[Federal Register Volume 80, Number 63 (Thursday, April 2, 2015)]
[Proposed Rules]
[Pages 18035-18070]
[FR Doc No: 2015-07293]

Vol. 80

Thursday,

No. 63

April 2, 2015

Part VI

 Securities and Exchange Commission

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17 CFR Part 240

Exemption for Certain Exchange Members; Proposed Rule

Federal Register / Vol. 80 , No. 63 / Thursday, April 2, 2015 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-74581; File No. S7-05-15]
RIN 3235-AL65

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
proposing to amend Rule 15b9-1 (``Rule'') under the Securities Exchange
Act of 1934 (``Act'' or ``Exchange Act''), which exempts certain
brokers or dealers from membership in a registered national securities
association (``Association''). The proposed amendments would replace
the current gross income allowance in the Rule with a narrower
exemption from Association membership for a broker or dealer that
carries no customer accounts and effects transactions on a national
securities exchange. The proposed amendments would create an exemption
for a dealer that effects transactions off the exchange of which it is
a member solely for the purpose of hedging the risks of its floor-based
activity, or a broker or dealer that effects transactions off the
exchange resulting 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.

DATES: Comments should be received on or before June 1, 2015.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-05-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Brent J. Fields, 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 us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site 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 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; the
Commission does not edit personal identifying information from
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 Web site. 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: David Michehl, Special Counsel, at
(202) 551-5627; Nicholas Shwayri, Special Counsel, at<PHONE_NUMBER>;
or Charles Sommers, Attorney-Adviser, at<PHONE_NUMBER>, Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Regulatory History
    B. Regulatory Oversight of Off-Exchange Trading Activity
II. Discussion of Amendments to Rule 15b9-1
    A. Prior Comments on Association Membership
    B. Overview of Amendments
    C. Elimination of the De Minimis Allowance
    D. Floor Member Hedging Exemption
    E. Regulation NMS Routing Exemption
III. Effective Date and Implementation
IV. General Request for Comments
V. Economic Analysis
    A. Baseline
    1. Regulatory Structure and Activity Levels of Non-Member Firms
    2. Current Market Oversight
    B. Broad Economic Considerations, Including Effects on
Efficiency, Competition and Capital Formation
    1. Effects on Regulatory Supervision
    2. Firm Response and Effect on Market Activity
    3. Competition To Provide Liquidity Is Distorted by Regulatory
Costs Borne by Only a Subset of Competitors, Member Firms
    4. Competitive Effects on Off-Exchange Market Regulation
    C. Consideration of Costs and Benefits
    1. Benefits
    2. Costs
    D. Alternatives
    1. Elimination of the Floor Member Hedging Exemption
    2. Improve Off-Exchange Supervision Through Action of Other SROs
With or Without CAT
    3. Exchange Membership Alternative
    4. Retaining the De Minimis Allowance
    5. The Commission Assumes Regulatory Oversight Role for Non-
Member Firms
    E. Request for Comment on Economic Analysis
VI. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    E. Collection of Information is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comments
VII. Consideration of Impact on Economy
VIII. Regulatory Flexibility Act Certification
IX. Statutory Authority--Text of the Proposed Amendments

I. Background

    Rule 15b9-1generally provides an exemption for certain broker-
dealers from the Exchange Act requirement to become a member of an
Association. However, the equities markets have undergone a substantial
transformation since the Commission previously considered the Rule.
Over time, active, cross-market proprietary trading firms began relying
on the Rule 15b9-1 exemption in ways that were not envisioned when the
Rule was adopted or amended. The Commission is proposing to amend Rule
15b9-1 to better align the scope of its exemption, in light of today's
market activity, with Section 15(b)(8) of the Exchange Act and the
Commission's purposes underlying the adoption of Rule 15b9-1.
    When the Exchange Act was adopted in 1934, the exchanges were the
only self-regulatory organizations (``SROs'') \1\ and were charged with
regulating the activities of their broker-dealer members.\2\ 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 \3\ and, in 1938, Congress
provided for the creation of national securities associations.\4\
Congress later mandated Association membership for all off-exchange
market participants through Section 15(b)(8) of the Exchange Act,\5\
which requires a broker-dealer to become a member of an Association
unless it effects transactions solely on an exchange of which it is a
member. This provision, among others, reflects an overarching principle
in the Exchange Act that the SRO best positioned to conduct regulatory
oversight should assume those responsibilities \6\ and,
correspondingly, that off-exchange trading is primarily the
responsibility of an Association or Associations.
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    \1\ 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). See also
infra notes 26-28 and accompanying text.
    \2\ See, e.g., 15 U.S.C. 78f(b) (requiring exchanges to be so
organized as to enforce compliance by their members and persons
associated with their members with the provisions of the Exchange
Act).
    \3\ ``Off-exchange'' trading as used herein means any securities
transaction in an exchange-listed security 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 on
alternative trading systems and directly with a broker-dealer,
acting either as agent or principal, and is also referred to as
over-the-counter (``OTC'') trading. The term ``off-exchange'' as
used herein does not refer, as it does in some contexts, to
transactions in securities, either in equities or other instruments,
that are not listed on a national securities exchange.
    \4\ See infra notes 31-33 and accompanying text (describing the
early history and background behind the creation of national
securities associations).
    \5\ 15 U.S.C. 78o(b)(8). Section 15(b)(8) of the Exchange Act
was adopted in 1964. See infra notes 36-37 and accompanying text.
Notably, however, from 1976-1983, broker-dealers engaged in off-
exchange trading could either join an Association or be subject to
direct regulation by the Commission under the SEC Only (``SECO'')
Program. See infra notes 38-48 and accompanying text.
    \6\ As originally adopted in 1934, the regulation of broker-
dealer activities on national securities exchanges was excluded from
the Commission's authority. See Section 15 as adopted in 1934,
Public Law 73-291, 48 Stat. 881, 895-96 (1934), infra note 27.
Rather, regulation of broker-dealer activities on exchanges
continued to be conducted by the exchanges themselves, many of which
existed prior to the enactment of the Exchange Act. Consequently,
this left regulation of the off-exchange market with the Commission,
until passage of the Maloney Act in 1938, providing for the creation
of voluntary, self-regulating Associations with powers to adopt and
enforce rules to regulate the off-exchange market. Public Law 75-
719, 52 Stat. 1070 (1938) (the ``Maloney Act''); see also infra note
23 and accompanying text.
     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). In adopting Section 17(d), a Senate
Report accompanying the 1975 Amendments expressed the view that
``the Commission should play an affirmative role in allocating
inspection and enforcement responsibilities among the self-
regulatory organizations'' and that ``for reporting purposes each
broker-dealer [should] be assigned to a designated principal self-
regulator or government regulator who will be responsible for
determining the broker-dealer's operating and financial status.''
See 1975 Amendments, Report of the Senate Committee on Banking,
Housing, and Urban Affairs to Accompany S. 249, S. Rep. No. 94-75,
94th Cong., 1st Session 33 (1975).
     As a general matter, SROs and the Commission have used the
flexibility provided by Section 17(d) of the Act to allocate
regulatory responsibilities in such a manner. 15 U.S.C. 78q(d). See,
e.g., Exchange Act Release No. 63750 (January 21, 2011), 76 FR 4948
(January 27, 2011) (order approving 17d-2 plan to allocate
regulatory responsibility to FINRA relating to surveillance,
investigation, and enforcement of insider trading rules); Exchange
Act Release No. 70052 (July 26, 2013), 78 FR 46665 (August 1, 2013)
(order approving 17d-2 plan to add Topaz Exchange, LLC to existing
plan with all other options exchanges to allocate regulatory
responsibility to FINRA relating to, among other things, opening of
accounts, supervision, suitability, discretionary accounts,
advertising, customer complaints, customer statements, disclosure
documents, and certification of personnel); Exchange Act Release No.
73641 (November 19, 2014), 79 FR 70230 (November 25, 2014) (order
approving 17d-2 plan to allocate regulatory responsibility to FINRA
for the Miami International Securities Exchange, LLC (``MIAX''),
with respect to examination and enforcement responsibility relating
to compliance by common members with the substantially similar rules
of the two SROs and applicable provisions of the federal securities
laws). See also infra notes 62-63 and accompanying text (discussing
the allocation of regulatory responsibilities among SROs).
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    Section 15(b)(9) of the Exchange Act,\7\ provides the Commission
with authority to exempt any broker-dealer from the requirements of
Section 15(b)(8), if that exemption is consistent with the public
interest and the protection of investors. Pursuant to that authority,
the Commission adopted Rule 15b9-1,\8\ which was last substantively
updated in 1983.\9\ That Rule was intended to address the limited
activities of exchange-based specialists and floor brokers that were
conducted off the exchange of which they were a member and that were
ancillary to their floor-based business.\10\ Specifically, the Rule
exempts a broker-dealer from the requirement to become a member of an
Association if it is a member of a national securities exchange,
carries no customer accounts, and has annual gross income of no more
than $1,000 that is derived from securities transactions effected
otherwise than on a national securities exchange of which it is a
member (the ``de minimis allowance''). Importantly, the Rule permits
income derived from transactions for the dealer's own account with or
through another registered broker-dealer, to not count toward the
$1,000 de minimis allowance (hereinafter, the ``exclusion for
proprietary trading'').\11\ As discussed more fully below, the de
minimis allowance originally was designed to permit broker-dealers
doing business on exchange floors to share in the commissions paid on
occasional off-exchange transactions in customer accounts they
introduced to other broker-dealers, up to a nominal amount.\12\ In
addition, when the exclusion for proprietary trading was adopted in
1976,\13\ the circumstances under which an exchange specialist or floor
broker would trade proprietarily off-exchange remained quite limited,
such as when a regional exchange specialist would hedge risk on the
primary listing market.\14\
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    \7\ The Commission by rule or order, as it deems consistent with
the public interest and the protection of investors, may
conditionally or unconditionally exempt from paragraph (8) of this
subsection any broker or dealer or class of brokers or dealers
specified in such rule or order. See 15 U.S.C. 78o(b)(9); Public Law
98-38, 97 Stat. 205 (1983).
    \8\ 17 CFR 240.15b9-1. See also infra notes 38-48 and
accompanying text for a discussion on Rule 15b8-1, the predecessor
to Rule 15b9-1.
    \9\ 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'').
    \10\ See infra note 22 and accompanying text (explaining that
the Rule is limited to receipt of a portion of the commissions paid
on occasional over-the-counter transactions and certain other
activities incidental to their activities as specialists).
    \11\ The exclusion for proprietary trading (conducted with or
through another registered broker-dealer) was not part of the
original exemption, but was added in 1976. See infra notes 43-44 and
accompanying text.
    \12\ 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, 11675
(September 11, 1965) (``Qualifications and Fees Release'')
(describing specialist or floor broker's proprietary off-exchange
activity as generally limited to occasional commissions on
introduced accounts and other transactions incidental to their
activity as specialists or floor brokers). See also infra note 22.
    \13\ In adopting the exclusion for proprietary trading, the
Commission indicated that an exchange floor broker, through another
broker-dealer, could effect transactions for its own account on an
exchange of which it was not a member. The Commission noted that
such transactions ultimately would be effected by a member of that
exchange. 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, 10600 (March 12,
1976) (``Adoption of Amendments to SECO Rules''). See also infra
note 44.
    \14\ In the Special Study of the Securities Markets in 1963, the
Commission described how regional exchange specialists reduced their
exposure, including by offsetting those 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 exclusion for
proprietary trading in Rule 15b9-1 was adopted in 1976.

