Letter'') at 2, Letter from Eric Chern, CEO, CTC Trading Group,
L.L.C., Andrew Killion, CEO, Akuna Capital LLC, Thomas Hutchinson,
President, Belvedere Trading LLC, Steven J. Gaston, Chief Compliance
Officer, Consolidated Trading LLC, Trent Cutler, CEO, Cutler Group
LP, John Kinahan, CEO, Group One Trading, L.P., Marc Liu, CEO,
Integral Derivatives LLC, Craig S. Donohue, Executive Chairman, The
Options Clearing Corporation, Sebastiaan Koeling, CEO, Optiver US,
LLC, Andrew Tourney, Chief Compliance Officer, Peak6 Investments,
L.P., Brian Donnelly, CEO, Volant Trading (July 13, 2016) (``Options
Market Makers Letter'') at 6, and FIA 2 Letter at 5.
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    Shortly after the Commission published the 2015 Proposal, FINRA
issued a Regulatory Notice proposing to amend the TAF such that it
would not apply to transactions by a proprietary trading firm effected
on exchanges of which the firm is a member.\153\ FINRA stated in its
Regulatory Notice that it would implement the TAF amendments to
coincide with the compliance date of amendments to Rule 15b9-1. Given
FINRA's prior consideration of amendments to its TAF, FINRA may again
evaluate its TAF to ensure that it appropriately reflects the
activities of, and regulatory responsibilities towards, broker-dealer
proprietary trading firms that would be required to join FINRA if the
proposed amendments to Rule 15b9-1 are adopted.\154\
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    \153\ See FINRA Regulatory Notice 15-13, Trading Activity Fee
(May 2015), available at http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-13.pdf. FINRA, in its
Regulatory Notice, stated that it analyzed the potential application
and impact of the TAF to proprietary trading firms and believed it
could result in a significant TAF obligation for these firms that
may be disproportionate to FINRA's anticipated costs associated with
the financial monitoring and trading surveillance of these firms, in
large part because these firms do not have customers. Id. By way of
example, FINRA stated that it conducts reviews for best execution
(FINRA Rule 5310), trading ahead of customer orders (FINRA Rule
5320), and display of customer limit orders (Exchange Act Rule 604),
all of which are directed at firms that have customers or receive
orders from customers of another broker-dealer. Id. To the extent
that firms that join FINRA do not carry customer accounts, FINRA
would not have to surveil such firms for compliance with these
rules. The objective of the contemplated TAF amendment, according to
FINRA, would be to tailor the TAF to FINRA's anticipated costs
associated with the financial monitoring and trading surveillance of
those firms that would be required to become FINRA members as a
result of the Commission's proposed amendments.
    \154\ Commenters on the 2015 Proposal addressed the costs of
FINRA membership, with some suggesting that the costs would be
burdensome for proprietary trading firms. See, e.g., FIA 1 Letter at
1 (``FINRA Membership would be costly to most proprietary trading
firms''); PEAK6 Letter at 2 (``[FINRA registration is] overly costly
and burdensome''); Hold Brothers Capital Letter at 2 (``[Costs of
FINRA membership] would be unduly burdensome to smaller, less well
funded Proprietary Traders''); Lakeshore Letter at 2-3; CTC Letter
at 5-6; D&D Letter at 2; PTR Letter at 2; Options Market Makers
Letter at 6; FIA 2 Letter at 5. Commenters also previously expressed
concern that the application of the TAF in its current form to
proprietary trading firms would be overly burdensome, but suggested
that FINRA's proposed TAF amendment would mitigate this concern.
See, e.g., HRT Letter at 5-6; FIA 1 Letter at 2; IEX Letter at 3;
CTC Letter at 5; PEAK6 Letter at 3. Some commenters suggested a
modification to FINRA's proposed amendment that would exclude from
the TAF all of a firm's proprietary trading activity on an exchange
of which it is a member. See, e.g., HRT Letter at 11. Apart from the
TAF as it currently exists, the Commission does not believe that
broker-dealer firms that join FINRA if proposed Rule 15b9-1 is
adopted would be disproportionately impacted by the costs of FINRA
membership compared to existing FINRA members that already incur
those costs, and as discussed in the Economic Analysis, the
Commission preliminarily believes that the costs would be justified
by the considerable benefits of this proposal. In addition, some
firms that could rely on Rule 15b9-1 nevertheless join FINRA
voluntarily, which suggests that there are business interests
satisfied by and benefits derived from FINRA membership that
outweigh the costs of being a FINRA member, for at least some firms.
Some commenters also raised the concern that FINRA may get paid
twice for its regulatory oversight--once, directly from the FINRA
membership, and again from the SROs that have outsourced regulatory
oversight to FINRA through RSA agreements. See, e.g., SIFMA Letter
at 3 and Lakeshore Letter at 3. The Commission notes that, as
privately negotiated agreements between SROs, the fees set forth in
RSAs are not subject to FINRA's rules or Commission review, and RSAs
may be revised or terminated by the SRO parties thereto. By
contrast, FINRA's rule-based fees are governed by Section 15A of the
Act, which requires that they be equitably allocated among FINRA
members and reasonable.

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

    On March 28, 2022, the Commission proposed changes to the
definition of ``dealer'' and ``government securities dealer,'' within
the meaning of Sections 3(a)(5) and 3(a)(44) of the Exchange Act,
respectively.\155\ We encourage commenters to review that proposal to
determine whether it might affect their comments on this proposing
release.
---------------------------------------------------------------------------

    \155\ See Securities Exchange Act Release No. 94524 (March 28,
2022), 87 FR 23054 (April 18, 2022).
---------------------------------------------------------------------------

Requests for Comment
    The Commission requests comment on all aspects of the proposed
elimination of the de minimis allowance and proprietary trading
exclusion as well as, in particular, on the following questions:
    6. Are there exchange floor members that currently rely on the
$1,000 de minimis allowance but not the proprietary trading exclusion?
Are there exchange floor members that currently rely on the proprietary
trading exclusion? If so, please describe the number and types of any
such exchange floor members, and the nature and extent of their
reliance. 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.
    7. Should the Commission retain the de minimis allowance but
eliminate the proprietary trading exclusion? If so, should the $1,000
threshold be changed? Why or why not? What should the threshold be?
Should the de minimis allowance be modified in some other way? Would
exchanges be able to appropriately monitor their members for compliance
with an increased de minimis allowance? Would an increased de minimis
allowance be an appropriate means of permitting hedging transactions
that exchange members may effect elsewhere than their member
exchange(s) without triggering Section 15(b)(8)'s Association
requirement?
    8. Instead of eliminating the proprietary trading exclusion, should
the Commission retain a modified version of it? If so, how should it be
modified and why? How could the proprietary trading exclusion be
modified such that there is appropriate and comprehensive SRO oversight
of firms that trade securities otherwise than on an exchange of which
they are member and that trading activity? For example, could the
proprietary trading exclusion be modified such that a firm's reliance
on it is contingent on the firm reporting its off-exchange securities
transactions to the appropriate FINRA facility or TRACE? Would this
suffice to enable the Commission to achieve the goals expressed herein,
despite not providing FINRA with direct regulatory oversight of the
firms?
    9. If the de minimis allowance and proprietary trading exclusion
are 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?
    10. To what extent do dealer firms that are not FINRA members and
that trade securities otherwise than on an exchange of which they are a
member rely on the proprietary trading exclusion? Where, other than an
exchange where they are a member, do they typically effect securities
transactions? On ATSs? Off-exchange otherwise than on an ATS? Another
exchange where they are not a member? In what sort of dealer activity
do these firms engage? For example, do they typically provide liquidity
or make markets? Do they typically remove liquidity? Do they engage in
other types of trading activities?
    11. If the de minimis allowance and proprietary trading exclusion
are eliminated, as proposed, what would be the effect on dealer firms
that currently rely on the proprietary trading exclusion? What, if
anything, would be the impact on their businesses if they are required
to register with an Association? Would business incentives change such
that firms might adjust their business model by exiting the off-
exchange market, moving transactions on-exchange, or leaving the
markets altogether? Would firms alter their organizational structure or
shift their proprietary trading activities to different or new
affiliates? Would the effects on firms be different depending on what
types of securities they trade?
    12. Do commenters agree that some exchange member dealer firms
trade proprietarily in U.S. Treasury securities as well as exchange-
traded securities, and are not FINRA members in reliance on the
proprietary trading exclusion? If the de minimis allowance and
proprietary trading exclusion are eliminated, as proposed, what would
be the effects on such firms? What, if anything, would be the impact on
their U.S. Treasury securities trading business? Do commenters expect
that these firms would alter their business model or organizational
structure if the amendments proposed herein are adopted? If so, how?
Would these firms shift their proprietary trading activities to
different or new affiliates? Would increased price discovery reduce any
competitive advantages these firms have by observing other firms'
trades and not reporting their own trades? Would this impact market
costs borne by the investing public?
    13. Do commenters believe that most exchange member dealer firms
that effect proprietary securities transactions otherwise than on an
exchange of which they are member would need to join FINRA as a result
of the elimination of the de minimis allowance and proprietary trading
exclusion? If so, would it help address the Commission's concerns
regarding FINRA's lack of direct jurisdiction over such firms' off-
member-exchange securities trading activity when they are not FINRA
members? What are commenters' views as to the extent of FINRA's current
ability to oversee off-member-exchange securities trading activity by
dealer firms that are not FINRA members?
    14. How do exchange SROs currently surveil or regulate their
members' securities trading activity and conduct elsewhere than the
exchange? Do exchange SRO efforts in this regard mitigate any need to
rescind the de minimis allowance and proprietary trading exclusion? How
would such an approach address the fact that TRACE reporting
obligations apply only to FINRA members?
    15. Are there concerns regarding how the TAF would apply to
proprietary trading broker-dealer firms?
    16. Are there concerns regarding the applicability of certain FINRA
rules to solely proprietary trading broker-dealers, as opposed to those
who face customers? Which rules, and why? Are there benefits to
applying FINRA rules to these broker-dealers?

