\ In April 2022, the Commission
estimates that three of the 65 broker-dealers that were exchange
members but not FINRA members accounted for over $700 billion in U.S.
Treasury securities volume executed on covered ATSs that was reported
to TRACE,\95\ which was approximately 2.5% of total U.S Treasury
securities volume traded in April 2022 that was reported to TRACE.\96\
---------------------------------------------------------------------------

    \92\ See Joint Staff Report, supra note 67, at 2; see also supra
note 70.
    \93\ See FINRA Rule 6730(a)(1) (requiring FINRA members to
report transactions in TRACE-Eligible Securities, including U.S.
Treasury securities).
    \94\ See FINRA Rule 6730--Transaction Reporting, Supplementary
Material .07--ATS Identification of Non-FINRA Member Counterparties
for Transactions in U.S. Treasury Securities, supra note 16 (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.
    \95\ See supra note 93.
    \96\ Id.
---------------------------------------------------------------------------

    Due to the evolution of the securities markets since Rule 15b9-1
was adopted, the Commission preliminarily believes that the rule's
effect has become dislodged from the rule's intended purpose. The
underlying presumption built into Rule 15b9-1's de minimis allowance
and proprietary trading exclusion was that Association membership
should not be required where a broker-dealer engaged in limited trading
activities elsewhere than its member exchange that were ancillary to
its trading business on its member exchange.\97\ Since the Commission
adopted Rule 15b9-1 in 1965 and then the proprietary trading exclusion
in 1976, the securities markets have transformed dramatically,
securities trading has become dispersed among myriad trading centers,
and firms today frequently trade securities proprietarily and
electronically across those trading centers, including on exchanges
where they are not a member and off-exchange. Moreover, today, unlike
forty years ago, there is extensive off-exchange proprietary trading
activity conducted electronically in the U.S. Treasury securities
market, and a transaction reporting regime for U.S. Treasury securities
transactions that stems from Association membership. Put simply, the
underlying tenet of Rule 15b9-1's de minimis allowance and proprietary
trading exclusion no longer holds true in light of the emergence of the
modern-day broker-dealer that trades securities proprietarily.
---------------------------------------------------------------------------

    \97\ See supra notes 60-62 and accompanying text.
---------------------------------------------------------------------------

    Indeed, as reflected by the figures set forth above, some dealer
firms are able to engage in substantial proprietary securities trading
activity elsewhere than their member exchange(s) without becoming FINRA
members, in reliance on Rule 15b9-1. These firms are not all subject to
the same set of rules and interpretations, which can vary between
exchanges. Importantly, FINRA has the expertise regarding off-exchange
trading, but under the current regulatory structure underpinning Rule
15b9-1, for non-FINRA members that trade off-exchange and are members
of different exchanges, FINRA applies the rules of the different
exchanges using the exchanges' interpretations of those rules. 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. The rise in
electronic proprietary trading and an increasingly fragmented market
where trading takes place across many active markets have put pressure
on the status quo and presented a need for there to be more consistent
regulation of such trading. As a result, the Commission preliminarily
believes that the exemption from FINRA oversight provided by Rule 15b9-
1 should be limited.
    In particular, there are Federal securities laws, Commission rules,
and SRO rules that prohibit various forms of improper activity by
broker-dealers.\98\ SROs 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.\99\ FINRA traditionally has been
the SRO that primarily oversees cross-exchange and off-exchange
securities trading activity. In the specific context of broker-dealer
firms that are not FINRA members and effect off-member-exchange
securities transactions, FINRA is unable to directly enforce such
firms' compliance with Federal securities laws and Commission rules, or
apply its own rules to such firms, because they are not FINRA members.
Without direct, membership-based FINRA oversight, the Commission
believes that SRO oversight of off-member-exchange securities trading
activity by non-FINRA members is largely a function of cooperative
regulatory arrangements among SROs, which, as explained below, do not
confer membership-based jurisdiction to FINRA to enforce compliance
with the Exchange Act and applicable rules.
---------------------------------------------------------------------------

    \98\ See, e.g., sections 10(b), 15(c), and 15(g) of the Exchange
Act; 15 U.S.C. 78j(b), 15 U.S.C. 78o(c), and 15 U.S.C. 78o(g);
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); and Cboe Rule
8.6 (Manipulation).
    \99\ See section 19(g) of the Act; 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    In this regard, exchange SROs and FINRA are able to perform cross-
market surveillance of trading activity in NMS and OTC securities using
the Consolidated Audit Trail (``CAT'') data.\100\ But access to CAT
data does not confer jurisdiction to FINRA over a firm that is not a
FINRA member and that trades those securities off-exchange.\101\ As a
result, a case regarding such a firm may be referred to the Commission
or an exchange where the firm is a member for further investigation
because 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 to
generate evidence.\102\ Moreover, trading activity in U.S. Treasury
securities is not reported to CAT, so CAT is not a tool that can be
used by SROs to surveil that activity, which, as reflected by the
figures set forth above, is engaged in extensively by some broker-
dealers that are not FINRA members.
---------------------------------------------------------------------------