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    Accordingly, those broker-dealers exempt from Association
membership pursuant to Rule 15b9-1 when it was first adopted were
broker-dealers with a business focused on the floor of an exchange of
which they were a member.\15\ The Commission crafted Rule 15b9-1 to
accommodate limited activities ancillary to that floor-based business,
and thereby left it to the exchange of which the specialist or floor
broker was a member to continue to regulate the entirety of that
broker-dealer's activities. Therefore, the scope of Rule 15b9-1
originally was consistent with the principle underlying Section
15(b)(8) of the Exchange Act, noted above, that the SRO best positioned
to conduct regulatory oversight should assume those responsibilities.
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    \15\ See infra note 22.
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    However, the equities markets have undergone a substantial
transformation since the Commission previously considered Rule 15b9-1,
evolving from markets with both manual and automated features and
trading volumes concentrated on the primary listing exchanges, to a
highly electronic, decentralized market with substantial competition
among a large number and great variety of trading venues.\16\ 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 alternative trading systems (``ATSs'').\17\ They
also tend to use complex electronic trading strategies and
sophisticated technology to generate a large volume of orders and
transactions throughout the national market system.\18\
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    \16\ See Concept Release Concerning Equity Market Structure,
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594, 3594-
3596 (January 21, 2010) (``Concept Release'') (discussing the
evolution from ``a market structure with primarily manual trading to
a market structure with primarily automated trading'').
    \17\ ATSs fall within the statutory definition of national
securities exchange, but are exempt from having to register as an
exchange if they comply with Regulation ATS. See Regulation of
Exchanges and Alternative Trading Systems, Exchange Act Release No.
40760 (December 8, 1998), 63 FR 70844, 70856 (December 22, 1998).
Regulation ATS requires ATSs to be registered as broker-dealers with
the Commission, which entails becoming a member of an Association
and complying with the broker-dealer regulatory regime. 17 CFR
242.301(b)(1). Unlike a registered national securities exchange, an
ATS is not required to file proposed rule changes with the
Commission. ATSs include both dark pools and electronic
communications networks (``ECNs''). ECNs provide their best-priced
orders for inclusion in the consolidated quotation data, while dark
pools do not. See Concept Release, supra note 16 at 3599. See also
infra notes 158--161 and accompanying text (describing some of these
firms' activity on exchanges). ATSs did not exist when Rule 15b9-1
was last amended in 1983.
    \18\ Many, but not all, such 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 over night).
See Concept Release, supra note 16, at 3606. See also Staff of the
Division of Trading and Markets, Commission, ``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).
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    Over time, active, cross-market proprietary trading firms began
relying on the Rule 15b9-1 exemption in ways that were not envisioned
when the Rule was adopted or amended.\19\ As noted above, the de
minimis allowance of Rule 15b9-1, and the subsequent exclusion of
income derived from proprietary transactions conducted with or through
another registered broker-dealer from such allowance, were designed to
permit exchange-based specialists or floor brokers to conduct limited
activities off-exchange. However, because the Rule does not explicitly
limit this exclusion from the de minimis allowance to dealer activities
ancillary to a floor-based business, a broker-dealer, with or without a
floor presence, may engage in unlimited proprietary trading in the off-
exchange market without becoming a member of an Association.
Consequently, many of the most active, cross-market proprietary trading
firms have been able to rely on the exemption from Association
membership, despite effecting a significant volume of transactions off-
exchange.
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    \19\ These firms are registered with the Commission as broker-
dealers but have elected to avail themselves of the Rule 15b9-1
exemption from membership in an Association.
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    As a result, an exemption that was developed to address limited
off-exchange activity by exchange-based specialists or floor brokers is
today being used by many broker-dealers without a floor-based business,
and that conduct a substantial percentage of the volume of off-exchange
trading in the U.S. securities markets. Specifically, during the fourth
quarter of 2014, broker-dealers that are not Association \20\ members
(``Non-Member Firms'') accounted for 45% of orders sent directly to
ATSs, a significant category of off-exchange trading venue.\21\
Preliminarily, the Commission does not believe the public interest
finding that originally supported the adoption and amendments of Rule
15b9-1continues to apply today in this context.
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    \20\ Financial Industry Regulatory Authority, Inc. (``FINRA'')
is currently the sole Association. See infra note 34. In 1939, the
Commission approved the National Association of Securities Dealers,
Inc. (``NASD'') as the first national securities association. See 4
FR 3564 (August 9, 1939). 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).
    \21\ ATSs received approximately 230 billion orders during 2014
that were sent directly to an ATS (i.e., orders received by a
broker-dealer that are then sent to another trading desk of that
broker-dealer (so called ``desk-reports'') are generally excluded
from these order totals). Orders from Non-Member Firms accounted for
49% of orders sent directly to ATSs during the first quarter of
2014, 49% of orders sent directly to ATSs during the second quarter
of 2014, 48% of orders sent directly to ATSs during the third
quarter of 2014, and 45% of orders sent directly to ATSs during the
fourth quarter of 2014. In 2013, ATSs received approximately 163
billion orders that were sent directly to an ATS. Orders from Non-
Member Firms accounted for 34% of orders sent directly to ATSs
during the first quarter of 2013, 38% of orders sent directly to
ATSs during the second quarter of 2013, 42% of orders sent directly
to ATSs during the third quarter of 2013, and 45% of orders sent
directly to ATSs during the fourth quarter of 2013. On a volume-
weighted basis (i.e., accounting for variations in total order
volume sent to ATSs), Non-Member Firms accounted for 48% of orders
sent directly to ATSs in 2014, 40% in 2013, and 32% in 2012. This
information is from data obtained from FINRA's Order Audit Trail
System (``OATS'').
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    Accordingly, the Commission is proposing to amend Rule 15b9-1 to
better align the scope of its exemption, in light of today's market
activity, with Section 15(b)(8) of the Exchange Act and the
Commission's original purpose in adopting Rule 15b9-1, which was to
accommodate broker-dealer activities ancillary to a floor-based
business while preserving the traditional role of the exchange as the
entity best suited to regulate member conduct on the exchange.\22\ A
broker-dealer that

conducts off-exchange transactions outside the limited scope of Rule
15b9-1, as proposed to be amended, would be required to become a member
of an Association. Consequently, such a broker-dealer would be subject,
with respect to its off-exchange transactions, to the oversight and
rules of an Association, the category of SRO primarily responsible for
regulating trading in the off-exchange market in accordance with
Section 15(b)(8).\23\ Further, as a result of the proposal, a broker-
dealer that does not trade off-exchange but that trades indirectly on
multiple exchanges would be required in accordance with Section
15(b)(8), to become a member of an Association, or alternatively, a
member of each exchange where it effects transactions other than
transactions to hedge the risks of its floor-based activities.
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    \22\ In adopting Rule 15b8-1, 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.'' See
Qualifications and Fees Release, supra note 12, at 11675.
    \23\ See Public Law 75-719, 52 Stat. 1070 (1938) (The Maloney
Act, which established the concept of and framework for
Associations, states in its preamble that its purpose was to provide
for the establishment of a mechanism of regulation [Associations]
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). See also infra notes 26, 28-33 and
accompanying text (describing the early history of the Maloney Act).
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A. Regulatory History

    The primary purpose of an SRO is to regulate its members.\24\
Although the 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.
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.\25\ A primary
purpose of an Association as an SRO, among other things, is to regulate
the off-exchange market.\26\ Under the Exchange Act, as adopted in
1934, the direct regulation of broker-dealer activities on national
securities exchanges was to be conducted by the exchanges themselves.
As there was no SRO for the off-exchange market, regulation of the off-
exchange market was to be the Commission's responsibility.\27\ Congress
recognized that the benefits of exchange regulation could be undermined
in the absence of a complementary regulatory framework for the off-
exchange market \28\ and provided the Commission the authority to adopt
rules and regulations concerning the off-exchange market to achieve
investor protections comparable to those on exchanges.\29\ After
further study,\30\ however, in 1938 Congress imposed a comprehensive
regulatory framework for the off-exchange market through the Maloney
Act.\31\ The Maloney Act added Section 15A to the Act,\32\ providing
for the creation of national securities associations of broker-dealers,
with powers to adopt and enforce rules to regulate the off-exchange
market.\33\ This led to the creation of NASD, the predecessor of FINRA,
and the only Association \34\ registered to date.\35\
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    \24\ See, e.g., S. Doc. No. 93-13 at 147 (1973) (describing the
structure of the self-regulatory system in which SROs ``are
delegated governmental power in order to enforce, at their own
initiative, compliance by members of the industry with legal and
ethical standards going beyond the basic requirements laid down in
the Act.'').
    \25\ 15 U.S.C. 78q(d); 15 U.S.C. 78s(g).
    \26\ The Maloney Act authorizes an Association to, among other
things, establish rules designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest. See 15 U.S.C 78o-
3(b)(6). See also First Jersey Sec., Inc. v. Bergen, 605 F.2d 690,
692 (3d Cir. 1979) (``The purpose of [NASD] is to provide self-
regulation of the over-the-counter securities market.''); Special
Study, supra note 14, at 65 (describing the NASD as ``the agency
with primary self-regulatory responsibility for over-the-counter
markets.'').
    \27\ As adopted in 1934, Section 15 of the Exchange Act read, in
relevant part: ``It shall be unlawful, in contravention of such
rules and regulations as the Commission may prescribe as necessary
or appropriate in the public interest and to insure to investors
protection comparable to that provided by and under authority of
this title in the case of national securities exchanges, (1) for any
broker or dealer . . . to make or create, a market, otherwise than
on a national securities exchange, for both the purchase and sale of
any security . . . or (2) for any broker or dealer to use any
facility of any such market. Such rules and regulations may provide
for the regulation of all transactions by brokers and dealers on any
such market, for the registration with the Commission of dealers
and/or brokers making or creating such a market, and for the
registration of the securities for which they make or create a
market and may make special provision with respect to securities or
specified classes thereof listed, or entitled to unlisted trading
privileges, upon any exchange on the date of the enactment of this
title, which securities are not registered under the provisions of
section 12 of this title.'' Public Law 73-291, 48 Stat. 881, 895-96
(1934).
    \28\ In considering adopting the Maloney Act, the House noted
that: ``The committee has been convinced that effective regulation
of the exchanges requires as a corollary a measure of control over
the over-the-counter markets. The problem is clearly put in the
recent report of the Twentieth Century Fund on `Stock Market
Control': `The benefits that would accrue as the result of raising
the standards of security exchanges might be nullified if the over-
the-counter markets were left unregulated and uncontrolled. . . . To
leave the over-the-counter markets out of a regulatory system would
be to destroy the effects of regulating the organized exchanges.'''
H.R. Doc No. 1383, 73d Cong. 2d Sess. at 4 (1934) (quoting report on
``Stock Market Control'' by the Twentieth Century Fund).
    \29\ Id.
    \30\ See Statement of Senator Francis T. Maloney, Hearings
before Committee on Banking and Currency on S. 3255, 75th Cong., 3d
Sess. (1938) (noting that the Maloney Act came after ``a long-time
effort on the part of the Securities and Exchange Commission in
rather close cooperation with members of the investment banking
business and over-the-counter dealers and brokers.'').
    \31\ Public Law 75-719, 52 Stat. 1070 (1938).
    \32\ 15 U.S.C. 78o-3.
    \33\ Id.; see also S. Rep. No. 75-1455, at 3-4 (1938) (``The
committee believes that there are two alternative programs by which
this problem [of regulation of the off-exchange market] could be
met. The first would involve a pronounced expansion of the
organization of the Securities and Exchange Commission; the
multiplication of branch offices; a large increase in the
expenditure of public funds; an increase in the problem of avoiding
the evils of bureaucracy; and a minute, detailed, and rigid
regulation of business conduct by law. . . . The second of these
alternative programs, which the committee believes distinctly
preferable to the first . . . is based upon cooperative regulation,
in which the task will be largely performed by representative
organizations of investment bankers, dealers, and brokers, with the
Government exercising appropriate supervision in the public
interest, and exercising supplementary powers of direct
regulation.''). See also S. Rep. No. 74-1455, at 2-3 (1938) (``It
has been deemed advisable to authorize the Commission to subject
such activities [i.e., trading in the over-the-counter markets] to
regulation similar to that prescribed for transactions on organized
exchanges. This power is vitally necessary to forestall the
widespread evasion of stock-exchange regulation by the withdrawal of
securities from listing on exchanges, and by transferring trading
therein to `over-the-counter' markets where manipulative evils could
continue to flourish, unchecked by any regulatory authority'')
(quoting S. Rep. No. 73-792, at 6 (1934)). See also supra note 26.
    \34\ See supra note 20. 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.
    \35\ The existing self-regulatory structure in which an
Association serves as the regulator of the off-exchange market and
exchanges focus their regulatory supervision on their respective
markets has not been materially altered from a statutory perspective
since its establishment. See Concept Release Concerning Self-
Regulation, Exchange Act Release No. 50700 (November 18, 2004), 69
FR 71256, 71258 (December 8, 2004).
---------------------------------------------------------------------------