B. Narrowed Criteria for Exemption From Association Membership

    The Commission is proposing to add to Rule 15b9-1 a new paragraph
(c) that would set forth two narrow circumstances in which a broker or
dealer could continue to be exempt from Section 15(b)(8)'s Association

membership requirement if it effects transactions in securities
otherwise than on an exchange of which it is a member.\156\
Specifically, following the existing paragraphs of Rule 15b9-1 that
require that a broker or dealer be a member of a national securities
exchange and carry no customer accounts (both of which paragraphs would
be retained), the Commission proposes to add language that would state:
``and, (c) Effects transactions in securities solely on a national
securities exchange of which it is a member, except that with respect
to this paragraph (c) . . .'' The two proposed exceptions would follow
in new paragraphs (c)(1) and (c)(2), and are discussed in turn below.
Proposed paragraphs (c)(1) and (c)(2) of the amended rule are intended
to provide more focused exemptions from Association membership for
types of off-member-exchange activity that are similar to the off-
member-exchange activities that Rule 15b9-1 was originally intended to
cover, and that are consistent with the public interest and the
protection of investors in accordance with Section 15(b)(9) of the Act.
---------------------------------------------------------------------------

    \156\ See proposed Rule 15b9-1(c). Relatedly, existing paragraph
(a) of Rule 15b9-1 would remain the same except it would no longer
be numbered as paragraph (a); existing paragraph (a)(1) would be
renumbered as paragraph (a); and existing paragraph (a)(2) would be
renumbered as paragraph (b). See proposed Rule 15b9-1.
---------------------------------------------------------------------------

1. Routing Exemption
    In paragraph (c)(1) of Rule 15b9-1, the Commission proposes to
provide an exemption from Association membership if a broker or dealer
that meets the criteria of paragraphs (a) and (b) of the rule effects
transactions in securities otherwise than on a national securities
exchange of which it is a member that result solely from orders that
are routed by a national securities exchange of which it is a member to
comply with Rule 611 of Regulation NMS \157\ or the Options Order
Protection and Locked/Crossed Market Plan.\158\ Relatedly, the
Commission also proposes to eliminate from Rule 15b9-1 outdated
references to the ``Intermarket Trading System.'' \159\
---------------------------------------------------------------------------

    \157\ 17 CFR 242.611.
    \158\ See proposed Rule 15b9-1(c)(1). See also Securities
Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August
6, 2009) (``Options Linkage Plan''). In the 2015 Proposal, the
Commission proposed to apply this exemption to orders routed to
comply with Rule 611 but did not propose to apply this exemption to
orders routed to comply with the Options Linkage Plan. Several
commenters on the 2015 Proposal supported this proposed exemption
for compliance with Rule 611. See, e.g., HRT Letter at 7; D&D Letter
at 3; PTR Letter at 3; CHX Letter at 3-4; SIFMA Letter at 3-4.
Commenters also suggested that the routing exemption should covers
orders routed to comply with the Options Linkage Plan. See, e.g.,
Cboe Letter at 4; Cboe/NYSE/Nasdaq Letter at 3.
    \159\ The Intermarket Trading System was an NMS plan, the full
title of which was ``Plan for the Purpose of Creating and Operating
an Intermarket Communications Linkage Pursuant to section
11A(c)(3)(B) of the Exchange Act of 1934'' (``ITS Plan''). The ITS
Plan was initially approved by the Commission in 1978. Exchange Act
Release No. 14661 (April 14, 1978), 43 FR 17419 (April 24, 1978)
(``ITS Plan Approval Order''). All national securities exchanges
that traded exchange-listed stocks and the NASD were participants in
the ITS Plan.
---------------------------------------------------------------------------

    The ITS Plan required each participant to provide electronic access
to its displayed best bid and offer, and provided an electronic
mechanism for routing orders, called commitments to trade, to access
those displayed prices.\160\ The ITS Plan provided each market limited
access to the other markets for the purpose of avoiding a trade-through
\161\ and locked or crossed markets.\162\ The ITS Plan was eliminated
in 2007 because it was superseded by Regulation NMS.\163\ Thus, the
references to the ``Intermarket Trading System'' in current paragraphs
(b)(2) and (c) of Rule 15b9-1 are obsolete.
---------------------------------------------------------------------------

    \160\ See ITS Plan Approval Order, supra note 159.
    \161\ See 17 CFR 242.600(b)(94) (defining a ``trade-through''
under Regulation NMS); see also Options Linkage Plan, supra note 158
(defining ``trade-through'' in the options context).
    \162\ A locked or crossed market occurs when a trading center
displays an order to buy at a price equal to or higher than an order
to sell, or an order to sell at a price equal to or lower than an
order to buy, that is displayed on another trading center.
    \163\ 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.
---------------------------------------------------------------------------

    Today, Rule 611 of Regulation NMS requires trading centers, such as
national securities exchanges, to establish, maintain, and enforce
written policies and procedures reasonably designed to prevent trade-
throughs in exchange-listed stocks, subject to certain exceptions.\164\
In general, Rule 611 protects automated quotations that are the best
bid or offer of a national securities exchange or an Association.\165\
To facilitate compliance with Rule 611, national securities exchanges
have developed the capability to route orders through brokers or
dealers (many of which are affiliated with the exchanges) to other
trading centers with protected quotations.\166\ Similarly, in the
options market, the Options Linkage Plan is a national market system
plan that requires linkages between the options exchanges to protect
the best-priced displayed quotes in the market and to avoid locked and
crossed markets.\167\ The Options Linkage Plan includes written
policies and procedures that provide for order protection and address
locked and crossed markets in eligible options classes.\168\
---------------------------------------------------------------------------

    \164\ 17 CFR 242.611. See also 17 CFR 240.600(b)(95) (defining
``trading center'').
    \165\ 17 CFR 242.611.
    \166\ See 17 CFR 242.600(b)(71) (defining ``protected
quotation'' under Regulation NMS) and 17 CFR 242.600(b)(70)
(defining ``protected bid'' and ``protected offer'' under Regulation
NMS); see also Options Linkage Plan, supra note 158 (defining
``protected bid'' and protected offer'' in the options context).
    \167\ See Options Linkage Plan, supra note 158.
    \168\ Id.
---------------------------------------------------------------------------

    The proposed rule would continue to accommodate securities
transactions away from a broker's or dealer's member exchange(s) that
are to comply with these regulatory requirements. An exchange member
may at times seek to effect a securities transaction on that exchange
at a price that would trade through a protected quotation displayed on
another trading center, such as another exchange or FINRA's ADF. In
such a case, the exchange may route the member's order (if the exchange
does not reject it), through a routing broker-dealer, to that other
trading center to access the protected quotation. Moreover, if, for
example, an ATS were to display a protected quotation on FINRA's ADF,
absent the proposed exemption, a broker or dealer would have to join
FINRA in order to have access to all protected quotations, even if the
broker or dealer already is a member of every exchange on which it
effects securities transactions.\169\
---------------------------------------------------------------------------

    \169\ See HRT Letter at 7 (stating that ``if an ATS were to
display a protected quote on FINRA's ADF, absent an exemption, a
Non-Member would not have access to the protected quotations without
registering with FINRA'' and asserting that allowing exempt firms to
have access to all protected quotations is critical because it
affects their ability to trade on exchanges of which they are
members). See also SIFMA Letter at 3 (suggesting that the Commission
clarify the exemption and whether it applies to non-floor exchange
members whose orders are routed by the exchange to an off-exchange
venue).
---------------------------------------------------------------------------

    In essence, a broker or dealer may, as a necessary part of its
business trading on exchanges of which it is a member and in light of
today's market structure, effect securities transactions elsewhere than
an exchange where it is a member solely as a consequence of routing by
its member exchange(s) to comply with the requirements of Rule 611 of
Regulation NMS or the Options Linkage Plan. The proposed rule would not
require Association membership as a result of such transactions. On the
contrary, it

would be consistent with Section 15(b)(9)'s goal of protecting
investors and the public interest if transactions effected solely to
comply with these regulatory requirements, via routing by the broker's
or dealer's member exchange(s), do not trigger Section 15(b)(8)'s
Association membership requirement for a broker or dealer that
otherwise limits its securities transactions to an exchange of which it
is a member (or to stock transactions that are covered by the stock-
option order exemption discussed below). The proposed routing exemption
would serve the limited, narrowly defined purpose of facilitating
compliance with intermarket order protection requirements.\170\
---------------------------------------------------------------------------

    \170\ One commenter stated that the routing exemption should be
``expanded to include all exchange-based routing activity,
including, but not limited to, routing effected for Regulation NMS-
compliance and best execution purposes'' and that the proposal
``does not contemplate the full array of legitimate and necessary
exchange-based routing activity.'' See CHX Letter at 3. The
commenter asserted that because all exchange routing functionalities
must be approved by the Commission, any type of exchange routing
would be consistent with the purposes of the Act and should be
covered by the proposed exemption. Id. at 3-4. In response to this
comment, the Commission preliminarily believes that many exchange-
offered routing functionalities are not necessary to facilitate an
exchange member's trading on the exchange. In addition, the
Commission is unaware of any exchange-offered routing options that
are specifically designated as being for best execution purposes. An
exchange member may utilize the exchange's routing functionality to
assist in meeting its best execution obligations, but this would not
appear limited to any particular exchange-offered routing option.
The commenter's suggested expansion of the proposed routing
exemption could create a gap in the FINRA oversight intended to be
achieved under the proposal if the exchange member could rely on its
member exchange's router to execute significant volume on other
markets where it is not a member without joining FINRA.
---------------------------------------------------------------------------

    The Commission also believes that it would be consistent with the
protection of investors and the public interest to permit reliance on
this exemption only where the routing is performed by a national
securities exchange of which the broker or dealer is a member. This
limitation would help ensure that the broker's or dealer's member
exchange has visibility into these routing transactions and thus is
better able to provide effective SRO oversight of its member's activity
that is related to its trading on the exchange and may not be overseen
by another SRO if the member is exempt from Association membership
under amended Rule 15b9-1.\171\ In this context, the exemption would be
applicable where the broker's or dealer's member exchange utilizes the
services of a designated broker-dealer (which could be affiliated or
unaffiliated with the exchange) to perform the exchange's outbound
routing, as the Commission understands that this type of arrangement is
typical among exchanges.
---------------------------------------------------------------------------

    \171\ Some commenters on the 2015 Proposal suggested that the
routing exemption should not be limited to where the broker's or
dealer's member exchange's routing mechanism is utilized, and that
the Commission also should provide relief to broker-dealers that
route orders to access protected quotations on away exchanges
without utilizing the linkage routing mechanism offered by a home
exchange. See Cboe Letter at 4; Cboe/NYSE/Nasdaq Letter at 3. The
Commission does not believe this would be appropriate because it
could permit scenarios in which there is insufficient SRO oversight
of the entirety of the broker-dealer's trading activity. By way of
example, if a broker-dealer were a member of some exchanges but not
others and not a FINRA member, and the broker-dealer could rely on
the exemption when routing orders to access protected quotations on
non-member exchanges or off-exchange in order to prevent a trade-
through on one of its member exchanges, the Commission believes that
it is possible that there would not be an SRO responsible for and
that could exercise jurisdiction over the broker-dealer's trading
activity away from its member exchange(s).
---------------------------------------------------------------------------