    \100\ Exchange rules require their members to report to CAT,
which is operated by FINRA CAT, LLC, a subsidiary of FINRA. See,
e.g., Cboe BYX Rules 4.5-4.17; Nasdaq General 7; and NYSE Rule 6800.
    \101\ See Concept Release Concerning Self-Regulation, supra note
18, 69 FR at 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.
    \102\ See infra note 140.
---------------------------------------------------------------------------

    Exchange SROs and FINRA also have entered into 17d-2 plans \103\
and RSAs. Under these arrangements, as of 2020, FINRA operated a cross-
market regulatory program that covered 100% of U.S. equity market
activity and approximately 45% of options contract volume, and FINRA
also provided market-specific regulatory services to several
exchanges.\104\ The Commission understands that these arrangements have
enhanced regulatory outcomes.\105\ However, neither of these
arrangements creates a requirement for broker-dealers that are not
FINRA members to report their U.S. Treasury securities activity to
TRACE. Moreover, 17d-2 plans are valuable, Commission-approved
arrangements in the context of common members of more than one SRO. A
17d-2 plan among one or more exchange SROs and FINRA would not provide
FINRA with jurisdiction over a firm that is not a FINRA member, as 17d-
2 plans are designed to mitigate duplicative SRO oversight over common
members of more than one SRO with respect to rules that are common
among the SROs. In other words, for FINRA to be named as the DEA for a
firm under a 17d-2 plan, the firm would have to be a FINRA member.\106\
---------------------------------------------------------------------------

    \103\ There are 19 effective bilateral plans and 4 multiparty
plans. The 17d-2 plans can be found on the Commission's website at:
https://www.sec.gov/rules/sro/17d-2.htm.
    \104\ See Cross-Market Regulatory Coordination Staff Paper,
supra note 31 (stating that ``[t]he exchanges have relied on FINRA
to perform regulatory functions, including surveillance,
examinations, investigations, and enforcement functions, pursuant to
RSAs and Rule 17d-2 plans. Under these arrangements, FINRA has
developed a cross-market program that covers 100% of U.S. equity
market activity and approximately 45% of options contract volume. In
addition to these cross-market supervision services, FINRA provides
market-specific regulatory services to several exchanges.'') (citing
Letter from Marcia E. Asquith, Executive Vice President, FINRA, to
Vanessa Countryman, Secretary, Commission, dated November 30, 2020).
    \105\ See Cross-Market Regulatory Coordination Staff Paper,
supra note 31.
    \106\ For example, under a 17d-2 plan among exchange SROs and
FINRA, FINRA is the Designated CAT Surveillance Authority (DCSA) for
members of the exchange SROs and FINRA, and in that capacity assumes
surveillance, investigation and enforcement responsibility relating
to compliance by common members with Rule 613 and the rules of the
SROs regarding compliance with the CAT NMS Plan. See Securities
Exchange Act Release No. 89042 (June 10, 2020), 85 FR 36450 (June
16, 2020) (File No. 4-618). But FINRA is not the DCSA for firms that
are not FINRA members.
---------------------------------------------------------------------------

    The Commission therefore understands FINRA's cross-market
regulatory program for equities and options relies on RSAs insofar as
it covers broker-dealers that are not FINRA members.\107\ RSAs can be
used to cover matters or firms that may fall outside the scope of a
17d-2 plan.\108\ While RSAs can serve useful purposes, they generally
are not publicly available, are not subject to Commission approval, and
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.\109\ As a result, to the extent FINRA
oversight is applied to non-FINRA member firms' off-member-exchange
securities trading activity based on RSAs, such oversight relies upon
arrangements between exchanges and FINRA that are discretionary. In
addition, under an RSA, FINRA examines for compliance with the rules of
the exchange that has entered into the RSA. 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 is less stable and consistent than a
regulatory regime in which Association membership and oversight is
mandated.
---------------------------------------------------------------------------

    \107\ See, e.g., Securities Exchange Act Release No. 89972
(September 23, 2020), 85 FR 61062, 61063 (September 29, 2020)
(amending the 17d-2 plan among exchange SROs and FINRA relating to
the surveillance, investigation, and enforcement of insider trading
rules, which allocates regulatory responsibility to FINRA over
common FINRA members (members of FINRA and at least one of the
exchange SRO participants in the plan), and stating that the
participating exchange SROs will also enter into an RSA to provide
for the investigation and enforcement of suspected insider trading
against broker-dealers that are not common FINRA members).
    \108\ See Cross-Market Regulatory Coordination Staff Paper,
supra note 31.
    \109\ Unlike with Commission-approved 17d-2 plans, the SRO
paying for regulatory services under an RSA retains ultimate legal
responsibility for and control over the functions allocated to the
service-providing SRO under the RSA. Further, 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 non-FINRA
member firm that is a member of the exchange is for compliance with
the exchange's rules, not FINRA's rules.
---------------------------------------------------------------------------