    Section 15(b)(8) of the Act, enacted in 1964,\36\ further
strengthened regulatory

oversight of the off-exchange market by prohibiting a broker-dealer
from effecting any transaction ``otherwise than on a national
securities exchange'' unless the broker-dealer was either a member of
an Association, or met the Commission's standards with respect to
training, experience, and other relevant qualifications.\37\ In 1965,
the Commission adopted Rule 15b8-1 to establish the SECO Program, which
provided for the direct regulation by the Commission of broker-dealers
that effected transactions off-exchange and that chose not to join an
Association.\38\
---------------------------------------------------------------------------

    \36\ Section 15(b)(8) as enacted provided that no broker or
dealer registered under section 15 of this title shall, during any
period when it is not a member of a securities association
registered with the Commission under section 15A of this title,
effect any transaction in, or induce the purchase or sale of, any
security (otherwise than on a national securities exchange) unless
such broker or dealer and all natural persons associated with such
broker or dealer meet such specified and appropriate standards with
respect to training, experience, and such other qualifications as
the Commission finds necessary or desirable. See Public Law 88-467,
78 Stat. 565, 572-73 (1964).
    \37\ In the Special Study, the Commission explained that the
controls over entry into the securities business were inadequate,
allowing entry by unqualified persons. Special Study, supra note 14,
at 1, 23 (1963). Congress' amendments in 1964 responded to these
findings.
    \38\ Under the SECO Program, every associated person engaged
directly or indirectly in securities activities for or on behalf of
a non-member broker-dealer, and every associated person who
supervised others engaged in any securities activities, was required
to successfully complete either the general securities examination
prescribed by the Commission or an alternative examination deemed
satisfactory by the Commission. See Qualifications and Fees Release,
supra note 12, at 11676 (defining the term ``nonmember broker or
dealer'' as ``any broker or dealer, including a sole proprietor,
registered under section 15 of the Act, who is not a member of a
national securities association registered with the Commission under
section 15A of the Act.''). Any broker-dealer could choose to join
an Association or be regulated by the Commission directly under the
SECO Program.
---------------------------------------------------------------------------

    Rule 15b8-1 provided for an exemption from the SECO Program, and by
extension from Association membership, for those broker-dealers that:
(1) Were members of a national securities exchange; (2) did not carry
customer accounts; and (3) had annual gross income derived from off-
exchange activity that amounted to no greater than $1,000.\39\ This set
the basic framework for the Rule 15b9-1 exemption from Association
membership that exists today. The Commission recognized that, at that
time, exchange-based specialists and other floor brokers, which were
comprehensively regulated by the exchange of which they were a member,
occasionally introduced accounts to other members and shared in the
commission revenues.\40\ Rule 15b8-1 permitted these broker-dealers,
who were not required to register with the Commission as broker-dealers
at the time,\41\ to receive a portion of the commissions paid on
occasional off-exchange transactions on these introduced accounts
without becoming subject to the SECO rules and broker-dealer
registration, so long as the income derived from those activities was
nominal.\42\
---------------------------------------------------------------------------

    \39\ ``Under Rule 15b8-1 (17 CFR 240.15b8-1), any broker-dealer
who is a member of a national securities exchange is exempt from the
rule if he does not carry customers' accounts and if his annual
gross income derived from his over-the-counter business is no more
than $1,000. Should a broker-dealer's over-the-counter income exceed
these limits for an accounting year, such broker-dealer and all
persons associated with him become subject to the requirements of
the rule.'' Id. at 11675.
    \40\ See supra note 22.
    \41\ Until 1975, broker-dealers who traded exclusively on the
floor of a national securities exchange were exempt from
registration with the Commission. The 1975 Amendments required all
broker-dealers, including exchange specialists and floor brokers, to
register with the Commission, and extended the Commission's SECO
rulemaking authority to any exchange member trading on an exchange
other than an exchange of which it was a member. 1975 Amendments,
supra note 6, at 121. The 1975 Amendments revised Section 15(b) such
that the substance of then existing Section 15(b)(8) was captured in
Sections 15(b)(7) through (9). See id. at 131. One purpose of the
1975 Amendments was to assure that the Commission could regulate and
recoup the costs of regulating transactions of exchange members
conducted on exchanges of which they were not a member. See 1975
Amendments, supra note 6, at 125 (amending Section 15 of the
Exchange Act to provide the Commission with authority to ``prescribe
reasonable fees and charges to defray its costs'' of regulation).
    \42\ See Adoption of Amendments to SECO Rules, supra note 13.
See also supra note 22 (noting that the over-the-counter business of
these broker-dealers may be limited and the income derived from
these activities is nominal).
---------------------------------------------------------------------------

    In 1976, the Commission amended Rule 15b8-1 to provide that income
derived from transactions for the dealer's own account effected with or
through another registered broker-dealer would not count towards the
$1,000 de minimis allowance.\43\ In adopting this amendment to Rule
15b8-1, the Commission noted that an exchange-based floor broker could
effect transactions through another broker-dealer for its own account
on an exchange of which it was not a member, and indicated that such
transactions ultimately would be effected by a member of that
exchange.\44\ At the time this provision was adopted, the circumstances
under which an exchange specialist or floor broker would trade
proprietarily off the exchange were quite limited, such as when a
regional exchange specialist would hedge risk on the primary listing
market.\45\
---------------------------------------------------------------------------

    \43\ ``Any nonmember broker or dealer who is a member of a
national securities exchange shall be exempt from this rule if (1)
he carries no accounts of customers, and (2) his annual gross income
derived from purchases and sales of securities otherwise than on a
national securities exchange of which he is a member is an amount no
greater than $1,000. Provided however, [t]hat gross income derived
from transactions otherwise than on such national securities
exchange which are effected for his own account with or through
another registered broker or dealer shall not be subject to such
limitation.'' See Adoption of Amendments to SECO Rules, supra note
13, at 10601. Thus, broker-dealers registering with the Commission
as a result of the 1975 Amendments became subject to the SECO rules
in 1976, but could remain exempt from such rules pursuant to Rule
15b8-1 and its exclusion for proprietary trading.
    \44\ The Commission provided the following example to describe
the application of the exclusion for proprietary trading: ``a broker
who is acting as a floor broker on a particular exchange, and who
effects transactions for his own account otherwise than on that
exchange through another broker-dealer who acts as a clearing member
for the floor broker, would be permitted to effect transactions on
exchanges of which neither he nor his clearing broker are members
without becoming subject to the SECO rules.'' Id. In this example,
``[t]he clearing broker would, of course, effect transactions on an
exchange of which he was not a member through a member of that
exchange.'' Id. at 10602, n. 8.
    \45\ See supra note 14.
---------------------------------------------------------------------------

    In 1983, Congress amended the Act to eliminate the direct oversight
of broker-dealers by the Commission.\46\ Congress maintained the
exception from membership in an Association in Section 15(b)(8) of the
Act for those broker-dealers that effected transactions in securities
only on an exchange of which they were a member. Congress also left
unchanged the ability of the Commission to expand upon the statutory
exception in Section 15(b)(8) through exemptive authority in Section
15(b)(9) of the Act.\47\ When the SECO rules were abolished in 1983,
the Commission amended and renumbered Rule 15b8-1.\48\ The substance of
newly renumbered Rule 15b9-1 remained largely the same as Rule 15b8-1,
with modifications that primarily accommodated transactions effected
through the new Intermarket Trading System (``ITS'') linkage,\49\ and
eliminated references to, and requirements under, the SECO Program.
---------------------------------------------------------------------------

    \46\ At that time, direct oversight of broker-dealers by the
Commission was conducted through the SECO Program. 15 U.S.C.
78o(b)(8), as amended by Pub. L. 98-38, 97 Stat. 205, 206 (1983).
See also H.R. Rep. No. 98-106, at 597 (1983) (citing a preference
for self-regulation over direct regulation by the Commission. Among
other benefits of self-regulation, the report noted that NASD had
available a broader and more effective range of disciplinary
sanctions to employ against broker-dealers than had the Commission).
    Section 15(b)(8) is virtually the same as it was in 1983: ``It
shall be unlawful for any registered broker or dealer to effect any
transaction in, or induce or attempt to induce the purchase or sale
of, any security (other than or commercial paper, bankers'
acceptances, or commercial bills), unless such broker or dealer is a
member of a securities association registered pursuant to section
15A of this title or effects transactions in securities solely on a
national securities exchange of which it is a member.'' 15 U.S.C.
78o(b)(8). In 1986, Congress enacted non-substantive amendments
modifying a few terms in the statute. Public Law 99-571, 100 Stat.
3208, 3218 (1986). 15 U.S.C. 78o(b)(8).
    \47\ See supra note 7.
    \48\ See supra note 9.
    \49\ See infra notes 126-130 and accompanying text.
---------------------------------------------------------------------------

    Under the Rule as amended in 1983, a broker-dealer was not required
to become a member of an Association if:

(1) It was a member of a national securities exchange, (2) carried no
customer accounts, and (3) had annual gross income no greater than
$1,000 that was derived from securities transactions effected otherwise
than on a national securities exchange of which the broker-dealer was a
member.\50\ As under the SECO rules, income derived from transactions
effected for a broker-dealer's own account with or through another
broker or dealer was not included in the $1,000 de minimis
allowance.\51\
---------------------------------------------------------------------------

    \50\ Any broker or dealer required by Section 15(b)(8) of the
Act to become a member of a registered national securities
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. See 17 CFR
240.15b9-1(a); see also SECO Programs Release, supra note 9, at
53690.
    \51\ The gross income limitation contained in paragraph (a) of
17 CFR 240.15b9-1, shall not apply to income derived from
transactions for the dealer's own account with or through another
registered broker or dealer, or through the Intermarket Trading
System. See 17 CFR 240.15b9-1(b); SECO Programs Release, supra note
9, at 53690.
---------------------------------------------------------------------------

    Since 1983, Rule 15b9-1 has remained unchanged, except for a
technical amendment in 2005 to update cross-references when the
Commission adopted Regulation NMS.\52\
---------------------------------------------------------------------------

    \52\ Regulation NMS, Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37618 (June 29, 2005).
---------------------------------------------------------------------------

B. Regulatory Oversight of Off-Exchange Trading Activity

    Section 19(g)(1) of the Act 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.\53\ Without this relief, the statutory
obligation of each individual SRO would result in duplicative
examinations and oversight of broker-dealers that are members of more
than one SRO (``common members''). Section 17(d)(1) of the Act is
intended, in part, to eliminate overlapping examinations and regulatory
functions.\54\ With respect to a 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.\55\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78s(g).
    \54\ See 1975 Amendments, Report of the Senate Committee on
Banking, Housing, and Urban Affairs to Accompany S. 249, S. Rep. No.
94-75, 94th Cong., 1st Session 32 (1975).
    \55\ 15 U.S.C. 78q(d)(1).
---------------------------------------------------------------------------

    To implement Section 17(d)(1), the Commission adopted two rules:
Rule 17d-1 and Rule 17d-2 under the Act.\56\ 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 the Commission or
SRO rules.\57\ 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.\58\ 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.\59\ 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.\60\ 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.\61\
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17d-1; 17 CFR 240.17d-2.
    \57\ See Exchange Act Release No. 12352 (April 20, 1976), 41 FR
18808 (May 7, 1976).
    \58\ See Exchange Act Release No. 12935 (October 28, 1976), 41
FR 49091 (November 8, 1976).
    \59\ Any two or more self-regulatory organizations may file with
the Commission a plan . . . for allocating among the self-regulatory
organizations the responsibility to receive regulatory reports from
persons who are members or participants of more than one of such
self-regulatory organizations to examine such persons for
compliance, or to enforce compliance by such persons, with specified
provisions of the Securities Exchange Act of 1934, the rules and
regulations thereunder, and the rules of such self-regulatory
organizations, or to carry out other specified regulatory functions
with respect to such persons. See 17 CFR 240.17d-2.
    \60\ Id.
    \61\ Id. Exchanges also enter into Regulatory Services
Agreements (``RSAs'') whereby one SRO contractually agrees to
perform regulatory services for another. See, e.g., FINRA News
Release, FINRA Signs Regulatory Services Agreement with the Chicago
Board Options Exchange, Incorporated (``CBOE'') and C2 Options
Exchange, Incorporated (``C2'') (December 22, 2014), available at
http://www.finra.org/newsroom/newsreleases/2014/p602174. However,
RSAs do not relieve the contracting SRO from regulatory
responsibility for the performance of any regulatory services
allocated pursuant to the RSA and are not filed with the Commission
for approval.
---------------------------------------------------------------------------

    The principle underlying the self-regulatory structure in the
Exchange Act is the concept that the SRO best positioned to conduct
regulatory oversight should assume responsibility for that
oversight.\62\ As a general matter, the SROs and the Commission have
used the flexibility provided by Section 17 to allocate
responsibilities in such a manner.\63\ 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.
Those exempt from Association membership pursuant to Rule 15b9-1
originally were exchange specialists and other floor members, and the
off-exchange activity permitted under Rule 15b9-1 (including its
predecessor rule) was intended only to accommodate limited activities
ancillary to that floor-based business.
---------------------------------------------------------------------------

    \62\ 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. See 15 U.S.C. 78q(d)(1).
    \63\ See supra note 6; infra note 69.
---------------------------------------------------------------------------

    As the sole currently registered Association, FINRA is the SRO
primarily responsible for regulating trading in the off-exchange
market.\64\ FINRA also conducts the vast majority of broker-dealer
examinations,\65\ mandates broker-dealer disclosures, and writes and
enforces rules governing broker-dealer conduct.\66\ FINRA regulates
trading in non-listed equities, fixed income, and other traded
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 rules
thereunder.\67\ As noted above, the regulatory focus of national
securities exchanges, which are also SROs, has been more narrow, with
primary

responsibility to regulate trading by their members on their respective
exchanges,\68\ enforce conduct rules (if they have not been relieved of
that responsibility by 17d-2 Agreements), and otherwise perform member
regulation for their members that are not also members of FINRA. Most
exchanges have entered into 17d-2 Agreements with FINRA that allocate
regulatory responsibility over common members to FINRA for compliance
with common conduct rules.\69\
---------------------------------------------------------------------------

    \64\ See supra note 31.
    \65\ The Commission staff also conducts risk-based examinations
of broker-dealers. However, routine broker-dealer examinations are
conducted by the SROs, and the Commission staff oversees the
examination efforts of the SROs.
    \66\ 15 U.S.C. 78o-3.
    \67\ Id.
    \68\ Congress saw the codification of the regulations requiring
the registration of off-exchange broker-dealers as ``an essential
supplement to regulation of the exchanges.'' H.R. Rep. No. 74-2601,
at 4 (1936). See also supra note 28 and accompanying text.
    \69\ See, e.g., Exchange Act Release No. 63430 (December 3,
2010), 75 FR 76758 (December 9, 2010) (order approving Rule 17d-2
plan to allocate regulatory responsibility to FINRA for certain
Regulation NMS rules by 13 exchanges). Generally, FINRA is also the
DEA for financial responsibility rules for exchange members that
also are members of FINRA. See infra note 164 (discussing DEAs).
---------------------------------------------------------------------------

    FINRA has developed a transparency and regulatory regime for the
off-exchange market. All off-exchange trades are reported to FINRA,\70\
and as a result FINRA has developed a set of trade reporting rules to
support that transparency regime.\71\ FINRA also has developed a
regulatory audit trail, which provides regulatory data on orders,
quotes, routes, cancellations, and executions.\72\ FINRA has developed
rules and guidance tailored to trading activity \73\ and has developed
surveillance technology and specialized regulatory personnel to provide
surveillance, supervision, and enforcement of activity occurring off-
exchange.\74\ Furthermore, FINRA has a detailed set of member conduct
rules that apply to all activities of a firm, whether on- or off-
exchange.\75\
---------------------------------------------------------------------------

    \70\ 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 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''), 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 49822 (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).
    \71\ See FINRA Rule 7000 Series--Clearing, Transactions and
Order Data Requirements, and Facility Charges.
    \72\ FINRA operates the OATS system, which is an integrated
audit trail of order, quote, and trade information for all NMS
stocks and OTC equity securities required to be submitted by FINRA
members. See e.g., Exchange Act Release No. 54585 (October 10,
2006), 71 FR 61112 (October 17, 2006) (order approving a proposed
rule change relating to the expansion of OATS reporting requirements
to OTC equity securities). FINRA uses the OATS audit trail system to
recreate events in the life cycle of orders and more completely
monitor the trading practices of FINRA member firms. See FINRA.org,
Order Audit Trail System (OATS), available at http://www.finra.org/industry/oats (last visited March 19, 2015).
    \73\ 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).
    \74\ See FINRA.org, FINRA 2013 Year in Review and Annual
Financial Report, available at http://www.finra.org/sites/default/files/Corporate/p534386.pdf (last visited March 19, 2015).
    \75\ See Part V.B.4 discussing the competitive effects of off-
exchange market regulation.
---------------------------------------------------------------------------

    As noted, Rule 15b9-1 in its current form allows a broker-dealer to
engage in unlimited proprietary trading in the off-exchange market
without becoming a member of an Association, so long as its proprietary
trading activity is conducted with or through another registered
broker-dealer (i.e., not with a customer). In practice, this allows
many cross-market proprietary trading firms to avoid Association
membership, despite their effecting a significant volume of
transactions in the off-exchange market. Non-Member Firms are not
subject to oversight by an Association and their off-exchange
transactions typically are not overseen by the exchanges of which they
may be members. Exchanges traditionally have not assumed the role of
regulating the totality of the trading of their member-broker-dealers,
and exchanges are currently not well-positioned to assume that role, in
light of the statutory scheme and, among other things, their limited
access to data \76\ and the proper rule set to regulate off-exchange
trading. Exchanges generally do not have a detailed set of member
conduct rules and non-exchange-specific trading rules, thus allowing
such broker-dealers and their personnel to conduct business under a
less specific regulatory regime than FINRA members. In this context and
consistent with the statutory framework that places responsibility for
off-exchange trading with an Association, therefore, the Commission
preliminarily believes that an Association is better suited to regulate
off-exchange trading.
---------------------------------------------------------------------------

    \76\ See Exchange Act Release No. 67457 (July 18, 2012), 77 FR
45722, 45728-30 (August 1, 2012) (discussing the use and limitations
of current SRO audit trails and noting that ``[m]ost SROs maintain
their own specific audit trails applicable to their members'' and
``each SRO only has direct access to its own audit trails . . .'').
---------------------------------------------------------------------------

    The Commission estimates that, today, there are approximately 125
broker-dealers exempt from Association membership.\77\ This group
includes some of the most active cross-market proprietary trading
firms, which generate a substantial volume of orders and transactions
in the off-exchange market. For example, the Commission estimates that
orders from Non-Member Firms represented a volume-weighted average of
approximately 32% of all orders sent directly to ATSs during 2012.\78\
By 2014, these Non-Member Firms represented a volume-weighted average
of approximately 48% of orders sent directly to ATSs.\79\
---------------------------------------------------------------------------

    \77\ The Commission believes that the majority of these firms
rely on the Rule 15b9-1 exemption rather than the statutory
exception from Association membership under Section 15(b)(8) of the
Act, 15 U.S.C. 78o(b)(8), because the Rule-based exemption is more
permissive than the statute, allowing, for example, unlimited
proprietary trading on an exchange of which a broker-dealer is not a
member. The estimate of 125 firms is based on publicly available
data reviewed by staff during March of 2015. See infra note 148.
    \78\ This estimate is based on data from OATS. See supra note
21.
    \79\ This information is based on data from OATS. In 2013, these
Non-Member Firms represented a volume-weighted average of
approximately 40% of orders sent directly to ATSs. Id.
---------------------------------------------------------------------------