    A commenter on the 2015 Proposal sought clarity as to whether the
exemption would apply to routing broker-dealers that are affiliated
with national securities exchanges that are used by exchanges to
conduct routing to other trading centers.\172\ The commenter pointed
out that the Commission has required these affiliated routing broker-
dealers to operate as ``facilities'' of their respective exchanges,
which set forth rules that require the exchange to arrange for the
routing broker-dealer to be overseen by a non-affiliated SRO, and which
in practice is FINRA.\173\ The commenter requested that the Commission
clarify that the exemption from FINRA registration under Rule 15b9-1
would not apply to a broker-dealer affiliated with a national
securities exchange that routes orders on behalf of the exchange for
the purpose of accessing quotations in other trading centers.\174\ In
response, proposed Rule 15b9-1 would provide an exemption from Section
15(b)(8) of the Act's Association membership requirement for routing
broker-dealers that meet the conditions for the exemption. However,
proposed Rule 15b9-1 would not provide routing broker-dealers with an
exemption from the rules of an exchange that are applicable to routing
broker-dealers that operate as facilities of that exchange (and that
the exchange uses to conduct routing to other trading centers). As is
the case today, if an exchange's routing broker-dealer is covered by
amended Rule 15b9-1, if adopted, then the routing broker-dealer would
qualify for the exemption from Section 15(b)(8) afforded by the rule.
But the routing broker-dealer would still be required to comply with
the applicable rules of any exchange for which it performs outbound
routing services, including those requiring the routing broker-dealer
to be overseen by an unaffiliated SRO such as FINRA.\175\
---------------------------------------------------------------------------

    \172\ See SIFMA Letter at 3-4.
    \173\ Id.
    \174\ Id. (expressing concern as to whether ``an exchange-
affiliated routing broker-dealer could restrict its activities to
accessing protected quotations on other exchanges and could
therefore avoid FINRA membership'').
    \175\ See, e.g., Cboe BZX Exchange, Inc. Rule 2.11 (Cboe
Trading, Inc. as Outbound Router); NYSE Rule 17(c) (Operation of
Routing Broker); Nasdaq Rule 4758(b) (Routing Broker).
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of the proposed
routing exemption in amended Rule 15b9-1. In particular, the Commission
seeks responses to the following questions:
    17. What are commenters' views on the proposed routing exemption?
How, if at all, should the proposed routing exemption be modified?
    18. Is the scope of the proposed routing exemption sufficient to
provide relief for all securities transactions effected elsewhere than
on an exchange of which a broker or dealer is a member that might be
effected to comply with Rule 611 of Regulation NMS and the Options
Linkage Plan? If not, how should it be changed?
    19. Should the proposed routing exemption be broadened to cover
transactions beyond those that are to comply with Rule 611 of
Regulation NMS and the Options Linkage Plan? If so, what types of
additional transactions should be covered and why? For example, should
the proposed routing exemption be broadened such that it covers routing
by an exchange for any purpose and pursuant to any of the exchange's
available routing functionalities? Should the proposed routing
exemption be narrowed so that it does not cover transactions to comply
with Rule 611 or the Options Linkage Plan? Should the proposed routing
exemption be eliminated in its entirety?
    20. Are there other off-exchange transactions that a broker or
dealer might effect in order to comply with regulatory requirements? If
so, please describe those transactions and the relevant regulatory
requirements. Should there be an exemption in amended Rule 15b9-1 that
applies to any such transactions?
    21. Should the proposed routing exemption also cover broker-dealer
routing to access protected quotations without using the member
exchange's routing mechanisms? Why or why not?
    22. As discussed above, the Commission preliminarily believes that

the proposed routing exemption from Section 15(b)(8)'s Association
membership requirement does not exclude a routing broker that operates
as the facility of an exchange, but such a routing broker would still
be required to comply with the rules of the exchange, including
exchange rules requiring that the routing broker be overseen by an SRO
that is not affiliated with the exchange. Do commenters agree with
this? Should Rule 15b9-1 be amended in some way such that it excludes
or applies differently to routing brokers that operate as the facility
of an exchange? Why or why not? Should the proposed routing exemption
apply where the exchange uses a routing broker, whether affiliated or
unaffiliated? Should the routing exemption apply only where the
exchange uses an affiliated routing broker? Should the routing
exemption apply only where the exchange uses an unaffiliated routing
broker?
2. Stock-Option Order Exemption
    In paragraph (c)(2) of amended Rule 15b9-1, the Commission proposes
to provide an exemption from Association membership if a broker or
dealer that meets the criteria of paragraphs (a) and (b) of the rule
effects transactions in securities otherwise than on a national
securities exchange of which it is a member, with or through another
registered broker or dealer, that are solely for the purpose of
executing the stock leg of a stock-option order.\176\ Proposed
paragraph (c)(2) also would require that a broker or dealer seeking to
rely on this proposed exemption establish, maintain, and enforce
written policies and procedures reasonably designed to ensure and
demonstrate that such transactions are solely for the purpose of
executing the stock leg of a stock-option order, and that the broker or
dealer preserve a copy of its policies and procedures in a manner
consistent with 17 CFR 240.17a-4 until three years after the date the
policies and procedures are replaced with updated policies and
procedures.\177\
---------------------------------------------------------------------------

    \176\ See proposed Rule 15b9-1(c)(2). The 2015 Proposal did not
include this type of exemption. Several commenters suggested that it
be added to the amended rule. See, e.g., Letter from Elizabeth K.
King, Secretary and General Counsel, NYSE and Joan C. Conley, Senior
Vice President and Corporate Secretary, NASDAQ OMX Group, Inc. (June
4, 2015) (``NYSE/Nasdaq Letter'') at 2-4; D&D Letter at 1-2; PTR
Letter at 1-2; Cboe Letter at 3; Cboe/NYSE/Nasdaq Letter at 4;
Lakeshore Letter at 2.
    \177\ See proposed Rule 15b9-1(c)(2).
---------------------------------------------------------------------------

    The Commission understands that there are firms that trade stock-
option orders whose business is focused on one or more options
exchanges of which they are a member, and whose trading elsewhere is
primarily to effect the execution of stock orders to facilitate their
stock-option order business. In the Commission's preliminary view,
these firms' stock trading activity is for a limited purpose and
ancillary to their primary business handling stock-option orders on an
options exchange of which they are member. As discussed below, there is
a close link between the stock component transaction of a stock-option
order and the relevant options exchange. As such, the proposed rule
would permit these types of firms to continue their stock-option order
trading business without being required to join stock exchanges or an
Association solely in order to effect the execution of the stock legs
of stock-option orders that they handle.
    As noted above, the Commission estimates that, in 2021, 50 of the
66 firms identified as registered broker-dealers and exchange members
but not FINRA members initiated options order executions.\178\ The
Commission estimates that seven of the firms that initiated options
order executions also effected the execution of stock leg transactions,
and therefore could potentially rely on the proposed stock-option order
exemption to the extent that they effect the stock leg executions off-
exchange or on an exchange where they are not a member. Because the
broker or dealer relying on proposed Rule 15b9-1(c)(2) would not itself
be a member of an exchange on which such stock transactions are
executed, or a member of an Association, such stock leg transactions
would need to be effected with or through another registered broker or
dealer that is a member of the exchange where the transactions are
executed or a member of an Association (or both).
---------------------------------------------------------------------------

    \178\ See supra note 81.
---------------------------------------------------------------------------

    Options exchanges define the term ``stock-option order'' in their
rules.\179\ Further, as far as the Commission is aware, all options
exchanges accept a stock-option order only if it complies with the
Qualified Contingent Trade (``QCT'') Exemption (``QCT Exemption'') from
Rule 611(a) of Regulation NMS.\180\ For purposes of relying on the
exemption provided by proposed Rule 15b9-1(c)(2), a broker or dealer
should adhere to the stock-option order definition of the options
exchange where the stock-option order is handled and of which the
broker or dealer is a

member.\181 \Specifically, the broker or dealer could rely on that
definition to determine whether, for purposes of amended Rule 15b9-
1(c)(2), an order is in fact a stock-option order and a stock order is
in fact the stock leg of a stock-option order. Moreover, the exemption
would apply regardless of whether the component legs of a stock-option
order are executed electronically, on the physical exchange floor, or
through a combination of both. The Commission believes that approaching
the proposed stock-option order exemption in this way should minimize
disruptions to the markets for stock-option orders by minimizing the
degree to which brokers and dealers that trade such orders would need
to alter their business in order to rely on the proposed exemption.
---------------------------------------------------------------------------

    \179\ See, e.g., Cboe Rule 1.1 (defining ``stock-option order''
as ``an order to buy or sell a stated number of units of an
underlying or a related security coupled with either (a) the
purchase or sale of option contract(s) on the opposite side of the
market representing either the same number of units of the
underlying or related security or the number of units of the
underlying security necessary to create a delta neutral position or
(b) the purchase or sale of an equal number of put and call option
contracts, each having the same exercise price and expiration date,
and each representing the same number of units of stock as, and on
the opposite side of the market from, the underlying or related
security portion of the order. For purposes of electronic trading,
the term ``stock-option order'' has the meaning set forth in Rule
5.33.''); Cboe Rule 5.33(b)(5) (defining a ``stock-option order'' as
``the purchase or sale of a stated number of units of an underlying
stock or a security convertible into the underlying stock
(``convertible security'') coupled with the purchase or sale of
options contract(s) on the opposite side of the market representing
either (i) the same number of units of the underlying stock or
convertible security or (ii) the number of units of the underlying
stock necessary to create a delta neutral position, but in no case
in a ratio greater than eight-to-one (8.00), where the ratio
represents the total number of units of the underlying stock or
convertible security in the option leg(s) to the total number of
units of the underlying stock or convertible security in the stock
leg''). See also, e.g., MIAX Rule 518(a)(5); MIAX Emerald Rule
518(a)(5); Nasdaq Options 3, Section 14(a)(i); Nasdaq PHLX Options
3, Section 7(b)(13); Nasdaq ISE Options 3, Section 14(a)(5); Nasdaq
MRX Options 3, Section 14(a)(5); Nasdaq BX Chapter 5, Section
27(a)(v)(1) of the ``Grandfathered Rules'' of the Boston Stock
Exchange, Inc.; NYSE Arca Rule 6.62-O(h)(1); and NYSE American Rule
900.3NY(h)(1).
    \180\ See, e.g., Cboe Rule 5.33, Interpretations and Policies
.04 Stock Option Orders (stating that a user may only submit a
stock-option order if it complies with the QCT Exemption and that a
user submitting a stock-option order represents that it complies
with the QCT Exemption); Supplementary Material to Nasdaq ISE
Options 3, Section 14 (stating that ``[m]embers may only submit
Complex Orders in Stock-Option Strategies and Stock-Complex
Strategies if such Complex Orders comply with the Qualified
Contingent Trade Exemption from Rule 611(a) of Regulation NMS under
the Exchange Act'' and that ``[m]embers submitting Complex Orders in
Stock-Option Strategies and Stock-Complex Strategies represent that
they comply with the Qualified Contingent Trade Exemption'') and
Commentary .01 to MIAX Rule 518 (stating that ``[m]embers may only
submit stock-option orders if such orders comply with the Qualified
Contingent Trade Exemption from Rule 611(a) of Regulation NMS under
the Securities Exchange Act of 1934'' and that ``[m]embers
submitting such complex orders represent that such orders comply
with the Qualified Contingent Trade Exemption''). A qualified
contingent trade is ``a transaction consisting of two or more
component orders, executed as agent or principal where: (1) at least
one component order is in an NMS stock; (2) all components are
effected with a product or price contingency that either has been
agreed to by the respective counterparties or arranged for by a
broker-dealer as principal or agent; (3) the execution of one
component is contingent upon the execution of all other components
at or near the same time; (4) the specific relationship between the
component orders (e.g., the spread between the prices of the
component orders) is determined at the time the contingent order is
placed; (5) the component orders bear a derivative relationship to
one another, represent different classes of shares of the same
issuer, or involve the securities of participants in mergers or with
intentions to merge that have been announced or since cancelled; and
(6) the transaction is fully hedged (without regard to any prior
existing position) as a result of the other components of the
contingent trade.'' Securities Exchange Act Release No. 54389
(August 31, 2006), 71 FR 52829 (September 7, 2006); see also
Securities Exchange Act Release No. 57620 (April 4, 2008), 73 FR
19271 (April 9, 2008).
    \181\ Presumably, an options exchange would accept only those
stock-option orders that meet the exchange's definition thereof. In
addition, the Commission's understanding is that, currently,
consistent with options exchange definitions, a stock-option order
contains only one stock leg. See supra note 179. Therefore, the
proposed stock-option order exemption is designed to cover stock-
option orders with only one stock leg.
---------------------------------------------------------------------------