    Further, the continued availability of the Rule 15b9-1 exemption
from Association membership detracts from FINRA's off-exchange
securities transaction reporting regime, and in particular, TRACE
reporting for U.S. Treasury securities transactions. The ``covered
ATS'' U.S. Treasury security volumes set forth above may not capture

all of those firms' U.S. Treasury securities transaction volume.\110\
Broker-dealers 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.\111\
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 via its MPID,\112\ thus providing
visibility to regulators as to what transactions on covered ATSs are
attributable to non-FINRA members. But regulators have no such
visibility when non-FINRA member broker-dealers trade U.S. Treasury
securities on an ATS that is not a covered ATS or otherwise than on an
ATS with a counterparty that also is not a FINRA member. In the former
case, the transaction still must be reported to TRACE but the non-FINRA
member is not specifically identified via a MPID and instead is
identified only as a ``customer''; in the latter case, there is no
TRACE reporting obligation whatsoever.\113\ These circumstances detract
from the comprehensiveness of U.S. Treasury securities TRACE data and
regulators' ability to utilize that data to detect and deter improper
trading activity in the U.S. Treasury securities market. The Commission
cannot quantify total secondary market trading in U.S. Treasury
securities due to the current lack of comprehensive data in U.S.
Treasury securities in TRACE. Moreover, broker-dealers that are not
FINRA members have a potential competitive advantage over those that
are FINRA members and thus incur the costs of reporting transactions in
U.S. Treasury securities transactions.
---------------------------------------------------------------------------

    \110\ In the proposal the Commission issued in January 2022 to,
among other things, amend Regulation ATS for ATSs that trade U.S.
government securities, the Commission estimated that there would be
7 trading systems that trade only government securities or
repurchase or reverse repurchase agreements on government securities
and operate pursuant to the Exchange Act Rule 3a1-1(a)(3) exemption
and which would be required to comply with Regulation ATS under the
proposal. See Securities Exchange Act Release No. 94062 (January 26,
2022), 87 FR 15496, 15523 (March 18, 2022).
    \111\ See FINRA Rule 6720--Participation in TRACE. Beginning
September 1, 2022, certain depository institutions will be 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 July
22, 2022).
    \112\ See FINRA Rule 6730--Transaction Reporting, Supplementary
Material .07--ATS Identification of Non-FINRA Member Counterparties
for Transactions in U.S. Treasury Securities, supra note 16.
    \113\ 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 July 22, 2022). The non-FINRA member is, however,
identified in CAT in this context.
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing to update Rule 15b9-1 such
that proprietary trading firms that are registered broker-dealers
generally must join FINRA, pursuant to Section 15(b)(8) of the Act, if
they effect securities transactions otherwise than on an exchange of
which they are a member. The Commission preliminarily believes that
amending Rule 15b9-1 so that broker-dealer proprietary trading firms
generally would be required to join FINRA if they trade elsewhere than
on an exchange where they are a member would address the above-
described issues by subjecting such firms to FINRA's direct,
membership-based jurisdiction and rules, including FINRA's TRACE
reporting regime for U.S. Treasury security transactions. This would be
consistent with the Exchange Act's statutory framework for
complementary exchange SRO and Association oversight of broker-dealer
trading activity, in which Section 15(b)(8) requires broker-dealers to
join an Association if they effect securities transactions elsewhere
than an exchange where they are a member. Amending Rule 15b9-1 in this
way also would modernize the rule in a manner that is consistent with
how proprietary trading occurs today and that promotes Section
15(b)(9)'s requirement that any exemption from Section 15(b)(8) be
consistent with the public interest and protection of investors. The
Commission believes that direct, membership-based FINRA oversight over
and the application of FINRA's securities transaction reporting
requirements to firms that effect off-member-exchange securities
transactions would create more effective SRO oversight over their off-
member-exchange securities trading activity and therefore promote the
protection of investors and the public interest.
    As discussed above,\114\ 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. The
Commission may bring enforcement actions, including pursuant to
referrals made by SROs, to enforce broker-dealers' compliance with the
Exchange Act and applicable rules, and SROs have regulatory authority
over their members pursuant to the Exchange Act. Moreover, 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
cross-market, off-member-exchange securities trading activity. The
Commission believes 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.
---------------------------------------------------------------------------

    \114\ See section II.A, supra.
---------------------------------------------------------------------------