    Accordingly, the Commission believes that many of the broker-
dealers today that rely on the Rule 15b9-1 exemption are very different
from those for which the Rule originally was intended--exchange-based
specialists and other floor members that focused their business on a
single exchange of which they were a member. The presumption built into
Section 15(b)(8) and further extended by Rule 15b9-1, namely that the
exchange of which the firm is a member is in the optimal position to
provide self-regulatory oversight, does not appear to hold for those
firms that avail themselves of the exemption but are engaged in a
significant amount of off-exchange trading.\80\ For broker-dealers that
conduct business only on one exchange, the exchange SRO is well-
positioned to oversee the activities of those broker-dealers and write
and enforce rules tailored to their business model and conduct. For a
broker-dealer that trades electronically across a range of exchange and
off-exchange venues, however, the individual exchange or exchanges of
which the broker-dealer may be a member are not able to as effectively
regulate the off-exchange activity of the broker-dealer because such
exchange(s) today has neither the

resources nor the necessary expertise to oversee such off-exchange
activity.\81\ The Commission is concerned that the reliance on the Rule
15b9-1 exemption by cross-market proprietary trading firms, given that
exchanges focus their regulatory oversight on their respective
exchanges, undermines the effectiveness of the regulatory structure of
the off-exchange market and the equities markets more broadly.
---------------------------------------------------------------------------

    \80\ For example, based on disclosures on Form BD as of March
2015, there were 13 Non-Member Firms that are members of only CBOE,
an options exchange, that do not disclose as part of their business
activities on Form BD being a ``put and call broker or dealer or
option writer.'' Similarly, five Non-Member Firms disclose on Form
BD that they are a ``broker or dealer making inter-dealer markets in
corporate securities over-the-counter'' and are not members of
FINRA.
    \81\ The Commission notes that, while today an exchange may not
be able to effectively regulate off-exchange activity, it may be
able to acquire the resources and expertise to do so.
---------------------------------------------------------------------------

    As noted, FINRA currently is the SRO to which off-exchange trades
are reported.\82\ However, because it does not have jurisdiction over
Non-Member Firms, it is unable to enforce compliance with the federal
securities laws and rules, or apply its own rules, to broker-dealers
that conduct a significant amount of off-exchange trading activity,
including those that engage in so-called high-frequency trading
strategies. As a result, FINRA's ability to perform comprehensive
market surveillance, especially for violations of Commission rules, as
well as its ability to understand and reconstruct activity in the off-
exchange market generally, is limited because Non-Member Firms are not
consistently identified in trade reports to the TRFs \83\ or the ADF,
and their order activity is not captured by OATS.\84\ Accordingly,
FINRA is unable to monitor the off-exchange market activity of Non-
Member Firms, and detect potentially manipulative or other illegal
behavior, as efficiently or effectively as it can with FINRA
members.\85\ Obtaining additional data, such as through the
Consolidated Audit Trail (``CAT''),\86\ or the assumption of post-trade
surveillance and investigation by the Non-Member Firm's member
exchange, would neither confer jurisdiction nor provide needed
oversight tools to FINRA over Non-Member Firms that participate in the
off-exchange market. No exchange currently is positioned to regulate
its members' conduct in the off-exchange market, as the exchanges
generally have access only to order and trade data for transactions
effected on their markets.\87\ Moreover, even if exchanges were able to
access the necessary trading data (a possibility that would increase
with the deployment of CAT),\88\ the Commission believes that piecemeal
regulation of the off-exchange market by multiple SROs based on the
membership status of the participants and a web of regulatory
allocations among SROs, through the use of multiple 17d-2 agreements,
is significantly less efficient and frustrates the structure
established by Congress that an Association regulate the off-exchange
market.\89\ In addition, an Association's regulatory responsibility for
the off-exchange market includes an obligation to monitor those markets
for operational and regulatory issues, as well as issues relating to
market disruptions.\90\ The Commission is concerned that the inability
of an Association to reliably identify and enforce regulatory
compliance by cross-market proprietary trading firms that are Non-
Member Firms in the off-exchange market, creates a risk to the fair and
orderly operations of the market.
---------------------------------------------------------------------------

    \82\ See supra note 70.
    \83\ Reports to the TRFs can only be made by FINRA members. See
FINRA Rules 7210A(k) and 7210B(i) (defining the term ``Trade
Reporting Participant'' or ``Participant'' as ``any member of FINRA
in good standing that uses the System'').
    \84\ When a Non-Member Firm routes an order to a FINRA member
which then routes the order to an exchange or off-exchange for
execution, OATS data would indicate only that the FINRA member
received an order from a Non-Member Firm. The identity of the Non-
Member Firm is often not captured because such Non-Member Firms are
not required to use a unique Market Participant Identifier
(``MPID'') or other identifier when routing orders to a FINRA
member. In some cases, FINRA is able to identify the Non-Member Firm
that participated in a transaction if, for example, it has an MPID
and provides it to the firm to which it routed an order and that
firm reports it to FINRA. FINRA has solicited comment from its
members on a proposed FINRA rule change that would require FINRA
members to identify Non-Member Firms in off-exchange transactions
reported to OATS. See FINRA Regulatory Notice 14-51, Equity Trading
Initiatives: OATS and ATS Reporting Requirements (November 2014),
available at https://www.finra.org/web/groups/industry/@ip/<EMAIL_ADDRESS>This proposal has not yet
been filed with the Commission pursuant to Section 19(b)(1) of the
Act. 15 U.S.C. 78s(b)(1).
    \85\ Non-Member Firms that engage in off-exchange transactions
are not required to submit audit trail data to FINRA. See FINRA
Rules 6610 and 6622(a)(i). The Commission believes that this lack of
audit trail reporting is problematic because an Association has
statutory responsibility for regulatory oversight of the off-
exchange market. Although the Commission understands some off-
exchange trades between Non-Member Firms are voluntarily reported by
clearing firms, clearing firms are not obligated to report such
transactions. Lack of comprehensive reporting of off-exchange
transactions to FINRA, among other things, undermines FINRA's
ability to effectively surveil the off-exchange market. By
extension, this also undermines the ability of the Commission and
investors to fully benefit from the self-regulatory model envisioned
by Congress in the Exchange Act.
    \86\ Rule 613 under the Act requires SROs to jointly submit to
the Commission a national market system plan (``NMS Plan'') to
create, implement, and maintain a consolidated order tracking
system, or consolidated audit trail, with respect to NMS securities,
that would capture customer and order event information for NMS
securities, across all markets, from the time of order inception
through routing, cancellation, modification, or execution. See
Exchange Act Release No. 67457 (July 19, 2012), 77 FR 45721 (August
1, 2012) (``CAT Release''); 17 CFR 242.613.
    \87\ While some exchanges have rules requiring the reporting of
certain off-exchange transactions by their members, these rules, as
they currently exist, would not provide the exchanges with the
complete view of the market that the Commission believes is
necessary to effectively regulate the off-exchange market. For
example, NYSE MKT LLC (``NYSE MKT'') Rule 410B--Equities (Reports of
Listed Securities Transactions Effected Off the Exchange) only
requires reporting of off-exchange transactions in securities listed
on NYSE MKT that are not reported to the Consolidated Tape. See
Exchange Act Release No. 58705 (October 1, 2008), 73 FR 58995
(October 8, 2008) (order approving, among other things, NYSE MKT
Rule 410B); see also, e.g., CBOE Rule 6.49 (Transactions Off the
Exchange) (requiring that CBOE members executing transactions in
options listed on the exchange other than on CBOE merely keep a
record of such transaction for a period of one year).
    \88\ The Commission notes that the CAT NMS plan would not be
implemented for several years. In accordance with Rule 613, the SROs
would be required to report the required data to the central
repository within one year after effectiveness of the NMS plan;
broker-dealers, other than small broker-dealers, would be required
to report the required data to the central repository within two
years after effectiveness of the NMS plan; and small broker-dealers
would be required to report the required data within three years
after effectiveness of the NMS plan. 17 CFR 242.613.
    \89\ See supra notes 28-33 and accompanying text.
    \90\ 15 U.S.C. 78o-3.
---------------------------------------------------------------------------

    Further, because FINRA is unable to apply the rules it has
developed for the off-exchange market to Non-Member Firms, its ability
to create a consistent regulatory framework for the off-exchange market
is undermined. FINRA has sought to establish a robust regulatory regime
for broker-dealers, including broker-dealers conducting business in the
off-exchange market, and has developed a detailed set of rules in core
areas such as trading practices,\91\ business conduct,\92\ financial
condition

and operations,\93\ and supervision.\94\ Because Non-Member Firms are
not subject to these or other FINRA rules, they may be subject to a
less robust regulatory framework than FINRA members that themselves
trade off-exchange. Non-Member Firms also are not subject to the costs
associated with FINRA membership.\95\
---------------------------------------------------------------------------

    \91\ See FINRA Rule 5000 Series--Securities Offerings and
Trading Standards and Practices. For instance, FINRA has rules
prohibiting 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.'' The Commission notes that CBOE has stated that it views
any collusion, intimidation and harassment by a CBOE member as
``inconsistent with the just and equitable principles of trade.''
See CBOE Regulatory Circular RG97-167 (February 7, 2000) and CBOE
Rule 4.1. See also supra note 73 and accompanying text.
    \92\ See FINRA Rule 2000 Series--Duties and Conflicts.
    \93\ See FINRA Rule 4000 Series--Financial and Operational
Rules. See e.g., FINRA Rule 4370(a) providing, 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.'' Although NYSE MKT LLC Equities Rule 4370 is similar to
FINRA Rule 4370(a), for example, a number of other exchanges do not
have such a rule.
    \94\ See FINRA Rule 3000 Series--Supervision and
Responsibilities Relating to Associated Persons. This rule series
generally requires FINRA member firms to, among other things,
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. Other SROs do not have similar standards for
associated persons of member broker-dealers.
    \95\ The Commission notes that FINRA may need to consider
reassessing the structure of its fees, including its Trading
Activity Fee, in order to assure that it is fairly and equitably
applied to many of the Non-Member Firms that, as a result of the
amendments to Rule 15b9-1, may join FINRA. 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 to the By-Laws of the Corporation, Section
1(a), available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4694 (``FINRA Schedule A'').
The TAF is generally assessed on FINRA member firms for all equity
sales transactions that are not performed in a broker-dealer's
capacity as a registered exchange specialist or market maker. See
id. at Section 1(b). As discussed above, many of the broker-dealers
that may be required to join FINRA if the proposed amendments are
adopted effect transactions in large volumes throughout the national
market system, and often in a capacity other than as a registered
market-maker. Accordingly, the Commission notes that FINRA may need
to consider reevaluating the structure of the TAF to assure that it
appropriately takes into account this business model. See also infra
notes 174-175 and accompanying text for further discussion of the
TAF.
---------------------------------------------------------------------------

    As is discussed in more detail in the Economic Analysis, firms that
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.\96\ FINRA's regulatory fees
include a Trading Activity Fee (``TAF'').\97\
---------------------------------------------------------------------------