    Relying on the options exchange's definition also should enhance an
exchange's ability to monitor whether its members are appropriately
relying on the proposed exemption and thereby enhance its ability to
provide effective SRO oversight of its members' stock-option order
trading activity. Under options exchange rules, an exchange member
submitting a stock-option order to the exchange must designate to the
exchange one or more specific broker-dealers: (i) that are not
affiliated with the exchange; (ii) with which the exchange member has
entered into a brokerage agreement; (iii) that the exchange has
identified as having connectivity to electronically communicate the
stock components of stock-option orders to stock trading venues; and
(iv) to which the exchange will electronically communicate the stock
component of the stock-option order on behalf of the member.\182\ The
option exchange's execution of the stock-option order is contingent on
the exchange's receipt from the designated broker-dealer of an
execution report for the stock component transaction confirming that
the transaction has occurred.\183\ In light of these rules, the
Commission preliminarily believes that there is a close link between
the stock component transaction of a stock-option order and the
relevant options exchange. Accordingly, the Commission believes that
this proposed exemption would serve the limited, narrowly defined
purpose of facilitating the execution of stock-option orders consistent
with options exchange rules and that the options exchange would be able
to monitor and oversee the totality of the securities trading activity
of any of its members that rely on the exemption.
---------------------------------------------------------------------------

    \182\ See, e.g., Cboe Rule 5.33(l) and Interpretations and
Policies .04; Nasdaq ISE Options 3, Section 7 and Supplementary
Material .01, Options 3, Section 14 and Supplementary Material .07;
and MIAX Rule 518 and Commentary .01.
    \183\ See, e.g., Cboe Rule 5.33(l); Nasdaq ISE Options 3,
Section 7 and Supplementary Material .01, Options 3, Section 14 and
Supplementary Material .07; and MIAX Rule 518 and Commentary .01.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the exchange's oversight
capabilities will be further enhanced, consistent with the public
interest and protection of investors, by requiring written policies and
procedures in connection with the stock-option exemption in proposed
paragraph (c)(2) of the amended rule. This requirement would help
facilitate exchange SRO supervision of brokers and dealers relying on
the stock-option order exemption because it would provide an efficient
and effective way for the relevant options exchange to assess
compliance with the proposed exemption. Moreover, the Commission
preliminarily believes that requiring brokers and dealers to develop
written policies and procedures would provide sufficient flexibility to
accommodate potentially varying business models of brokers and dealers
that effect stock-option orders and may seek to rely on this exemption.
    Such written policies and procedures must be reasonably designed to
ensure and demonstrate that the broker's or dealer's securities
transactions elsewhere than on an exchange of which it is a member are
solely for the purpose of executing the stock leg of a stock-option
order. Accordingly, a broker or dealer seeking to rely upon the
proposed stock-option order exemption must establish, maintain, and
enforce written policies and procedures reasonably designed to ensure
and demonstrate that such transactions are solely for the purpose of
executing the stock leg of a stock-option order. For example, the
broker or dealer could maintain documentation that demonstrates its
compliance with the stock-option order requirements of any options
exchange of which it is a member and where it effects the execution of
stock-option orders. Indeed, in addition to the Commission, the options
exchange of which the broker or dealer is a member and where the stock-
option order is handled would be able to enforce compliance with the
stock-option order exemption. In the context of routine examinations of
its members, the options exchange generally would review the adequacy
of its members' written policies and procedures and assess whether its
members' off-member-exchange transactions comply with those written
policies and procedures as well as the terms of the exemption itself,
as set forth in amended Rule 15b9-1.\184\
---------------------------------------------------------------------------

    \184\ Section 19(g)(1) of the Act, 15 U.S.C. 78s(g), among other
things, requires every SRO to examine for and enforce compliance by
its members and associated persons with the Act, the rules and
regulations thereunder, and the SRO's own rules, unless the SRO is
relieved of this responsibility pursuant to section 17(d), 15 U.S.C.
78q(d) or section 19(g)(2), 15 U.S.C. 78s(g)(2), of the Act.
---------------------------------------------------------------------------

    Finally, a broker or dealer seeking to rely on the stock-option
order 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.\185\
Accordingly, a broker or dealer would be required to keep the policies
and procedures relating to its use of this proposed exemption as part
of its books and records while they are in effect, and for three years
after they are updated.
---------------------------------------------------------------------------

    \185\ See, e.g., 17 CFR 240.17a-4(e)(7).
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of the proposed
stock-option order exemption in Rule 15b9-1. In particular, the
Commission seeks responses to the following questions:
    23. Is the proposed stock-option order exemption necessary and
appropriate? Why or why not? How, if at all, should this proposed
exemption be modified?
    24. Is the scope of the proposed stock-option order exemption
sufficient to provide for all off-member-exchange transactions that
might be effected by a broker or dealer as a necessary component of
handling stock-option orders? If not, how should it be changed?
    25. Should the proposed stock-option order exemption be broadened
to cover transactions beyond those necessary to complete stock-option
orders? If so, what types of additional transactions should be covered
and why? Should the proposed exemption be narrowed in some way? Should
the proposed stock-option order exemption be eliminated in its
entirety?
    26. Is the Commission's understanding correct that all stock-option
orders must be QCTs? If not, what types of stock-option orders are not
required to be QCTs? Should they be covered by the proposed exemption?
    27. The proposed stock-option order exemption is limited to
transactions

effected with or through another registered broker-dealer. Are there
circumstances where a broker or dealer that is not a FINRA member might
not need to effect the execution of the stock leg of a stock-option
order with or through another registered broker-dealer? Are there
circumstances in which a broker or dealer that is not a FINRA member
might need to effect the execution of the stock leg of a stock-option
order with or through a party that is a registered broker-dealer but
not a member of an exchange where the stock leg is executed, or not a
member of an Association if the stock leg is not executed on an
exchange? If so, please describe the nature and extent of such
transactions.
    28. Stock transactions effected in reliance on the exemption would
still be subject to required transaction reporting. Would such reliance
impede required transaction reporting in any way?
    29. As proposed, the stock-option order exemption would cover
stock-option orders with one stock leg and any number of options legs.
Is this appropriate? Should the proposed stock-option order exemption
be limited to two-leg stock-option orders where one leg is a stock and
the other leg is an option? Why or why not? Do firms execute stock-
option orders that contain multiple stock legs? If so, should the stock
legs of such stock-option orders be covered by the proposed exemption?

C. No Floor-Member Hedging Exemption

    As discussed above, the Commission adopted Rule 15b9-1 so that an
exchange member's limited trading activity ancillary to its floor
business on a single national securities exchange would not necessitate
Association membership in addition to exchange membership.\186\ Since
that time, the securities markets have evolved to include significant,
cross-market and off-exchange electronic proprietary trading as a
primary business model. This business model did not exist when the
Commission adopted Rule 15b9-1 in its current form, nor did firms
engage in extensive off-member-exchange proprietary trading activity
while exempt from Association membership by virtue of Rule 15b9-1.
---------------------------------------------------------------------------

    \186\ See supra notes 60-62 and accompanying text.
---------------------------------------------------------------------------

    Unlike today's proposed amendments, the 2015 Proposal would have
provided an exemption from Association membership for a dealer that is
an exchange member, carries no customer accounts, conducts business on
the floor of a national securities exchange, and effects transactions
off the exchange, for the dealer's own account with or through another
registered broker or dealer, that are solely for the purpose of hedging
the risks of its floor-based activity.\187\ The Commission proposed
that the hedging exemption be limited to a dealer's floor-based trading
on a national securities exchange, and understood then that dealers
that limit their activities to an exchange's physical trading floor
tend to be specialists or floor brokers based on the floor of an
individual exchange.\188\ That proposed hedging exemption was intended
to be consistent with the original intent of Rule 15b9-1 to accommodate
only limited proprietary trading activity elsewhere than a broker's or
dealer's member exchange(s) that is ancillary to the broker's or
dealer's primary trading activity on its member exchange(s). But based
on data available to the Commission today that was not available in
2015, the Commission believes that no dealers currently trade in a
manner that would enable reliance on the hedging exemption as proposed
in the 2015 Proposal, i.e., no dealer's trading on an exchange of which
it is a member is solely on the exchange's floor. Accordingly, the re-
proposed rule does not include the hedging exemption included in the
2015 Proposal.\189\
---------------------------------------------------------------------------

    \187\ Currently, NYSE Arca Options, NYSE American Options,
Nasdaq Phlx, Cboe, NYSE, and BOX Exchange have physical exchange
floors.
    \188\ See 2015 Proposing Release, supra note 6, 80 FR at 18047.
    \189\ As described above, to the extent a stock transaction is a
component of a stock-option order, and the broker or dealer handling
the stock-option order otherwise meets the requirements of the
proposed amended rule, that stock transaction would not trigger
Section 15(b)(8)'s Association membership requirement.
---------------------------------------------------------------------------