Requests for Comment
    The Commission requests comment on all aspects of the foregoing
background discussion as well as, in particular, on the following
questions:
    1. Is the Commission's estimate of the number of broker-dealers
that are exchange members but not FINRA members still accurate as of
the time of publication of this re-proposal? Is it too high or too low?
Are there broker-dealers that were not FINRA members as of April 2022
that have since joined FINRA? Please explain.
    2. Are the Commission's estimates of the securities transaction
volumes attributable to non-FINRA member broker-dealers accurate? If
not, why are they inaccurate? Are there any uncertainties associated
with such estimates?
    3. Do exchange SROs directly exercise their SRO authority with
respect to off-member-exchange securities trading activity by their
members? If so, how have exchange SROs exercised their authority in
this regard? In particular, how, if at all, have exchange SROs sought
to exercise SRO authority over off-member-exchange securities trading
activity conducted by their broker-dealer members that are not FINRA
members? Have exchange SROs sought to exercise authority over U.S.
Treasury securities trading activity by their members? Please explain
and provide examples, if possible.
    4. Do RSAs or other cooperative arrangements among SROs cover the

U.S. Treasury securities trading activity conducted by broker-dealers
that are exchange members but not FINRA members? If so, please specify
the arrangements and how they work, including any limitations
associated with such arrangements.
    5. Is the Commission's understanding correct that FINRA's cross-
market regulatory program for equities and options is based on RSAs
insofar as it covers broker-dealers that are not FINRA members? If not,
how are broker-dealers that are not FINRA members covered?

C. 2015 Proposal

    The Commission previously proposed to amend Rule 15b9-1 in March
2015.\115\ The 2015 Proposal would have eliminated the de minimis
allowance and proprietary trading exclusion from the rule, and added
language to the rule that more closely tracked Section 15(b)(8) in
providing an exemption from Section 15(b)(8)'s Association membership
requirement only for a broker or dealer that carries no customer
accounts and effects transactions in securities solely on a national
securities exchange of which it is a member except in certain limited
circumstances.\116\ The Commission did not adopt the 2015 Proposal but,
as discussed above, remains concerned that proprietary trading dealer
firms' reliance on the Rule 15b9-1 exemption from Association
membership undermines the effectiveness of the SRO regulatory structure
and SRO oversight of the securities markets as envisioned by Congress
in the Exchange Act. Therefore, today the Commission is re-proposing
amendments to Rule 15b9-1 that are similar to what was proposed in
2015, but modified in certain respects in light of the Commission's
further consideration of what set of circumstances would continue to be
appropriate for an exemption from Association membership in today's
market, which consideration is informed by comments on the 2015
Proposal.\117\
---------------------------------------------------------------------------

    \115\ See 2015 Proposing Release, supra note 6, 80 FR 18036-37.
    \116\ The 2015 Proposal would have provided exemptions from
Association membership for a dealer that is an exchange member,
carries no customer accounts, and effects transactions elsewhere
than an exchange of which it is a member solely for the purpose of
hedging the risks of its floor-based activity; or for a broker or
dealer that is an exchange member, carries no customer accounts, and
effects transactions elsewhere than an exchange of which it is a
member that result from orders that are routed by a national
securities exchange of which it is a member to prevent trade-
throughs, consistent with the provisions of Rule 611 of Regulation
NMS. As discussed below, the Commission is re-proposing herein that
amended Rule 15b9-1 set forth a modified version of that routing
exemption but is not including in this re-proposal a hedging
exemption outside the context of stock-option orders.
    \117\ See supra note 17.
---------------------------------------------------------------------------

III. Discussion of Amendments to Rule 15b9-1

    As a general matter, the result under the amended version of Rule
15b9-1 being proposed today would be the same as under the 2015
Proposal: a broker or dealer would be required to join an Association
if it effects transactions in securities elsewhere than on an exchange
to which it belongs as a member, unless it can rely upon one of the
amended rule's narrow exceptions.\118\ Conversely, a broker or dealer
would not need to become a member of an Association if it effects
securities transactions only on an exchange of which it is a
member.\119\ The Commission preliminarily believes that these outcomes
would enhance SRO regulatory oversight in a manner that promotes
Section 15(b)(8) of the Act and the public interest and investor
protection requirements of Section 15(b)(9) of the Act by enabling
direct Association oversight of off-member-exchange broker-dealer
proprietary trading activity. Several commenters supported the 2015
Proposal.\120\ Some commenters questioned the necessity of expanded
FINRA oversight.\121\
---------------------------------------------------------------------------