    \96\ FINRA Schedule A, supra note 95, at Section 1.
    \97\ FINRA assesses each member a TAF on the sale of all covered
securities. For the purposes of determining the TAF, covered
securities include, among other things, all exchange-registered
securities wherever executed and all other equity securities traded
otherwise than on an exchange. FINRA last adjusted the TAF rate for
sales of covered equity securities effective July 2012. FINRA's
regulatory fees also include a Gross Income Assessment (``GIA'') and
a Personnel Assessment.
    In addition, Section 3 of Schedule A to the FINRA By-Laws states
that each member will be assessed a regulatory transaction fee that
is determined periodically in accordance with Section 31 of the
Exchange Act. Section 31(c) generally requires each national
securities association to pay the Commission a fee based on the
aggregate dollar amount of sales of certain securities transacted by
or through any member of such association otherwise than on a
national securities exchange. 15 U.S.C. 78ee(c). The Commission
preliminarily believes that FINRA's Section 3 fees will not change
as a result of the proposed amendments to Rule 15b9-1. The fees
collected by FINRA under Section 3 are intended to correspond to its
obligations to the SEC under Section 31(c) of the Act. However, if
the proposal is adopted, as Non-Member Firms become FINRA members,
FINRA could seek to reallocate Section 3 fees among FINRA members.
Nonetheless, because the Commission generally believes that Section
3 fees are passed through by FINRA members to the parties to covered
transactions, we do not expect the burden of Section 3 fees to
materially change.
---------------------------------------------------------------------------

    The number of trades subject to the TAF in the off-exchange
market--and thus the aggregate fees collected by FINRA for that market
segment--would not be expected to materially change if the proposed
amendments are adopted because, in general, the TAF currently is
assessed on the ATSs where Non-Member Firms effect off-exchange
transactions, rather than on the Non-Member Firms. However, it is
likely that certain on-exchange trades by Non-Member Firms that
currently are not covered by the TAF would be captured.\98\ As such,
the Commission preliminarily believes that FINRA may need to consider
reevaluating its fee structure to ensure that it appropriately reflects
the activities of, and regulatory responsibilities towards, these FINRA
members, if the proposal is adopted.
---------------------------------------------------------------------------

    \98\ As is discussed in more detail in the Economic Analysis,
the Commission preliminarily estimates that some firms could be
subject to a TAF of up to $3.2 million based on their current sales
of covered securities. See Section V.C.2.
---------------------------------------------------------------------------

    In addition, under the proposal a broker-dealer that effects
transactions on multiple exchanges, and not on ATSs or elsewhere in the
off-exchange market, would need to become a member of an Association if
it effects transactions indirectly on exchanges of which it is not a
member (i.e., through another broker-dealer that is a member of that
exchange) in accordance with Section 15(b)(8), unless one of the
specified exceptions in the proposed amendment is available.\99\ The
Commission believes that this is consistent with the statutory
framework and would address an activity potentially not subject to
effective regulatory oversight in today's market. Specifically, if such
a broker-dealer were a member of one exchange but conducted a
significant amount of activity indirectly on other exchanges of which
it was not a member, the exchange of which it was a member would not be
well-positioned to regulate the member's activity on those other
exchanges. As with the off-exchange market, individual exchanges today
lack access to data,\100\ the proper rule set and the necessary
expertise to regulate trading on other exchanges. Under these
circumstances--where the broker-dealer would not be conducting ``off-
exchange'' activity but would be effecting transactions on an exchange
of which it is not a member, the Commission believes that an
Association is best-positioned to oversee this activity.\101\ As
discussed elsewhere in this release, FINRA currently

conducts cross-market surveillance and is provided exchange audit trail
data pursuant to existing RSAs and 17d-2 agreements.\102\ In contrast,
exchanges generally do not conduct cross-market surveillance and most
have allocated this responsibility to FINRA. Accordingly, the
Commission believes that, as a practical matter and consistent with
Section 15(b)(8), FINRA is currently in the best position to regulate
cross-market activity \103\ by broker-dealers that effect transactions
on exchanges other than those of which the broker-dealer is a member,
even if they do not effect transactions in the off-exchange
market.\104\
---------------------------------------------------------------------------

    \99\ The Commission is not currently aware of any broker-dealer
with such a business model.
    \100\ See supra note 76.
    \101\ The Commission also believes that this would be consistent
with the statutory framework, which subjected broker-dealers that
effect transactions on an exchange of which they are not a member
first to Commission, and then to Association, oversight. In amending
Rule 15b8-1 in 1976 to add the exclusion for proprietary trading,
the Commission also revised the text of Rule 15b8-1 by substituting
the phrase ``otherwise than on a national securities exchange of
which he is a member'' to replace the phrase ``otherwise than on a
national securities exchange.'' See Adoption of Amendments to SECO
Rules, supra note 13, at 10600. The Commission made this revision
``to conform the scope of the SECO rules to the Commission's
authority'' under Section 15(b)(8) and 15(b)(9) (as revised in 1975)
to subject ``broker-dealers who effect transactions on exchanges
other than those of which they are members to the SECO rules.'' Id.
This change reflected the Commission's understanding that broker-
dealers effecting transactions on exchanges of which they were not a
member should be subject to the then-existing regulatory framework
(i.e., either Association membership or direct Commission regulation
under the SECO program) governing off-exchange trading. As noted
above, Congress amended the Act in 1983 ``to eliminate direct
regulation of broker-dealers by the Commission through the SECO
Program and to require any broker-dealer engaged in an over-the-
counter (`OTC') securities business to join a registered securities
association.'' See SECO Programs Release, supra note 9, at 53688.
Consistent with the Commission's rationale in 1976, the Commission
believes that broker-dealers that effect transactions on exchanges
of which they are not a member should be subject to the current
regulatory framework governing off-exchange trading, namely,
membership in an Association.
    \102\ See, e.g., News Release, FINRA, BATS Global Markets, FINRA
Enter Regulatory Service Agreement (February, 6, 2014), available at
https://www.finra.org/Newsroom/NewsReleases/2014/P443474. Such
agreements provide detailed data that allow FINRA to comprehensively
identify the market-wide activity of broker-dealers, and to surveil
behavior for violative activity that might otherwise go undetected
if surveillance were only being conducted on an exchange-specific
basis.
    \103\ 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).
    \104\ A broker-dealer would not need to become a member of an
Association if it conducts no activity in the off-exchange market
and it becomes a member of each exchange upon which it effects
transactions. Although the Commission is not aware of such broker-
dealer business model existing today, if one were to arise, the
Commission notes that the exchanges upon which such broker-dealer
directly effects transactions 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 Agreements, subject to Commission
approval, and RSAs.
---------------------------------------------------------------------------

    In sum, the Commission is concerned that some of the most active
cross-market proprietary trading firms may not be subject to effective
regulatory oversight by an exchange or Association with respect to the
full range of their market activity. Accordingly, the Commission is
proposing to amend Rule 15b9-1, as described below, to appropriately
tailor the exemption from Association membership for today's markets.

II. Discussion of Amendments to Rule 15b9-1

A. Prior Comments on Association Membership

    In 2010, the Commission issued a Concept Release that, among other
things, solicited comment on whether all proprietary trading firms
should be required to register as broker-dealers and become members of
FINRA to help assure that their operations were subject to full
regulatory oversight.\105\ The Commission received six comment letters
that directly addressed the question as it relates to FINRA membership,
including one comment letter from FINRA.\106\ The six comment letters
offered contrasting views. Three commenters expressed their support for
enhanced oversight of proprietary trading firms, including a
requirement to become members of FINRA, generally asserting that
because proprietary trading firms are not all members of FINRA there is
a lack of uniform regulation among registered broker-dealers.\107\
Three commenters expressed opposition to the idea of requiring
proprietary trading firms to become FINRA members, asserting their
belief that such firms are already subject to full regulatory
oversight,\108\ requiring such firms to join FINRA would be costly and
burdensome,\109\ and that, because proprietary trading firms do not
have customers, there would be no benefit to requiring such firms to
become members of FINRA.\110\ The Commission has considered these
comments, and, for the reasons set forth throughout this release, is
proposing to amend Rule 15b9-1 as described herein.
---------------------------------------------------------------------------

    \105\ See Concept Release, supra note 16, at 3612.
    \106\ See letters to Elizabeth M. Murphy, Secretary, Commission,
from Kimberly Unger, Executive Director, Security Traders
Association of New York, Inc., dated April 30, 2010 (``STANY
Letter''); from Liam Connell, Chief Executive Officer, Allston
Trading, LLC, and Richard B. Gorelick, Chief Executive Officer, RGM
Advisors, LLC, and Adam Nunes, President, HRT Financial LLC, Hudson
River Trading, LLC, and Cameron Smith, General Counsel, Quantlab
Financial, LLC, dated April 23, 2010 (``Allston Letter''); from
Donald R. Wilson, Jr., DRW Trading Group, dated April 21, 2010
(``DRW Letter''); from Marcia E. Asquith, Senior Vice President and
Corporate Secretary, Financial Industry Regulatory Authority, dated
April 23, 2010 (``FINRA Letter''); letter to the Commission from
Berkowitz, Trager & Trager, LLC, dated April 21, 2010 (``Berkowitz
Letter''); and from Stephen M. Barnes, J.D., Salt Lake City, Utah,
received October 3, 2011 (``Barnes Letter'').
    \107\ See FINRA Letter, supra note 106, at 4-5; Barnes Letter,
supra note 106, at 32-33 (suggesting that, to level the regulatory
playing field, high-frequency trading firms should be required to
register as broker-dealers with the Commission and become members of
an SRO such as FINRA or an exchange); and STANY Letter, supra note
106, at 14 (suggesting that the Commission review and consider
registration requirements of market participants that are not
required to be registered with FINRA and noting that enhanced
surveillance and enforcement should improve investor confidence in
the markets). See also letter to the Honorable Mary Schapiro,
Chairman, Commission, from Kimberly Unger, Executive Director,
Security Traders Association of New York, Inc., dated May 10, 2010,
at 14 (urging the Commission to work towards a more harmonized
regulatory structure, which the commenter believes will put FINRA in
a better position to address regulatory gaps through a holistic,
cross-market approach to regulation that can detect problematic
activity across multiple markets and products).
    \108\ See Allston Letter, supra note 106, at 14-15 (stating that
it is inaccurate to say that proprietary trading Non-Member Firms
are not subject to full regulatory oversight and noting that such
firms are generally members of several exchanges and are
consequently subject to multiple regulators).
    \109\ See Berkowitz Letter, supra note 106, at 1 (stating that
requiring proprietary trading firms to register as broker-dealers
and become members of FINRA would add significant costs and burdens
to those firms).
    \110\ See DRW Letter, supra note 106, at 4 (stating that FINRA's
focus is on investor protection and not proprietary trading, and,
therefore, there would be no benefit to requiring proprietary
trading firms that do not undertake a customer business to become
members of FINRA).
---------------------------------------------------------------------------

B. Overview of Amendments

    As noted above, Section 15(b)(8) \111\ of the Act \112\ generally
prohibits any registered broker or dealer from effecting transactions
in securities unless it (1) is a member of an Association or (2)
effects transactions in securities solely on an exchange of which it is
a member. Section 15(b)(9) \113\ of the Act provides the Commission
authority to exempt any broker or dealer from the requirements of
Section 15(b)(8). The Commission has, by rule, exercised its exemptive
authority. Specifically, Rule 15b9-1 \114\ generally exempts any broker
or dealer from membership in an Association if it: (1) is a member of a
national securities exchange; (2) carries no customer accounts; and (3)
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. However, income derived from transactions for
the dealer's own account with or through another registered broker or
dealer,\115\ or through the ITS, is excluded from such de minimis
allowance.
---------------------------------------------------------------------------

    \111\ See supra note 46.
    \112\ 15 U.S.C. 78a et seq.
    \113\ See supra note 7.
    \114\ See supra notes 50-51.
    \115\ See supra note 51.
---------------------------------------------------------------------------

    The Commission is proposing to eliminate the existing de minimis
allowance (including the exclusion for proprietary trading) and replace
it with a more targeted exemption from Association membership for a
broker-dealer that conducts business on a

national securities exchange, to the extent it effects transactions
off-exchange for the dealer's own account with or through another
registered broker-dealer, that are solely for the purpose of hedging
the risks of its floor-based activities, by reducing or otherwise
mitigating the risks thereof. The proposed amendments also include an
exemption for a broker-dealer to the extent it executes orders that are
routed by a national securities exchange of which it is a member, to
prevent trade-throughs on such national securities exchange consistent
with the provisions of Rule 611 of Regulation NMS.