    Some commenters supported the proposed hedging exemption in the
2015 Proposal, but suggested that the exemption should not be limited
to a dealer operating solely on a physical exchange floor, and also
should cover off-member-exchange hedging transactions by dealers that
trade electronically on their member exchange(s).\190\ The Commission
preliminarily believes that an exemption of this nature might swallow
the amended rule, as proposed, and would not be appropriate. As
discussed above, electronic trading dealer firms effect securities
transactions proprietarily across market centers as a primary business
model, including to a significant degree in the off-exchange market and
on exchanges of which they are not a member.\191\ The Commission
acknowledges that it is unlikely that all of these firms' securities
trading activity away from their member exchanges is to hedge their
securities trading activity on their member exchanges. Thus, the off-
member-exchange transaction volume attributable to these firms likely
overstates the volume of transactions that would be attributable to
firms who could rely on a hedging exemption that covered electronic
trading activity as contemplated by commenters. The Commission cannot
reliably discern from available data what off-member-exchange
securities transactions effected by these firms are for hedging
purposes and what transactions are not. But the Commission
preliminarily believes that there are proprietary trading dealer firms
that trade electronically and in significant volumes, including off any
exchange where they are a member, which could potentially meet the
criteria of a hedging exemption that covered electronic trading
activity. Indeed, in light of the concentration of off-member-exchange
securities transaction volume among certain firms, as discussed above,
even if only a small number of firms could rely on a hedging exemption
that covered electronic trading activity, it could translate into
significant trading activity that would not be subject to direct FINRA
oversight. This would not be consistent with the protection of
investors or the public interest, or with the historical rationale for
Rule 15b9-1.
---------------------------------------------------------------------------

    \190\ See, e.g., CHX Letter at 3; CTC Letter at 7; Cboe Letter
at 2-3; Options Market Makers Letter at 4; and Cboe/NYSE/Nasdaq
Letter at 2-3.
    \191\ See supra Section II.B.
---------------------------------------------------------------------------

    Commenters more broadly suggested that the 2015 Proposal did not
adequately consider options market makers or their hedging needs.\192\
Some of these commenters' concerns appear to center on firms' needs in
relation to their handling of stock-option orders.\193\ As such, these
concerns could be mitigated by the stock-option order

exemption that the Commission is proposing to include in amended Rule
15b9-1.\194\
---------------------------------------------------------------------------

    \192\ See, e.g., Options Market Makers Letter at 1; CTC Letter
at 1; CHX Letter at 3; Cboe Letter at 2-3; Cboe/NYSE/Nasdaq Letter
at 2-3; NYSE/Nasdaq Letter at 2-4; Letter from Reps. Bill Foster and
Randy Hultgren, Members of U.S. Congress (Nov. 15, 2016) at 2.
    \193\ See, e.g., NYSE/Nasdaq Letter at 2-4; Cboe Letter at 3;
Cboe/NYSE/Nasdaq Letter at 4. For example, one commenter expressed
concern that the 2015 Proposal would ``unintentionally require
[options] floor brokers, which have a business focused on the floor
of an exchange in which they are members, to become members of
FINRA'' and specifically noted that this ``could restrict floor
brokers from fulfilling stock-option orders. . .[b]ecause the stock
component of a stock-option order cannot be executed on the options
exchange of which a floor broker is a member.'' NYSE/Nasdaq Letter
at 2. This commenter suggested that any amendment ``maintain floor
brokers' ability to route the stock leg of a stock-option order for
execution on another market by a member of the away market without
requiring the floor broker to become a member of FINRA.'' NYSE/
Nasdaq Letter at 4; see also Lakeshore Letter at 2.
    \194\ In addition, Section 15(b)(9) of the Act provides the
Commission with the authority, by rule or order, and as it deems
consistent with the public interest and the protection of investors,
to conditionally or unconditionally exempt from the requirements of
Section 15(b)(8) any broker or dealer or class of brokers or
dealers. Accordingly, if a dealer or class of dealers believes that
it should be exempted from the requirements of Section 15(b)(8) in a
manner that is not provided by amended Rule 15b9-1, it may seek an
exemption from the Commission, by order, pursuant to Section
15(b)(9). For example, the Commission may consider granting such an
exemption, where appropriate, if a dealer or class of dealers
chooses to limit its exchange trading activity to the physical floor
of an exchange of which it is a member, but must effect limited
securities transactions elsewhere for its own account in order to
facilitate its exchange-floor business.
---------------------------------------------------------------------------

    The Commission requests comment on its re-proposed approach of not
providing a hedging exemption in amended Rule 15b9-1. In particular,
the Commission seeks responses to the following questions:
    30. Should the Commission adopt a hedging exemption outside the
context of the proposed stock-option order exemption? Why or why not?
Would it be apparent whether a securities transaction is for hedging
purposes?
    31. Should the Commission adopt a hedging exemption (in addition to
the proposed stock-option order exemption) that applies to a dealer
that is a member of multiple exchanges? Why or why not? Should the
Commission allow firms to rely on any such exemption only if they
effect hedging transactions in securities on exchanges where they are
not a member (i.e., off-exchange transactions, even if solely for
purposes of hedging a single exchange member's trading activity on that
exchange, would not be covered by the exemption)? Why or why not?
    32. Should the Commission adopt a hedging exemption that covers
off-member-exchange transactions to hedge on-member-exchange electronic
transactions and physical exchange floor transactions, just on-member-
exchange physical exchange floor transactions or just on-member-
exchange electronic transactions? Why would one of these possible
approaches be preferable to another? Under each possible approach, how
difficult would it be to discern what off-member-exchange securities
transactions by electronic trading firms are for hedging purposes? The
Commission specifically seeks data that demonstrates the extent to
which exchange member dealer firms trade elsewhere than on their member
exchange(s) in order to hedge the risks of their trading activities on
their member exchange(s).
    33. Are there non-floor-based exchange members that today focus
their business activities on a single exchange? Are there floor-based
exchange members that today focus their business activities on a single
exchange? If so, what is the nature of each firm's business activities?
    34. Should the Commission adopt a hedging exemption in the amended
rule that requires a dealer seeking to rely on the exemption to
establish, maintain, and enforce written policies and procedures
reasonably designed to ensure and demonstrate that its off-member-
exchange hedging transactions reduce or otherwise mitigate the risks of
the financial exposure the dealer incurs as a result of its on-member-
exchange activity? Why or why not? What would be the costs of
establishing, maintaining, and enforcing the policies and procedures,
and any 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
hedging exemption? Are there more efficient and effective alternatives
to a policies and procedures approach? If so, what are they? Please
describe in detail.
    35. Would current exchange surveillance and enforcement mechanisms
be effective to monitor off-member-exchange trades that would be
executed pursuant to a possible hedging exemption? Could this be
accomplished through 17d-2 plans and RSAs? Please explain. Would
exchanges otherwise have the ability to assess dealers' compliance with
a hedging exemption? If not, should the Commission require additional
reporting by registered broker-dealers acting as an agent for dealers
relying on a hedging exemption? Please explain.
    36. Should the Commission adopt a hedging exemption that is subject
to quantitative limits on the volume of hedging transactions that a
firm may execute in reliance on such an exemption? Could qualitative or
quantitative requirements assist in identifying off-member-exchange
activity that is solely for the purpose of hedging? Please explain.
    37. Should the Commission adopt a hedging exemption that requires
the exchange member to retain records demonstrating how each off-
member-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, impractical,
or unnecessary?
    38. Should the Commission adopt a hedging exemption that requires
dealers to make a certification in connection with their reliance on
the 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? For example, should
firms be required to certify that they have a reasonable basis to
believe that they are in compliance with a hedging exemption? Or should
they be required to make such a certification to the best of their
knowledge? Is there a different standard that would be appropriate?
Should the certification be made in conjunction with an internal
compliance review? If so, what type of internal compliance review
should be conducted?
    39. Would not adopting a hedging exemption affect liquidity on any
national securities exchange?

IV. Effective Date and Implementation

    The Commission recognizes that firms may need time to comply with
any amended Rule 15b9-1 if adopted. In particular, they may need time
to become a member of an Association. As noted previously, FINRA is
currently the only Association. To become a FINRA member, a broker or
dealer must complete FINRA's New Member Application and participate in
a pre-membership interview.\195\ The broker or dealer and its
associated persons must comply with FINRA's registration and
qualification requirements.\196\ The amount of time that it takes to
become a FINRA member depends on a number of factors, including the
nature of the broker's or dealer's business, the level of complexity or
uniqueness of the firm's business plan, the number of associated
persons that the firm employs, and whether the firm has an affiliate
that is already a member of FINRA.\197\ The Commission understands
that, on average, the FINRA membership application process takes
approximately six months.
---------------------------------------------------------------------------

    \195\ See FINRA.org, How to Apply, available at https://www.finra.org/registration-exams-ce/broker-dealers/how-apply (last
visited on July 22, 2022).
    \196\ See FINRA Rule 1010--Electronic Filing Requirements and
Uniform Forms, which sets out the substantive standards and
procedural guidelines for the FINRA membership application and
registration process.
    \197\ See Section VI.C.2, infra, discussing the costs of joining
FINRA.
---------------------------------------------------------------------------

    Alternatively, broker-dealer firms that currently rely on Rule
15b9-1 and carry no customer accounts may choose to adjust their
business model or

organizational structure such that they effect securities transactions
solely on national securities exchanges of which they are a member, and
therefore comply with Section 15(b)(8) without needing to join FINRA or
rely on any amended version of Rule 15b9-1 if adopted. This may require
such firms to become a member of additional exchanges upon which they
trade. Or, firms may need time to adjust their business models such
that their securities transactions elsewhere than exchanges of which
they are a member comply with the proposed amendments to paragraphs
(c)(1) or (c)(2) if adopted, including establishing policies and
procedures that would be required by proposed paragraph (c)(2). More
broadly, broker-dealer firms may need to modify their systems or take
other steps to achieve compliance with any amended rule if adopted.
    The Commission preliminarily believes that one year after
publication in the Federal Register of any amended version of Rule
15b9-1 that the Commission may adopt should provide firms with enough
time to comply.\198\ Therefore, the Commission proposes that the
compliance date for amended Rule 15b9-1 would be one year after
publication of any final rule in the Federal Register. The Commission
solicits comment on the adequacy of this proposed implementation
timeline. In particular, the Commission seeks responses to the
following questions:
---------------------------------------------------------------------------

    \198\ In the 2015 Proposal, supra note 6, the Commission
solicited comment on the appropriate length of time that it should
provide firms to comply with the then-proposed amended version of
Rule 15b9-1. In this regard, the Commission also solicited comment
on the FINRA membership process. Some commenters stated that one
year generally is sufficient to join FINRA. See, e.g., IEX Letter at
3. Other commenters requested more time or requested that the
Commission require FINRA to develop a ``fast track'' application
process. See, e.g., FIA 2 Letter at 5. Another commenter suggested a
waiver process for a proprietary trading firm that is registered
with the Commission and an SRO, if the firm's information has not
materially changed from the time it registered with such entities,
and so long as the firm remains in good standing with the Commission
and other regulators. See Peak6 Letter at 2. FINRA stated that it
tentatively believed that most broker-dealer firms that are not
FINRA members ``are already members of an exchange and are engaged
solely in proprietary trading activity'' and would be candidates for
its ``fast track/triage program'' which has an average processing
time of 60 days for membership. See FINRA Letter at 5-6. As
reflected in the requests for comment in this section, the
Commission again solicits comment from FINRA and exchanges regarding
the length of time of the membership application and approval
process, and from any interested parties generally regarding the
appropriate length of time for compliance with the proposed
amendments to Rule 15b9-1 if they are adopted.
---------------------------------------------------------------------------