    \118\ See proposed Rule 15b9-1; see also 2015 Proposing Release,
supra note 6.
    \119\ See section 15(b)(8) of the Act. If a broker or dealer is
a member of multiple exchanges and effects securities transactions
only on those exchanges, those exchanges could enter into an RSA to
ensure effective cross-market supervision of this activity. The
Commission acknowledges that in the future another SRO could assume
these responsibilities pursuant to 17d-2 plans, subject to
Commission approval. In addition, a given exchange may choose to
enter into an RSA with an Association, as some exchanges have now.
In those cases, the exchange maintains the ultimate responsibility
for the contracted regulatory responsibilities.
    \120\ See, e.g., Letters from: Ryan W. Porter, Founder, High
Amplitude Capital Trading (March 28, 2015) (``Porter Letter'') at 1;
Chris Barnard (May 20, 2015) (``Barnard Letter'') at 1 (stating that
the proposal would ``improve the consistency and effectiveness of
regulatory supervision; reduce the existing differential regulatory
burden of Member Firms and Non-Member Firms; and promote firms to
compete more equitably to supply liquidity both on exchanges and
off-exchange.''); Claudia Crowley, Chief Regulatory Officer, IEX
Group, Inc. (May 22, 2015) (``IEX Letter'') at 2 (stating that there
is a need to update the exemption in Rule 15b9-1 to better align it
with its original intent and ``better reflect current market
technology and practices'' which would result in ``more
comprehensive and consistent regulatory oversight of off-exchange
market activity.''); Marcia E. Asquith, Senior Vice President and
Corporate Secretary, FINRA (June 2, 2015) (``FINRA Letter'') at 9-
10; Theodore R. Lazo, Managing Director and Associate General
Counsel, SIFMA (June 1, 2015) (``SIFMA Letter'') at 1; Angelo
Evangelou, Associate General Counsel, Legal Division, Cboe (June 10,
2015) (``Cboe Letter'') at 1 (supporting the proposal ``insofar as
the rulemaking seeks to require FINRA membership of proprietary
firms whose primary business is executing transactions off-
exchange.''); and Elliot Grossman, Managing Director, Dinosaur
Securities (Sep. 15, 2015) (``Dinosaur Letter'') at 2.
    \121\ See infra notes 125-127 and accompanying text.
---------------------------------------------------------------------------

    As noted above, Rule 15b9-1 currently exempts any broker or dealer
from membership in an Association if it is a member of a national
securities exchange, carries no customer accounts, and has annual gross
income of no more than $1,000 that is derived from purchases or sales
of securities effected otherwise than on an exchange of which it is a
member.\122\ Under the rule's proprietary trading exclusion, income
derived from transactions for a dealer's own account with or through
another registered broker or dealer is excluded from the de minimis
allowance.\123\
---------------------------------------------------------------------------

    \122\ 17 CFR 240.15b9-1(a).
    \123\ 17 CFR 240.15b9-1(b)(1). The current rule 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). ITS was a national market
system plan (``NMS Plan'') that was eliminated in 2007 because it
was superseded by Regulation NMS. See infra notes 159-168 and
accompanying text. Since Rule 15b9-1's references to ITS are now
obsolete, as in the 2015 Proposal, the Commission is re-proposing to
eliminate these references from the rule.
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    The Commission is proposing to eliminate the de minimis allowance
and the proprietary trading exclusion, and continue to allow 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 transactions in securities otherwise
than on an exchange to which it belongs as a member 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 transactions in securities otherwise than on an exchange to
which it belongs as a member that are solely for the purpose of
executing the stock leg of a stock-option order. In the subsections
below, the Commission discusses each element of the re-proposed rule in
detail.

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

    As in the 2015 Proposal, today the Commission is re-proposing to
delete paragraphs (a)(3) and (b) from Rule

15b9-1.\124\ This would eliminate the de minimis allowance and
proprietary trading exclusion. As a result, under Rule 15b9-1 as
amended, any broker or dealer required by Section 15(b)(8) of the Act
to become a member of an Association would be exempt from that
requirement only if it is a member of a national securities exchange,
carries no customer accounts, and any securities transactions that it
effects elsewhere than on an exchange of which it is a member meet the
limited criteria set forth in proposed paragraph (c) of the amended
rule, which are discussed in detail below. The re-proposed elimination
of the de minimis allowance and proprietary trading exclusion would
generally preclude proprietary trading firms that are registered with
the Commission pursuant to Section 15 of the Act and conduct off-
member-exchange securities trading from relying on Rule 15b9-1 as an
exemption from Section 15(b)(8)'s Association membership requirement.
Therefore, pursuant to Section 15(b)(8), they would be required to
become a member of an Association unless they effect transactions in
securities solely on an exchange of which they are a member.
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    \124\ The Commission also is proposing to renumber the
paragraphs that remain in the amended rule.
---------------------------------------------------------------------------