C. Elimination of the De Minimis Allowance

    The Commission proposes to eliminate the de minimis allowance in
its entirety. Specifically, the Commission is proposing to delete the
following language from Rule 15b9-1(a): ``and (3) has annual gross
income derived from purchases and sales of securities otherwise on a
national securities exchange of which it is a member in an amount no
greater than $1000.'' The Commission also is proposing to delete
paragraphs (b) and (c) of the Rule, as they set forth two exceptions to
the de minimis allowance.\116\ Paragraph (b) provides that income
derived from (1) transactions for the dealer's own account with or
through another registered broker-dealer, and (2) transactions through
the ITS, do not count toward the $1,000 de minimis allowance, and
paragraph (c) defines the ITS.
---------------------------------------------------------------------------

    \116\ See supra notes 50-51.
---------------------------------------------------------------------------

    As discussed above, the $1,000 de minimis allowance originally was
intended to permit exchange specialists and other floor members to
receive a nominal amount of commissions on occasional off-exchange
transactions for accounts referred to other members, without subjecting
them to SECO rules and broker-dealer registration and, later,
Association membership.\117\ Since the de minimis allowance was first
adopted in 1965, the securities markets have undergone a significant
transformation. At that time, virtually all trading activity was
conducted manually on the floors of national securities exchanges.\118\
Today, however, electronic cross-market order routing and trading
strategies are a significant component of the markets, and exchange
floor-based businesses represent only a small fraction of market
activity. The $1,000 de minimis allowance has never been adjusted, and
the Commission is unaware of any floor members today that refer
accounts to other broker-dealers in exchange for a share of the
broker's commission revenues. Although the Commission is proposing to
eliminate the de minimis allowance, it is soliciting comment on whether
the de minimis allowance might continue to be appropriate in today's
markets. In particular, the Commission seeks responses to the following
questions:
---------------------------------------------------------------------------

    \117\ See supra note 39 and accompanying text.
    \118\ See, e.g., Special Study, supra note 14, 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 . .
.'').
---------------------------------------------------------------------------

    1. Do exchange floor members currently rely on the $1,000 de
minimis allowance? If so, how? Please describe the number and types of
floor members that rely on the allowance. Please provide the nature and
extent of reliance on the allowance. Also, please provide any available
data on the amount and frequency of commissions or referral fees that
floor members may continue to receive with respect to off-exchange
transactions.
    2. If the de minimis allowance is being used by exchange floor
members, is it being relied upon for its original purposes (i.e.,
accommodating occasional commission splitting or referrals by such
members)? If not, for what purposes are floor members today relying on
the de minimis allowance?
    3. If exchange floor members currently rely on the de minimis
allowance and the Commission retains that allowance, should the $1,000
limit be changed? Why or why not? What should the limit be?
    4. If the de minimis allowance were eliminated, as proposed, would
some exchange floor members be required to become members of an
Association? If so, how many? Please provide the basis of any estimate.
What would be the effect on those firms?
    5. Do other broker-dealers that are not floor members rely on the
de minimis allowance? If so, for what activities? Specifically, do
cross-market proprietary trading firms, as discussed above, rely on the
allowance? If so, why? Are there other types of businesses that use the
allowance? If so, please describe them. How and why do they rely on the
allowance?
    6. If the de minimis allowance were eliminated, what would be the
effect on these non-floor-based broker-dealer firms? For example, if
the allowance were eliminated, would there be effects on the business
of firms that would be required to register with an Association, and if
so what would they be? Would business incentives change such that firms
might adjust their business model or their trading volume by leaving
the off-exchange market, moving transactions on-exchange, or leaving
the markets altogether? Would the effects be different on broker-
dealers trading equities from those trading options?

D. Floor Member Hedging Exemption

    Although the Commission proposes to eliminate the de minimis
allowance in its entirety, it also proposes to replace the allowance
with an exemption from Association membership for exchange member
broker-dealers that operate on the floor of the exchange, to the extent
they effect transactions off-exchange solely for the purpose of hedging
the risks of their floor-based activities. The Commission proposes the
hedging exemption be limited to firms that trade on the floor of a
national securities exchange, as the Commission understands that
currently, broker-dealers that trade exclusively on a single exchange
do so on a physical exchange floor.\119\ Accordingly, the Commission is
proposing to add the following language to Rule 15b9-1: ``and, (c)
Effects transactions solely on a national securities exchange of which
it is a member, except that . . . (1) A dealer that conducts business
on the floor of a national securities exchange may effect transactions,
for the dealer's own account with or through another registered broker
or dealer, that are solely for the purpose of hedging the risks of its
floor-based activities, by reducing or otherwise mitigating the risks
thereof. A dealer seeking to rely on this exception shall establish,
maintain and enforce written policies and procedures reasonably
designed to ensure and demonstrate that such hedging transactions
reduce or otherwise mitigate the risks of the financial exposure the
dealer incurs as a result of its floor-based activity. Such dealer
shall preserve a copy of its policies and procedures in a manner
consistent with 17 CFR 240.17a-4 until three years after the date the
policies and procedures are replaced with updated policies and
procedures.''
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    \119\ Currently, NYSE Arca Options, NYSE Amex Options, NASDAQ
OMX Phlx, CBOE, NYSE, and NYSE MKT have physical exchange floors.
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    The Commission understands that today there are some broker-dealers
that continue to limit their activities to exchange floors,
particularly in the options markets.\120\ As discussed above,

at the time Rule 15b9-1 was adopted, the circumstances under which an
exchange specialist or floor broker would trade proprietarily off-
exchange were quite limited, such as where a regional exchange
specialist would hedge risk on the primary listing market. The
Commission believes that those broker-dealers that today continue to
limit their trading activities to an exchange floor may seek to hedge
the risks of their floor-based activities on other markets, both on
national securities exchanges and off-exchange.\121\ Therefore, the
Commission proposes to retain a more focused exemption from Association
membership for the type of activity for which the Commission believes
the exclusion for proprietary trading in Rule 15b9-1 was originally
designed.\122\
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    \120\ Based on disclosures on Form BD, as of February 2015, the
Commission understands that there are approximately 43 Non-Member
Firms that are members of one national securities exchange and that
disclose being engaged in floor activities on Form BD. The business
model of these firms varies widely, and may include market making,
other proprietary trading and agency business.
    \121\ For example, a broker-dealer may operate a floor-based
business on one or more options exchanges. As a result of this
activity, the broker-dealer may need to mitigate the risk of its
options positions, resulting from such activity, on other options
markets or in the equities markets. The proposed floor member
hedging exemption would allow the broker-dealer to enter into
transactions on other markets solely for the purpose of hedging this
risk.
    \122\ See supra note 39 and accompanying text.
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    The availability of the proposed hedging exemption would be limited
to dealers that conduct business on the floor of a national securities
exchange and are members of that exchange. Section 15(b)(8) requires
Association membership for all registered broker-dealers other than
those that effect transactions solely on an exchange of which they are
a member. Broker-dealers that limit their activities in this manner
generally are specialists or floor brokers based on the floor of an
individual exchange. In exercising its exemptive authority when it
adopted Rule 15b8-1 in 1965, the Commission sought to accommodate off-
exchange activities ancillary to that floor-based business. The
Commission believes that, today, few broker-dealers limit their
activities to a particular exchange. Those broker-dealers that do limit
their business to an exchange floor, however, may continue to seek to
hedge the risk of their floor-based activities by effecting
transactions on another exchange or in the off-exchange market.
    The Commission preliminarily believes that a floor-based dealer
seeking to rely on the proposed hedging exemption in Rule 15b9-1 should
be required to establish, maintain and enforce written policies and
procedures reasonably designed to ensure and demonstrate that its off-
exchange transactions are solely for the purpose of hedging the risks
of its floor-based activities, by reducing or otherwise mitigating the
risks thereof. Such hedging should reduce or otherwise mitigate the
risks of the financial exposure the dealer incurs as a result of its
business on the floor of an exchange of which it is a member. Because
such hedging transactions must be solely for the purpose of hedging the
risks of the dealer's floor-based activities, the transactions, of
course, should not be for the purpose of increasing the aggregate risk
of the dealer. The Commission notes that whether a transaction or
transactions entered into to reduce or otherwise mitigate risk results
in a profit or loss is not dispositive of whether or not such a
transaction or transactions meets the terms of the proposed floor
member hedging exemption. A floor-based dealer seeking to rely on the
proposed hedging exemption would be required to preserve a copy of its
policies and procedures in a manner consistent with Rule 17a-4 until
three years after the date the policies and procedures are replaced
with updated policies and procedures.\123\
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    \123\ 17 CFR 240.17a-4.
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    The Commission preliminarily believes that requiring written
policies and procedures, as described above, would facilitate SRO
supervision of broker-dealers relying on the proposed hedging
exemption, as it would provide an efficient and effective way for
regulators to assess compliance with the proposed exemption. The
determination of whether an off-exchange transaction by a floor-based
dealer reduces or otherwise mitigates the risk of the financial
exposure incurred as a result of the dealer's floor-based business may
vary depending on the nature of the business of the floor-based dealer,
its financial position, and the particular transactions effected.
Consequently, the Commission preliminarily believes that requiring
floor-based dealers to develop written policies and procedures will
provide sufficient flexibility to accommodate the varying business
models of floor-based dealers and appropriate hedging activities.
    The Commission notes, however, that such written policies and
procedures must be reasonably designed to ensure and demonstrate that
the floor-based dealer's off-exchange hedging transactions reduce or
otherwise mitigate the risks of the financial exposure it incurs as a
result of its floor-based activity. Accordingly, a dealer seeking to
rely upon the proposed hedging exemption should maintain documentation
that, in the context of an SRO or Commission examination, would enable
it to show how the hedging transactions it effects off the exchange
reduce or otherwise mitigate the risks of its floor-based business.
    The Commission notes that the exchange of which the dealer is a
floor member would be responsible for enforcing compliance with the
hedging exemption, including reviewing the adequacy of the dealer's
written policies and procedures and whether the dealer's off-exchange
transactions comply with those written policies and procedures,
including the requirement that the hedging transactions reduce or
otherwise mitigate the risks of financial exposure the dealer incurs as
a result of its floor-based activity and that the policies and
procedures are reasonably designed to so demonstrate.\124\
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    \124\ See 15 U.S.C. 78f(b)(1) which requires that an exchange is
so organized and has the capacity to be able to carry out the
purposes of the Exchange Act and to comply, and to enforce
compliance by its members and persons associated with its members,
with the provisions of the Exchange Act, the rules and regulations
thereunder, and the rules of the exchange.
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    Because the proposed hedging exemption is intended to allow a
dealer to reduce or otherwise mitigate risk incurred in connection with
its floor-based activities, it would be limited to transactions for the
dealer's own account. In addition, because the floor-based dealer would
not itself be a member of the national securities exchange on which
transactions may be effected, or an Association, such transactions
would need to be conducted with or through another registered broker-
dealer that is a member of such other national securities exchange or a
member of an Association (or both).
    Finally, a dealer seeking to rely on the proposed hedging exemption
would be required to preserve a copy of its policies and procedures in
a manner consistent with Rule 17a-4 under the Exchange Act until three
years after the date the policies and procedures are replaced with
updated policies and procedures. Accordingly, a dealer must keep the
policies and procedures relating to its use of the hedging exemption as
part of its books and records while they are in effect, and for three
years after they are updated.
    The Commission requests comment on all aspects of the proposed
hedging exemption in Rule 15b9-1. In particular, the Commission seeks
responses to the following questions:
    7. To what extent do exchange floor members that are Non-Member
Firms today effect transactions in the off-exchange market to hedge the
risk of their floor-based activities? What is the nature and extent of
such off-exchange market activities? Do these activities