    40. Would one year after publication of any final rule in the
Federal Register provide firms with sufficient time to comply with
amended Rule 15b9-1, if adopted? Would firms be in a position to comply
with any final, amended rule earlier than one year after publication?
Would a compliance period that is shorter or longer than one year be
more appropriate? If so, how long should the revised compliance period
be and why?
    41. Would one year after publication of any final rule in the
Federal Register provide firms with sufficient time to comply with
Section 15(b)(8) of the Act by joining an Association? Would one year
after publication of any final rule in the Federal Register provide
firms that do not trade securities off-exchange with sufficient time to
comply with Section 15(b)(8) of the Act by becoming a member of all
national securities exchanges where they trade securities (if they are
not already a member of all such exchanges)?
    42. How long is the registration process with FINRA typically? How
long would it take FINRA to process new membership applications from
firms that join FINRA as a result of the proposed amendments,
considering that many such firms may submit applications close in time
to each other? Please include the estimated time to prepare the
application as well as the estimated time for FINRA to process the
application.
    43. How long does it typically take to complete the application
process with a national securities exchange? Please include the
estimated time to prepare the application as well as the estimated time
for an exchange to process the application.
    44. To the extent a firm intends to rely on one or more of the
exemptions in the amended rule, how long would it take such firm to
make the required systems changes to comply? Are there other steps that
would need to be taken to achieve compliance? If so, what is the
estimated time to accomplish those steps? How long would it take a firm
to establish the policies and procedures that would be necessary to
rely on the stock-option order exemption?
    45. To the extent a firm intends to adjust its business model or
organizational structure such that it effects securities transactions
only on an exchange of which it is a member, how long would it take
such firm to make such an adjustment? What systems or other changes
would be required?

V. General Requests for Comments

    The Commission seeks comment on all aspects of the proposed
amendments to Rule 15b9-1. Commenters should, when possible, provide
the Commission with data to support their views. Commenters suggesting
alternative approaches should provide comprehensive proposals,
including any conditions or limitations that they believe should apply,
the reasons for their suggested approaches, and their analysis
regarding why their suggested approaches would satisfy the objectives
of the proposed amendments.
    46. The Commission requests comment generally on whether the
proposed amendments to Rule 15b9-1 are appropriate. How, if at all,
should the proposed amendments be modified? Should either of the
proposed exemptions from Association membership set forth in proposed
paragraphs (c)(1) and (c)(2) of the amended rule be eliminated? If so,
why? For example, should the Commission maintain the proposed routing
exemption, but not maintain the proposed stock-option order exemption?
Why or why not? Should the Commission maintain the proposed stock-
option order exemption, but not the routing exemption? Why or why not?
    47. Should the Commission eliminate Rule15b9-1 in its entirety,
such that there is no exemption from Section 15(b)(8) of the Act?
Broker-dealers would then be statutorily required by Section 15(b)(8)
of the Act, without exception, to join an Association if they effect
securities transactions otherwise than on an exchange where they are a
member. In other words, a broker-dealer that effects transactions in
securities otherwise than on an exchange of which it is a member would
have to join FINRA even if its transactions result solely from orders
that are routed by an exchange of which it is a member to comply with
order protection requirements or are solely for the purpose of
executing the stock leg of a stock-option order. What would be the
benefits or drawbacks of eliminating Rule 15b9-1 in its entirety?
Please explain.
    48. Should the Commission amend Rule 15b9-1 to capture only those
broker-dealers that are exchange members but not FINRA members that
account for the high degree of concentration of off-exchange listed
equities volume? For example, the Commission estimates that, as of
September 2021, 13 of the 47 identified firms that initiated orders in
listed equities then accounted for approximately 94% of the off-
exchange listed equities transaction volume attributable to the 47
identified firms that month. If so, what methodology should be used to
select the most significant firms?
    49. Other than the proposed routing exemption and stock-option
order

exemption set forth in proposed paragraphs (c)(1) and (c)(2) of the
amended rule, respectively, are there other exemptions that the
Commission should consider?
    50. How might dealers that currently rely on Rule 15b9-1's de
minimis allowance and proprietary trading exclusion respond to the
proposed elimination of these provisions from the amended rule? Might
they seek to avoid Association membership in ways other than complying
with the exemptions in the amended rule, i.e., are there ways they
could avoid Association membership other than by ceasing all off-
exchange activity and becoming a member of each exchange on which the
firm effects securities transactions, or limiting the firm's securities
transactions elsewhere than an exchange where it is a member such that
they comply with the routing exemption or stock-option order exemption?
If so, please explain.
    51. Reliance on Rule 15b9-1 is currently self-effecting (i.e., the
rule does not require the reporting of such reliance to the Commission
or any other regulatory authority). In lieu of the proposed amendments,
should the Commission require broker-dealers relying on Rule 15b9-1 to
report such reliance to the Commission or to the exchange of which the
broker-dealer is a member? How frequently should such reporting occur?
If so, what form should such reporting take and what information should
be provided to the Commission or the exchange of which the broker-
dealer is a member? For example, should a broker-dealer be required to
report in writing to its member exchange and/or the Commission whether
it is relying on Rule 15b9-1, and should information such as
transactional volume be provided, or information on the type or
categories of securities traded? If not, why not and what alternative
means could be used to collect data about reliance on Rule 15b9-1?
    52. If the Commission were to eliminate Rule 15b9-1 altogether, how
many broker-dealers would: (i) effect securities transactions only on
national securities exchanges of which they are already member; (ii)
become members of additional national securities exchanges such that
they are not required to join an Association; and/or (iii) become
members of an Association?
    53 Would the proposed amendments have an effect on market
liquidity? If so, please estimate that effect. Would there be any
deleterious impacts on market quality? Would there be positive impacts
on market liquidity or market quality more broadly?
    54. Should the Commission allow broker-dealers that are a member of
an exchange and conduct off-exchange trading activity to remain exempt
from membership in an Association? If so, why? Should the level of off-
exchange activity affect the ability of a firm to be exempt from
Association membership? Why or why not?
    55. Does the CAT plan mitigate the need for the proposed amendments
to Rule 15b9-1? If so, how? Would it be appropriate and feasible to
modify CAT reporting to accomplish any of the goals of amended Rule
15b9-1?
    56. Do existing 17d-2 plans and RSAs among SROs mitigate the need
for the proposed amendments to Rule 15b9-1? If so, how? Do commenters
agree that RSAs are subject to change and may not in the future provide
the stability of FINRA oversight? How frequently are RSAs typically
renegotiated?
    57. Is Association membership an efficient or effective approach
for the regulation of firms that trade across multiple exchanges but do
not trade off-exchange? Are there more effective alternatives?
    58. Under the proposed amendments to Rule 15b9-1, a broker-dealer
that does not effect securities transactions off an exchange, but
currently effects securities transactions on an exchange of which it is
not a member, would be required either to join an Association or become
a member of each exchange where it effects securities transactions,
unless its exchange trading is covered by an exemption in the proposed
amended rule. Should the proposed amendments be revised to provide an
exemption from Section 15(b)(8) of the Act to permit such a firm, with
no off-exchange trading, to remain exempt from membership in an
Association and continue trading on exchanges of which it is not a
member even if that trading activity would not satisfy one of the
proposed exemptions in the amended rule? Should any such approach be
based on certain conditions being met, such as any exchange of which
the firm is a member entering into appropriate contractual or self-
regulatory responsibility sharing arrangements such that an exchange
SRO is in a position to effectively surveil all of the trading
activities of that firm?
    59. If the proposed rule amendments are adopted, proprietary
trading broker-dealers that are not currently FINRA members may join
FINRA. Would this affect FINRA's governance or its performance of its
regulatory or supervisory functions?
    60. Are there other changes the Commission should make to Rule
15b9-1? If so, why? What specifically should be changed and how? How
would any such changes better achieve the stated goals of the proposal?

VI. Economic Analysis

    The Commission is proposing to amend Rule 15b9-1 to re-align it
with today's market so that the regulatory scheme more appropriately
effectuates Exchange Act principles regarding complementary exchange
SRO and Association oversight. Currently, a broker or dealer may 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 or
dealer.
    However, the Exchange Act's statutory framework places SRO
oversight responsibility with an Association for trading that occurs
elsewhere than on an exchange to which a broker or dealer belongs as a
member.\199\ Currently, nearly all equity activity of non-FINRA member
broker-dealers is surveilled by FINRA through the extensive use of
RSAs. However, RSAs are voluntary, privately negotiated agreements that
can expire or be terminated, and accordingly, these agreements do not
provide the consistent and stable oversight that direct Association
oversight of such trading activity does.\200\ For example, of the
current FINRA RSA contracts: six RSA contracts expire by the end of
2023, two RSA contracts expire by the end of 2024, and three RSA
contracts expire by the end of 2025 unless extended or terminated
early.\201\ The amendments would provide consistency and stability of
oversight in the future.
---------------------------------------------------------------------------

    \199\ See Section I, supra.
    \200\ See Section I, supra.
    \201\ Based on information provided by FINRA.
---------------------------------------------------------------------------

    In the case of U.S. Treasury securities and other fixed income
securities (other than municipal bonds) \202\ that trade off-exchange,
surveillance relies on TRACE data which is collected by FINRA from its
members. Some dealer firms that are not FINRA members are significantly
involved in trading U.S. Treasury securities \203\ proprietarily but
are not

required to report these transactions because they are not FINRA
members. Consequently, trades that do not occur on an ATS that are
between two non-FINRA member broker-dealers are not reported to TRACE
at all and trades that occur on an ATS that is not a covered ATS do not
specifically identify the non-FINRA member in the information reported
by the ATS to TRACE.\204\
---------------------------------------------------------------------------