    Some commenters on the 2015 Proposal questioned the necessity and
appropriateness of the expanded FINRA oversight that would result from
the then-proposed elimination of the de minimis allowance and
proprietary trading exclusion. Their concerns centered on assertions
that exchange oversight may be more effective than FINRA
oversight,\125\ FINRA membership would result in duplicative regulation
for certain firms,\126\ and FINRA regulation is customer-focused and
therefore not appropriate for proprietary trading firms that do not
carry customer accounts.\127\
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    \125\ See, e.g., Letters from: Mary Ann Burns, Chief Operating
Officer, FIA Principal Traders Group (June 1, 2015) (``FIA 2
Letter'') at 4; Joanne Moffic-Silver, Executive Vice President,
General Counsel and Corporate Secretary, Cboe, Elizabeth K. King,
Secretary and General Counsel, NYSE, Joan C. Conley, Senior Vice
President and Corporate Secretary, NASDAQ OMX Group, Inc., (June 1,
2015) (``Cboe/NYSE/Nasdaq Letter'') at 2; James Ongena, Senior Vice
President and General Counsel, Chicago Stock Exchange (June 1, 2015)
(``CHX Letter'') at 2; Jay Coppoletta, Chief Legal Officer, PEAK6
Capital Management LLC (June 1, 2015) (``PEAK6 Letter'') at 2; Frank
A. Bednarz, Global Co-Head of Trading, CTC Trading Group, LLC (June
1, 2015) (``CTC Letter'') at 2-3.
    \126\ See, e.g., Letters from: Mark E. Gannon, Chief Compliance
Officer, Lakeshore Securities, LP (June 4, 2015) (``Lakeshore
Letter'') at 2-3; Mark Schepps, General Counsel and Senior Director
of Compliance, D&D Securities, Inc. (May 29, 2015) (``D&D Letter'')
at 3.
    \127\ See, e.g., CTC Letter at 2-3; PEAK6 Letter at 2; Letter
from Gregory F. Hold, CEO, Hold Brothers Capital LLC (June 1, 2015)
(``Hold Brothers Capital Letter'') at 2.
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    The Commission continues to believe, however, that in today's
market the de minimis allowance and proprietary trading exclusion are
no longer appropriate, and that direct Association regulation generally
of broker-dealers' off-member-exchange securities trading activity,
consistent with what Congress envisioned in Section 15(b)(8) of the
Act, would promote the protection of investors and the public interest
pursuant to Section 15(b)(9) of the Act. As discussed above, the de
minimis allowance and proprietary trading exclusion originally were
intended to permit a type of off-exchange activity that no longer
occurs today.\128\ When the Commission adopted Rule 15b9-1 and then the
proprietary trading exclusion, virtually all trading activity was
conducted manually on the floors of national securities exchanges.\129\
Today's market structure is dramatically different--proprietary, cross-
market order routing and trading strategies are a significant component
of the markets, and exchange floor-based businesses represent only a
fraction of market activity. Despite this transformative shift in how
trading is conducted, the de minimis allowance and proprietary trading
exclusion set forth in Rule 15b9-1 have never been adjusted.
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    \128\ See supra note 60 and accompanying text. The Commission is
unaware of any floor members today that refer accounts to other
broker-dealers in exchange for a share of commission revenues.
    \129\ See, e.g., Special Study, supra note 62, at 98 (``Trading
by NYSE members on the Exchange but from off the floor accounts for
approximately 5 percent of total Exchange purchases and sales . .
.'').
---------------------------------------------------------------------------

    Rule 15b9-1's stasis notwithstanding the market's transformation
has led to a misalignment in the complementary regulatory structure
contemplated by Congress since FINRA does not have direct, membership-
based jurisdiction over off-member-exchange securities trading activity
by broker-dealers that are not FINRA members. The Exchange Act
established the concept of an Association as the regulator of such
trading activity,\130\ a role currently fulfilled by FINRA, which also
is the SRO to which off-exchange trades are reported.\131\ As noted
above, as of April 2022 there were approximately 65 brokers or dealers
that were not FINRA members, including active proprietary trading
firms, which accounted for a significant percentage of off-exchange
equities and U.S. Treasury securities transaction volumes, as well as a
significant amount of transaction volume on exchanges where they are
not a member.\132\ The Commission is concerned that the current cross-
market regulatory program applied to such firms' off-member-exchange
securities trading activity--which the Commission understands is
dependent on RSAs--is not as stable or consistent as direct,
membership-based Association oversight through FINRA membership in
addressing any such trading activity and does not trigger FINRA's off-
exchange transaction reporting obligations for such firms. Under the
amended rule, the 65 firms identified above generally would not be
exempt from Section 15(b)(8) of the Act and therefore would be required
to join FINRA (unless they qualify for one of the amended rule's
exceptions), the only Association currently, to the extent that they
effect securities transactions elsewhere than an exchange where they
are a member. The Commission believes that direct, membership-based
FINRA oversight over and the application of FINRA's securities
transaction reporting requirements to such firms would create more
effective SRO oversight over their off-member-exchange securities
trading activity and therefore promote the protection of investors and
the public interest.
---------------------------------------------------------------------------

    \130\ See 15 U.S.C. 78o(b)(8).
    \131\ See supra notes 40-43 and accompanying text.
    \132\ See supra notes 79-94 and accompanying text.
---------------------------------------------------------------------------