tend to focus on particular products? The Commission specifically seeks
data from exchange floor members that demonstrates the extent to which
they trade off the exchange floor and how such off-exchange trading
relates to their floor-based business, including to hedge the risks
thereof, as such data may be particularly helpful in assessing a
potential floor member hedging exemption when the Commission considers
adoption of the proposed amendments.
    8. Is the Commission's proposed description of hedging transactions
appropriate? Is it sufficiently defined? If not, how should it be
modified or supplemented? Is the phrase ``solely for the purpose of
hedging the risks of its floor-based activities,'' as used in the
proposed amendments, sufficiently precise that broker-dealers will know
what activities are allowed under the proposed floor member hedging
exemption from Association membership? If not, what should be changed
or what guidance should be provided?
    9. Will broker-dealers seeking to rely on the floor member hedging
exemption be able to evaluate whether, and demonstrate that, off-
exchange transactions are ``solely for the purpose of hedging the risks
of floor-based activities''? Please provide specific examples. What
would be the associated costs?
    10. Should there be a hedging exemption at all? Why or why not?
    11. Should the Commission narrow or broaden the proposed floor
member hedging exemption in any way? If so, how and why?
    12. Do exchange floor members that are Non-Member Firms effect
transactions in the off-exchange market, or on exchanges of which they
are not a member, for purposes other than hedging the risk of their
floor-based activities? If so, please describe the nature and extent of
such activities. Should there be an exemption for these activities? Why
or why not?
    13. Are there non-floor-based exchange members that today focus
their business activities on a single exchange? If so, what is the
nature of their business activity? Should there be an exemption for
such activities? Why or why not?
    14. The proposed floor member hedging exemption is limited to
transactions effected with or through another registered broker-dealer.
Are there circumstances where an exchange floor member that is a Non-
Member Firm, might need to hedge the risk of its floor-based activities
through a transaction with a non-registered broker-dealer counterparty?
If so, please describe the nature and extent of such transactions and
the particular reason(s) that such transactions should be covered.
    15. The proposed floor member hedging exemption is limited to
transactions for the dealer's own account. Are there circumstances
where an exchange floor member that is a Non-Member Firm might need to
hedge the risk of customer activity on the exchange, as agent, in the
off-exchange market or on exchanges of which it is not a member? If so,
please describe.
    16. Is the proposed policies and procedures requirement appropriate
for the floor member hedging exemption? What would be the costs of
establishing, maintaining and enforcing the policies and procedures,
and the related record-keeping requirements? How are such costs
determined? Please provide evidence of the nature, timing, and extent
of such costs. Would such costs deter dealers from relying on the floor
member hedging exemption? Are there more efficient and effective
alternatives to a policies and procedures approach? If so, what are
they? Have the transactions executed by floor members pursuant to the
current Rule's exclusion for proprietary trading posed issues of
regulatory compliance, market surveillance, or enforcement? If so,
please describe in detail.
    17. Will the proposed requirement to establish, maintain, and
enforce written policies and procedures enable floor members to
efficiently hedge their floor-based activities while effectively
ensuring the floor member hedging exemption is used as intended? Is
there another approach that would better achieve these goals?
    18. Would the proposed floor member hedging exemption present
compliance risks or otherwise raise concerns regarding the protection
of investors or the maintenance of fair, orderly, and efficient
markets? If so, please describe.
    19. Would current exchange surveillance and enforcement mechanisms
be effective to monitor trades that would be executed pursuant to the
proposed floor member hedging exemption? Please explain.
    a. If not, should the Commission require additional reporting by
registered broker-dealers acting as agent for dealers relying on the
floor member hedging exemption? For example, should they report to an
exchange or an Association (i) the identity of the floor member
effecting the hedging transaction; and (ii) the fact that the
transaction was a hedging transaction? Is such a requirement necessary
to assure the adequacy of market surveillance and compliance? Or,
alternatively, is the registered broker-dealer acting as agent on
behalf of the dealer subject to sufficient rules and regulations
(including Rule 15c3-5 under the Exchange Act,\125\ known as the
Commission's ``Market Access Rule'')? Please explain.
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    \125\ 17 CFR 240.15c3-5.
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    b. Could a Non-Member Firm execute a hedging transaction directly
with another Non-Member Firm? If so, how would the transaction be
subject to surveillance? How would this activity affect the enforcement
of the exemption? Please explain.
    c. Would exchanges otherwise have the ability to assess compliance
of broker-dealers relying on the Rule?
    20. Should the proposed floor member hedging exemption be subject
to any quantitative or qualitative limitations, or to special reporting
obligations? Please explain.
    21. Should the proposed floor member hedging exemption require the
floor member to retain records demonstrating how each off-exchange
transaction complies with its policies and procedures? Why or why not?
What would be the associated costs, and what is the basis for those
costs? Would the cost associated with recordkeeping on a transaction by
transaction basis be overly burdensome, or unnecessary given the
Commission's proposed policies and procedures requirement?
    22. Should the Rule contain an anti-evasion provision to prevent
floor members from attempting to circumvent the limitations in the
floor member hedging exemption? Is there a better method than the
proposed policies and procedures approach to ensure that floor members
do not misuse the proposed floor member hedging exemption? If so, what
is it? Alternatively, are the existing Commission anti-fraud and anti-
manipulation rules sufficient to prevent misuse of the proposed floor
member hedging exemption?
    23. Should floor members have to make a certification in connection
with their reliance on the floor member hedging exemption? Why or why
not? If a certification should be required, what would be the key
elements thereof? How frequently should the certification be made? Who
should make it? What qualifications, if any, to such certification
might be appropriate (e.g., reasonable basis to believe, best of my
knowledge)? Should the certification be made in conjunction with an
internal compliance review? If so, what type of internal compliance
review should be conducted?

    24. Are certifications an appropriate way to promote compliance
with the hedging exemption? Do certifications bring more
accountability, or do they create compliance costs and therefore a
barrier to entry?
    25. Is data currently available that could be used by regulators to
monitor the use of the proposed floor member hedging exemption? Are
there other approaches that would do more to enhance regulatory
surveillance, protect investors, or ensure fair, orderly, and efficient
markets?
    26. Are there other mechanisms the Commission could consider to
monitor compliance with the floor member hedging exemption? If so,
please explain.

E. Regulation NMS Routing Exemption

    The Commission proposes to eliminate a portion of subparagraphs
(b)(2) and all of subparagraph (c) from Rule 15b9-1, because both
contain outdated references to the ``Intermarket Trading System.''
\126\ ITS was a national market system plan (``ITS Plan'') operated by
the national securities exchanges and NASD that required each
participant to provide electronic access to its displayed best bid and
offer to other participants and provided an electronic mechanism for
routing orders, called commitments to trade, to access those displayed
prices.\127\ This permitted ITS Plan members at each market to have
limited access to the other markets for the purpose of avoiding trade-
throughs \128\ and locked markets.\129\ However, the ITS Plan was
eliminated in 2007, when it was superseded by Regulation NMS.\130\
Accordingly, the Commission is proposing to eliminate the following
language, which creates an additional exception to the de minimis
allowance, from Rule 15b9-1 (b): ``Or (2) through the Intermarket
Trading System.'' In addition, the Commission is eliminating in its
entirety subparagraph (c) of the Rule, which defines the ITS as
follows: ``(c) For purposes of this section, the term Intermarket
Trading System shall mean the intermarket communications linkage
operated jointly by certain self-regulatory organizations pursuant to a
plan filed with, and approved by, the Commission pursuant to Sec.
242.608 of this chapter.''
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    \126\ The full title of the ITS Plan was ``Plan for the Purpose
of Creating and Operating an Intermarket Communications Linkage
Pursuant to Section 11A(c)(3)(B) of the Exchange Act of 1934.'' The
ITS Plan was initially approved by the Commission in 1978. Exchange
Act Release No. 14661 (April 14, 1978), 43 FR 17419 (April 24,
1978). All national securities exchanges that traded exchange-listed
stocks and the NASD were participants in the ITS Plan.
    \127\ Id.
    \128\ See 17 CFR 242.600(b)(77) defining a ``trade-through''
under Regulation NMS.
    \129\ A ``locked market'' occurs when a trading center displays
an order to buy at a price equal to an order to sell, or an order to
sell at a price equal to an order to buy, displayed on another
trading center.
    \130\ Notice of Filing and Immediate Effectiveness of the Twenty
Fourth Amendment to the ITS Plan Relating to the Elimination of the
ITS Plan, Exchange Act Release No. 55397 (March 5, 2007), 72 FR
11066 (March 12, 2007). Today, Regulation NMS contains an updated
trade-through rule, and contemplates the use of private linkages by
trading centers to route orders to avoid trade-throughs. 17 CFR
242.610-611.
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    Today, Rule 611 of Regulation NMS requires trading centers to
establish, maintain and enforce policies and procedures reasonably
designed to prevent trade-throughs in exchange-listed stocks, subject
to certain exceptions.\131\ In general, Rule 611 protects automated
quotes that are the best bid or offer of a national securities exchange
or Association.\132\ To facilitate compliance with Rule 611 of
Regulation NMS, national securities exchanges have developed the
capability to route orders through broker-dealers (many of which are
affiliated with the exchanges) to other trading centers with protected
quotations.
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    \131\ Exchange Act Rule 611 states, in part, that ``a trading
center shall establish, maintain, and enforce written policies and
procedures that are reasonably designed to prevent trade-throughs on
that trading center of protected quotations in NMS stocks. . . .''
17 CFR 242.611.
    \132\ Id.
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    As discussed above, the Commission understands that some broker-
dealers today continue to limit their activities to exchange floors,