    \202\ Municipal bond trades are reported to the MSRB but not
TRACE, so the Commission does not expect the proposed amendments to
affect the data collected on municipal bonds. Off-exchange trading
of both listed and unlisted equities by non-FINRA member broker-
dealers is already reported to CAT.
    \203\ The Commission can observe and quantify some of this
activity through the reporting of U.S. Treasury securities on
covered ATSs as discussed in section II.B. See supra note 96.
Because there is no analogous reporting regime in other fixed income
securities, the Commission cannot similarly describe non-member
broker-dealer activity in these other securities, but it is likely
that non-member broker-dealers also trade fixed-income securities
other than U.S. Treasury securities and these transactions are also
not reported to TRACE. This Economic Analysis focuses on the effects
on equities, options, and U.S. Treasury securities markets. To the
extent that non-FINRA member broker-dealers do trade in additional
asset classes, the Commission believes that the economic impacts
discussed herein would also apply. In particular, if a non-FINRA
member broker-dealer does trade in an asset class which requires
reporting to FINRA, the proposal would improve transparency for
these securities, which would enhance the regulatory oversight of
such activity.
    \204\ See section II.B, supra. The Commission preliminarily
believes this is a small fraction of U.S. Treasury securities
trading. In April 2022, the Commission estimates that non-FINRA
member firms' U.S. Treasury securities transactions executed on
covered ATSs accounted for 2.5% of total U.S. Treasury securities
transaction volume reported to TRACE that month. See supra note 94.
The unreported trades involving only non-FINRA member firms that are
not executed on covered ATSs might be similar but could be a lower
fraction of the total U.S. Treasury securities volume. The
Commission believes that all fixed income trading should be
reported. The Commission also believes that firms that can observe
other firms' trades and not report their own trades may have a
competitive advantage, the cost of which is borne by the investing
public through reduced price discovery.
---------------------------------------------------------------------------

    The Exchange Act presents exchange SROs and Associations as
complements, providing for member-based supervision both on and off-
exchange. The proposed amendments would rescind the de minimis
allowance and proprietary trading exclusion so that the regulatory
scheme more appropriately effectuates Exchange Act principles regarding
complementary exchange SRO and Association oversight in today's
market.\205\ For firms currently relying on the exemption that would be
required to register with FINRA under the proposed amendments, joining
FINRA will expose them to additional costs that they previously did not
incur.\206\ While reliance on the exemption may be cost-efficient for
these firms, it introduces inefficiencies for exchange SROs, FINRA, and
regulatory oversight more generally. FINRA, the sole Association, has a
rulebook, surveillance infrastructure, and supervisory expertise that
is targeted to off-exchange trading of both listed and unlisted
securities. Without an RSA, when FINRA detects potentially violative
behavior by a non-FINRA member firm, it can and does refer such cases
to other SROs or the SEC. However, it lacks certain investigative
tools, which could help it further investigate potentially violative
behavior before making such referrals. As such, FINRA referrals could
be premature. In addition, RSAs with FINRA are privately negotiated
contracts that can differ from exchange to exchange and the
administrative and operational burdens create inefficiencies in
investigating potential non-compliance. As such, oversight through an
RSA is not equivalent to direct oversight by FINRA of its members. The
Commission believes that, particularly in the case of fixed income
trading, FINRA is the SRO best positioned to efficiently investigate
such instances because of its TRACE data collection and expertise in
such trading, and such a role is consistent with the SRO structure
mandated by the Exchange Act.
---------------------------------------------------------------------------

    \205\ See section II.B, supra.
    \206\ FINRA member firms that compete with these firms may be at
a cost disadvantage due to this fee disparity.
---------------------------------------------------------------------------

    The Commission discusses below a number of economic effects that
are likely to result from the proposed amendments.\207\ As discussed in
detail below, the effects are quantified to the extent practicable.
Although the Commission is providing estimates of direct compliance
costs where possible, the Commission also anticipates that brokers and
dealers affected by the amendments, as well as competitors of those
broker and dealers, may modify their business practices regarding the
provision of liquidity in both off-exchange markets and on exchanges.
Consequently, much of the discussion below is qualitative in nature,
but where possible, the Commission has provided quantified
estimates.\208\ To the extent that non-FINRA member firms change their
business practices, by reducing or eliminating their off-exchange
trading activity, the proposal may impact competition and harm
liquidity, particularly in the off-exchange market. The proposal would
increase costs for non-FINRA member firms that will have to register
with FINRA, which may result in decreased liquidity from their orders.
Additionally, the amendments to Rule 15b9-1 may create incentives for
non-FINRA member firms that are impacted by the amendments to form a
new Association.
---------------------------------------------------------------------------

    \207\ The Commission is sensitive to the economic effects of its
rule, including the costs and benefits and effects on efficiency,
competition, and capital formation. Section 3(f) of the Exchange Act
requires the Commission, whenever it engages in rulemaking pursuant
to the Exchange Act, to consider or determine whether an action is
necessary or appropriate in the public interest, and to consider, in
addition to the protection of investors, whether the action would
promote efficiency, competition, and capital formation. See 15
U.S.C. 78c(f). In addition, section 23(a)(2) of the Exchange Act
requires the Commission, when making rules under the Exchange Act,
to consider the effect such rules would have on competition. See 15
U.S.C. 78w(a)(2). Exchange Act Section 23(a)(2) prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
    \208\ See infra section VI.C. for further discussion of the
difficulties in estimating market quality effects likely to result
from the amendments.
---------------------------------------------------------------------------

A. Baseline

1. Regulatory Structure and Activity Levels of Non-FINRA Member Firms
    The Exchange Act governs the way in which the U.S. securities
markets and its brokers and dealers operate. Section 3(a)(4)(A) of the
Act generally defines a ``broker'' broadly as ``any person engaged in
the business of effecting transactions in securities for the account of
others.'' \209\ In addition, Section 3(a)(5)(A) of the Act generally
defines a ``dealer'' as ``any person engaged in the business of buying
and selling securities . . . for such person's own account through a
broker or otherwise.'' \210\
---------------------------------------------------------------------------

    \209\ 15 U.S.C. 78c(a)(4)(A).
    \210\ 15 U.S.C. 78c(5)(A).
---------------------------------------------------------------------------

    Generally, any broker-dealer that wants to interact directly on a
securities exchange must register with the Commission as a broker-
dealer before applying to gain direct access to the exchange.\211\
There is diversity in the size and business activities of brokers and
dealers. Carrying brokers and dealers hold customer funds and
securities; some of these are also clearing brokers and dealers that
handle the clearance and settlement aspects of customer trades,
including record-keeping activities and preparing trade
confirmations.\212\ However, of 3,528 registered brokers and dealers,
only 156 were classified as carrying or clearing brokers and dealers
during the fourth quarter of 2021. Thus, the majority of brokers and
dealers engage in a wide range of other activities, which may or may
not include handling customer accounts. These other activities include
intermediating between customers and carrying/clearing brokers; dealing
in government bonds; private placement of securities; effecting
transactions in mutual funds that involve transferring funds directly
to the issuer; writing options; acting as a broker solely on an
exchange; and providing liquidity to securities markets, which
includes, but is not limited to, the activities of registered market
makers.
---------------------------------------------------------------------------

    \211\ A firm that wishes to transact business upon an exchange
without becoming a broker or dealer can do so by engaging a broker-
dealer that is a member of that exchange to provide market access
and settlement services.
    \212\ Based on December 2021 FOCUS data.

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

    Most brokers and dealers are small, with 66% of brokers and dealers
employing 15 or fewer associated persons and only 10% of brokers and
dealers employing over 100 associated persons.\213\ Further, while
there are many registered brokers and dealers, a small minority of
brokers and dealers controls the majority of broker and dealer capital
and each play a significant role in the allocation of capital to
liquidity provision.\214\
---------------------------------------------------------------------------

    \213\ Based on December 2021 Annual FOCUS data filings. See also
supra note 136.
    \214\ See infra section IX.
---------------------------------------------------------------------------

    The Commission has identified 65 firms that, as of April 2022, were
Commission registered broker-dealers and exchange members, but not
members of FINRA, that may be required to either join an Association or
change their trading practices under the proposed amendments.\215\ To
the extent that the definitions of ``dealer'' and ``government
securities dealer'' might change, the number of affected firms could
increase.\216\ Because of Rule 15b9-1's exclusion of proprietary
trading, a dealer that does not carry customer accounts may not be
required to join an Association as long as they are a member of an
exchange SRO, even when that dealer has substantial off-exchange
trading activity.
---------------------------------------------------------------------------

    \215\ Historically, floor brokers had only incidental trading on
exchanges of which they were not members, and limited off-exchange
trading activity. The background and history of Rule 15b9-1 are
discussed in section I.
    \216\ See supra note 155 and accompanying text.
---------------------------------------------------------------------------

    In September 2021, there were 66 registered broker-dealers that
were exchange members but not FINRA members.\217\ The Commission is
aware that some non-FINRA member firms trade U.S. Treasury securities.
Covered ATSs report the U.S. Treasury securities trading activity of
non-FINRA-member firms to TRACE. The Commission estimates that, in
2021, four of the 66 non-FINRA member firms had $7 trillion in U.S.
Treasury securities volume reported to TRACE by covered ATSs. This
accounts for approximately 2% of U.S. Treasury volume as reported to
TRACE throughout the year. In April 2022, there were three non-FINRA
member firms with approximately $700 billion in U.S. Treasury
securities volume executed on covered ATSs or approximately 2.5% of
total U.S. Treasury securities transaction volume reported to TRACE
that month.
---------------------------------------------------------------------------

    \217\ See supra note 74.
---------------------------------------------------------------------------

    FINRA members are required to report transactions in TRACE-eligible
securities. Market participants can gain real-time access to TRACE
through market vendors, for most TRACE-eligible securities, with a few
exceptions including U.S. Treasury securities.\218\ However, FINRA does
make public aggregate U.S. Treasury securities data on a weekly
basis.\219\ Non-FINRA member firms are not required to report their
trading activity to TRACE. With respect to trading activity in U.S.
Treasury securities markets on a covered ATS, non-FINRA member
counterparties are identified in TRACE.\220\ With respect to trading
activity in other TRACE-eligible securities, non-FINRA member
counterparties are not identified in TRACE. Therefore, the Commission
is unable to estimate the level of trading activity of non-FINRA member
firms for other fixed income securities, and cannot reasonably assume
either significant or insignificant unreported volume. However, based
on the non-FINRA member firms' activity in U.S. Treasury securities
markets, some non-FINRA member firms are likely to be active in other
fixed income markets as well.
---------------------------------------------------------------------------

    \218\ See FINRA.org, TRACE at 20--Reflecting on Advances in
Transparency in Fixed Income, available at https://www.finra.org/media-center/blog/trace-at-20-reflecting-advances-transparency-fixed-income (last visited July 22, 2022). See also FINRA Rule
6750(c).
    \219\ See supra note 45 and accompanying text.
    \220\ See supra note 112 and accompanying text.
---------------------------------------------------------------------------

    In September 2021, of the 66 non-FINRA member firms, 47 initiated
equity orders that were not executed on an exchange, accounting for
$789 billion (approximately 9.8%) in off-exchange traded dollar volume
in listed equities.\221\ In April 2022, of the 65 non-FINRA member
firms, 43 initiated equity orders that were not executed on an
exchange, accounting for $441 billion (approximately 4.6%) in off-
exchange traded dollar volume in listed equities.
---------------------------------------------------------------------------

    \221\ See supra section II.B for further discussion of trading
activities of non-FINRA member firms.
---------------------------------------------------------------------------