    Contrary to certain commenters' suggestion that FINRA oversight of
proprietary trading firms is not necessary since they do not carry
customer accounts, 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. For example, FINRA has
developed a detailed set of rules in core areas such as trading
practices,\133\ business conduct,\134\

financial condition and operations,\135\ and supervision,\136\ many of
which apply to FINRA members regardless of whether they handle customer
orders or carry customer accounts.\137\ FINRA's ability to create a
consistent regulatory framework for all such broker-dealers that effect
securities transactions elsewhere than on exchanges where they are a
member, including the off-exchange market, is undermined by the subset
of such broker-dealers that are not FINRA members in reliance on Rule
15b9-1. Moreover, part of FINRA's regulatory framework is its
transaction reporting regime, and it is not customer-focused--it
applies to FINRA members regardless of whether they handle customer
orders or carry customer accounts.\138\ Continuing to permit an
exemption from FINRA membership on the basis that 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 reporting to TRACE or address the potential
competitive advantage of non-FINRA members that, unlike FINRA members,
may trade U.S. Treasury securities without reporting those
transactions.
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    \133\ 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), providing, 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.''
    \134\ See FINRA Rule 2000 Series--Duties and Conflicts, supra
note 38.
    \135\ 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.''
    \136\ 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.
    \137\ See, e.g., the FINRA rules set forth in notes 38-43 and
133-136 supra and accompanying text.
    \138\ See FINRA Rule 6000 Series (Quotation, Order, and
Transaction Reporting Facilities), supra note 40.
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    In addition, an Association's regulatory responsibility, like
exchange SROs', includes an obligation to monitor for operational and
regulatory issues, as well as issues relating to market
disruptions.\139\ The inability of FINRA to directly enforce regulatory
compliance by non-FINRA member proprietary trading firms--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, for
example, 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.\140\
This is the case regardless of whether the firm has customers. And as
discussed above,\141\ the Commission believes that RSA-based regulatory
efforts among exchange SROs and FINRA, while beneficial in many
contexts, are a less stable and consistent mechanism for SRO oversight
than the Association membership required by the Exchange Act in the
context presented here.
---------------------------------------------------------------------------

    \139\ 15 U.S.C. 78o-3.
    \140\ FINRA could refer such a matter to the Commission. See,
e.g., Statement of Robert W. Cook, President and CEO, FINRA,
``Equity Market Surveillance Today and the Path Ahead'' (Sep. 20,
2017), available at https://www.finra.org/media-center/speeches-testimony/equity-market-surveillance-today-and-path-ahead (stating
that FINRA makes referrals to the Commission or other authorities if
the target of an investigation is beyond the collective jurisdiction
of FINRA and the exchanges, and that in a prior year FINRA's market
regulation department made over 500 referrals to the Commission on
behalf of FINRA and its exchange clients related to potential
abusive trading strategies or other rule violations). FINRA also
could refer such a matter to an exchange where the firm is a member
or, as discussed above, potentially address the matter through an
RSA if covered by the terms of the RSA.
    \141\ See supra Section II.B. As is also discussed above, while
the Commission 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. See supra Sections II.A and II.B.
---------------------------------------------------------------------------

    Moreover, contrary to commenters' assertions, the Commission does
not preliminarily believe that exchange oversight alone would be more
effective at remedying the above-described issues than direct FINRA
oversight of off-member-exchange securities trading activity through
the Association membership envisioned by Congress, or that FINRA
membership would result in duplicative regulation for broker-dealer
proprietary trading firms. The imposition of FINRA rules on such firms
would require them to report their U.S. Treasury securities
transactions under FINRA's TRACE reporting regime. It also would
require that such firms be identified in off-exchange NMS stock
transaction reports to FINRA's TRFs,\142\ and thus promote broader
public market transparency in NMS stocks.\143\ Firms that are not FINRA
members generally are not identified in TRF transaction reports.\144\
Moreover, FINRA registration would confer jurisdiction to FINRA to
regulate directly off-member-exchange trading activity as Congress
envisioned in Section 15(b)(8) of the Act, to apply a more consistent
regulatory framework to such trading activity, and to mitigate the
risks to the fair and orderly operation of the market that stem from
FINRA's current lack of direct oversight of non-FINRA members. Further,
due to FINRA's experience and expertise in cross-market supervision,
the Commission preliminarily believes that FINRA is well-positioned to
assume direct jurisdiction over dealer firms that currently are not
FINRA members and effect securities transactions elsewhere than
exchanges where they are a member.\145\ As for the potential for

duplicative SRO oversight, to the extent such firms also effect
securities transactions on exchanges where they are a member, 17d-2
plans are designed to mitigate duplicative SRO oversight over common
members.
---------------------------------------------------------------------------

    \142\ See supra note 42 and accompanying text.
    \143\ 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, supra note 40; see also note 112 and accompanying text.
    \144\ See supra note 113.
    \145\ One commenter stated that the costs of cross-market
surveillance ``are appropriately funded by exchanges as regulators
of their markets and FINRA as the regulator of the off-exchange
market.'' See Letter from Adam Nunes, Head of Business Development,
Hudson River Trading LLC (June 1, 2015) (``HRT Letter'') at 9. This
commenter further stated that the Commission should not ``attempt to
address cross-market surveillance by forcing all broker-dealers to
become members of FINRA'' and should attempt to ``ensure that cross-
market surveillance is not dependent on exchanges outsourcing
exchange regulation to FINRA, as it leads to the possibility that
changes to RSAs and 17d-2 agreements could substantially degrade the
ability to perform appropriate cross-market surveillance.'' Id. This
commenter also weighed the appropriateness of subjecting all broker-
dealers to FINRA oversight and the benefits of regulatory
standardization against potential negatives associated with having a
single regulator. Id. at 9-11. See also CHX Letter at 1-2 (stating
concern about a single point of failure in regulatory surveillance
and oversight practices). As discussed above, in the specific
context of broker-dealers that are not FINRA members and that effect
off-member-exchange securities transactions, the Commission believes
that cross-market surveillance is not performed via 17d-2 plans and
should not be dependent on RSAs. See supra Sections II.A and II.B
(discussing, among other things, that Commission approval of a 17d-2
plan relieves an SRO of the regulatory responsibilities allocated by
the plan to another SRO but only with respect to common members of
the participating SROs, and that RSAs' coverage is not limited to
common members of the participating SROs but RSAs are discretionary
arrangements among SROs that do not relieve the SRO contracting for
regulatory services of ultimate regulatory responsibility over its
members). Moreover, consistent with section 15(b)(8) of the Act,
broker-dealers that do not effect securities transactions otherwise
than on an exchange where they are a member would not be required to
join FINRA. In addition, as re-proposed and discussed below, Rule
15b9-1 would continue to provide certain narrow exemptions from
section 15(b)(8)'s Association membership requirement for broker-
dealers that do effect securities transactions otherwise than on an
exchange where they are a member. Thus, the Commission does not
believe it is necessarily the case that all broker-dealers would be
required to join FINRA as a result of the proposal.
---------------------------------------------------------------------------

    Some commenters on the 2015 Proposal also contended that the
availability of CAT data would mitigate the need to subject proprietary
trading firms to FINRA SRO oversight.\146\ As discussed above, the
Commission preliminarily believes that the NMS and OTC securities data
available to SROs through the CAT NMS Plan are helpful tools, but such
access does not confer jurisdiction to FINRA over a firm that is not a
FINRA member and that trades those securities off-exchange, or ensure
that an individual exchange SRO of which such a firm is a member would
seek to enforce compliance with its rules, Commission rules or Federal
securities laws with respect to the firm's off-member-exchange
activity.\147\ 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 in this manner
is less certain and stable 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 securities
transactions elsewhere than exchanges where they are a member.\148\
Further, CAT reporting obligations do not apply to U.S. Treasury
securities, U.S. Treasury securities are not traded on any exchange,
and to the Commission's knowledge, unlike FINRA,\149\ no exchange SRO
possesses the expertise or proclivity to exert SRO oversight over their
members' U.S. Treasury securities trading activity. Access to CAT data
would not shed light on firms' U.S. Treasury securities trading
activity or provide exchanges or FINRA with any ability to monitor that
activity.
---------------------------------------------------------------------------

    \146\ See, e.g., CHX Letter at 2.
    \147\ See supra Section II.B.
    \148\ See 2015 Proposing Release, supra note 6, 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 31 (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.
    \149\ See supra notes 32-33 and accompanying text.
---------------------------------------------------------------------------

    As is discussed in more detail in the Economic Analysis, firms that
must become FINRA members would 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.\150\ These regulatory fees
include a Trading Activity Fee (``TAF''),\151\ which, at the time of
the 2015 Proposal, was a primary source of commenter concern over the
costs of FINRA membership that would be borne by proprietary trading
firms.\152\
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    \150\ FINRA Schedule A to the By-Laws of the Corporation
(``FINRA Schedule A''), at Section 1.
    \151\ 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,
Section 1(a), available at https://www.finra.org/rules-guidance/rulebooks/corporate-organization/section-1-member-regulatory-fees.
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). Many of the broker-dealers that could be required to join
FINRA if the proposed amendments to Rule 15b9-1 are adopted effect
securities transactions in large volumes throughout the national
market system, and often in a capacity other than as a registered
market-maker. See also infra note 241 and accompanying text for
further discussion of the TAF.
    \152\ See, e.g., Letter from Mary Ann Burns, Chief Operating
Officer, FIA (May 6, 2015) (``FIA 1 Letter'') at 1, PEAK6 Letter at
2, Hold Brothers Capital Letter at 2, Lakeshore Letter at 2, CTC
Letter at 5-6, D&D Letter at 2, Mark Schepps, General Counsel and
Senior Director of Compliance, PTR, Inc. (May 29, 2015) (``PTR