    There is significant diversity in the business models of non-FINRA
member firms. Some non-FINRA member firms may limit their equity
trading to a single exchange, while others trade on multiple venues
including off-exchange venues such as ATSs. Some firms are significant
contributors to both off-exchange and exchange volume. Because CAT
requires reporting of all NMS stock trades, including off-exchange
trades, FINRA and the Commission are able to quantify the aggregate
off-exchange activity of non-FINRA member firms.
    Off-exchange equity trading occurs across many trading venues. In
quarter 3 of 2021, 32 ATSs actively traded NMS stocks, comprising 9.6%
of NMS stock share volume. Furthermore, 187 named \222\ broker-dealers
transacted a further 33% of NMS stock share volume off-exchange without
the involvement of an ATS. Although many market participants provide
liquidity within this market, non-FINRA member firms are particularly
active within ATSs.\223\ Although non-FINRA member firms may trade in
the non-ATS segment of the off-exchange market, the Commission believes
they rarely act as liquidity suppliers outside of ATSs because they do
not carry customer accounts that might generate orders they could fill
from inventory.
---------------------------------------------------------------------------

    \222\ ATSs often report the MPID of counterparties that are not
FINRA members, allowing their activity to be partially identified in
CAT data.
    \223\ See Table 1 for information on trading activities on ATSs.
---------------------------------------------------------------------------

    While some non-FINRA member firms trade actively off-exchange, some
of these firms also supply and demand liquidity actively on multiple
equity and options exchanges. Table 1 below shows the executed dollar
volume in listed equities by trading venue type during September 2021
and April 2022 for the non-FINRA member firms. Table 2 below shows the
executed dollar volume, number of trades, and number of contracts in
options during September 2021 and April 2022 for the non-FINRA member
firms.

                       Table 1--Non-FINRA Members NMS Equity Trading Volume by Venue Type
----------------------------------------------------------------------------------------------------------------
                                                                       Traded dollar volume
                                                 ---------------------------------------------------------------
                                                             Sept 2021                      April 2022
                                                 ---------------------------------------------------------------
                                                   Billions ($)     % of Total     Billions ($)     % of Total
----------------------------------------------------------------------------------------------------------------
I. All Non-FINRA Member Firms \1\
Trading Venue:

    Off-Exchange: ATS...........................          661.50            11.9          374.43             9.8
    Off-Exchange: Non-ATS.......................          127.50             2.3           66.57             1.7
    On-Exchange: Exchange Member \2\............        4,190.57            75.2        2,904.01            76.0
    On-Exchange: Cross-Exchange \3\.............          592.29            10.6          475.30            12.4
                                                 ---------------------------------------------------------------
        Total...................................        5,571.87           100.0        3,820.32           100.0
II. Largest Non-FINRA Member Firms \4\
Trading Venue:
    Off-Exchange: ATS...........................          629.41            12.9          345.56            10.9
    Off-Exchange: Non-ATS.......................          114.59             2.3           58.19             1.8
    On-Exchange: Exchange Member \2\............        3,622.30            74.1        2,384.36            75.1
    On-Exchange: Cross-Exchange \3\.............          520.97            10.7          388.48            12.2
                                                 ---------------------------------------------------------------
        Total...................................        4,887.27           100.0        3,176.59           100.0
----------------------------------------------------------------------------------------------------------------
Data Source: CAT.
\1\ Non-FINRA Member firms that initiated orders that were executed either on or off-exchange. There were 47
  firms in September 2021 and 43 firms in April 2022.
\2\ Exchange Member refers to trades executed on an exchange where the Non-FINRA member is a registered member.
\3\ Cross-Exchange refers to trades executed on an exchange where the Non-FINRA member is not a registered
  member.
\4\ The largest Non-FINRA member firms ranked by off-exchange traded dollar volume. There were 13 firms in
  September 2021 and 12 firms in April 2022.

                         Table 2--Non-FINRA Members Options Trading Volume by Venue Type
----------------------------------------------------------------------------------------------------------------
                                                                       Traded dollar volume
                                                 ---------------------------------------------------------------
                                                             Sept 2021                      April 2022
                                                 ---------------------------------------------------------------
                                                   Millions ($)     % of Total     Millions ($)     % of Total
----------------------------------------------------------------------------------------------------------------
                                          Panel A: Option Dollar Volume
----------------------------------------------------------------------------------------------------------------
I. All Non-FINRA Member Firms \1\
Trading Venue:
    On-Exchange: Exchange Member \2\............          650.75            94.6          713.10            92.9
    On-Exchange: Cross-Exchange \3\.............           37.09             5.4           54.45             7.1
                                                 ---------------------------------------------------------------
        Total...................................          687.84           100.0          767.54           100.0
----------------------------------------------------------------------------------------------------------------
II. Largest Non-FINRA Member Firms \4\
Trading Venue:
    On-Exchange: Exchange Member \2\............          493.09            94.1          645.48            92.6
    On-Exchange: Cross-Exchange \3\.............           31.05             5.9           51.37             7.4
                                                 ---------------------------------------------------------------
        Total...................................          524.14           100.0          696.85           100.0
----------------------------------------------------------------------------------------------------------------

                                                                              Trades
                                                 ---------------------------------------------------------------
                                                             Sept 2021                      April 2022
                                                 ---------------------------------------------------------------
                                                   Millions ($)     % of Total     Millions ($)     % of Total
----------------------------------------------------------------------------------------------------------------
                                            Panel B: Number of Trades
----------------------------------------------------------------------------------------------------------------
I. All Non-FINRA Member Firms \1\
Trading Venue:                                    ..............  ..............  ..............  ..............
    On-Exchange: Exchange Member \2\............           28.33            96.1           23.04            93.2
    On-Exchange: Cross-Exchange \3\.............            1.14             3.9            1.67             6.8
                                                 ---------------------------------------------------------------
        Total...................................           29.47           100.0           24.71           100.0
----------------------------------------------------------------------------------------------------------------
II. Largest Non-FINRA Member Firms \4\
Trading Venue:
    On-Exchange: Exchange Member \2\............           20.72            95.9           20.96            93.4
    On-Exchange: Cross-Exchange \3\.............            0.89             4.1            1.49             6.6
                                                 ---------------------------------------------------------------
        Total...................................           21.61           100.0           22.44           100.0
----------------------------------------------------------------------------------------------------------------

                                                                             Contracts
                                                 ---------------------------------------------------------------
                                                             Sept 2021                      April 2022
                                                 ---------------------------------------------------------------
                                                   Millions ($)     % of Total     Millions ($)     % of Total
----------------------------------------------------------------------------------------------------------------
                                          Panel C: Number of Contracts
----------------------------------------------------------------------------------------------------------------
I. All Non-FINRA Member Firms \1\
Trading Venue:
    On-Exchange: Exchange Member \2\............          197.36            95.2          185.65            94.4
    On-Exchange: Cross-Exchange \3\.............            9.97             4.8           10.93             5.6
                                                 ---------------------------------------------------------------
        Total...................................          207.33           100.0          196.58           100.0
----------------------------------------------------------------------------------------------------------------
II. Largest Non-FINRA Member Firms \4\
Trading Venue:
    On-Exchange: Exchange Member \2\............          138.33            94.8          167.37            94.6
    On-Exchange: Cross-Exchange \3\.............            7.65             5.2            9.57             5.4
                                                 ---------------------------------------------------------------
        Total...................................          145.98           100.0          176.94           100.0
----------------------------------------------------------------------------------------------------------------
Data Source: CAT.
\1\ Non-FINRA Member firms that initiated options orders that were executed. There were 42 firms in September
  2021 and 35 firms in April 2022.
\2\ Exchange Member refers to trades executed on an exchange where the Non-FINRA member is a registered member.
\3\ Cross-Exchange refers to trades executed on an exchange where the Non-FINRA member is not registered member.
\4\ The largest non-FINRA member firms ranked by equity off-exchange traded dollar volume. Nine of the largest
  13 firms in September 2021 and nine of the largest 12 firms in April 2022 initiated options orders that were
  executed.

    Table 1 shows that the majority of non-FINRA member firms executed
listed equity orders (approximately 75%) on exchanges where the firm
was a registered member. However, they also transacted on exchanges
where the firm was not a member in addition to trading off-exchange.
Table 2 shows the number of non-FINRA member firms that also executed
trades in the options market and the total dollar, trades, and contract
volume. In September 2021, forty-two non-FINRA member firms and nine of
the 13 largest firms executed trades on options exchanges. Eight of the
nine largest firms executed trades on seven or more options exchanges.
In April 2022, 35 non-FINRA member firms and nine of the 12 largest
firms executed trades on options exchanges.
2. Current Market Oversight
    The surveillance and regulation of each broker or dealer is
partially dependent upon its individual SRO membership status. Each SRO
is required to examine for and enforce compliance by its members and
associated persons with the Exchange Act, the rules and regulations
thereunder, and the SRO's own rules, including, for exchange SROs, the
rules on the trading that occurs on the exchange it oversees. Because
of this, SROs that oversee an exchange generally possess expertise in
regulating members who specialize in trading on their exchange and in
using the order types that may be unique or specialized within the
exchange. This expertise complements the expertise of an Association in
supervising cross-exchange and off-exchange trading activity.\224\
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    \224\ See supra Section II, discussing the requirement for SROs
to examine for and enforce compliance with the Exchange Act, and the
rules and regulations thereunder.
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    While all exchanges are SROs and have access to CAT data covering
trading activity by their members both on and off exchanges, currently
nearly all equity activity and much options activity of non-FINRA
member broker-dealers is surveilled by FINRA through the RSAs with
exchange SROs. However, RSAs are voluntary, privately negotiated
agreements that can expire or be terminated, and accordingly, these
agreements may not in the future provide the consistency and stability
of direct FINRA oversight. U.S. Treasury security trading and other
fixed income trading,\225\ however, is not covered by CAT; instead
transactions in these securities are only reported to FINRA's TRACE
database when there is a FINRA member that is party to the trade or the
trade occurs on an ATS because such reporting results from a FINRA
rule.\226\ Where no FINRA member is party to the transaction, and the
transaction does not take place on an ATS, it goes unreported to TRACE.
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    \225\ Municipal bond trades are not reported to TRACE.
    \226\ All ATSs are operated by FINRA member firms.
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    Some exchanges serve as DEA for certain of their members.\227\
Financial and operational requirements share many commonalities across
SROs, such as net capital requirements and books and records
requirements. Because many brokers and dealers are members of multiple
SROs with similar requirements, one SRO is appointed as the broker's or
dealer's DEA to examine common members for compliance with the
financial responsibility requirements imposed by the Act, or by
Commission or SRO rules.\228\ The exchange serving as DEA has
regulatory responsibility for their common members' compliance with the
applicable financial responsibility rules. However, the non-DEA
exchange maintains responsibility for compliance with its own rules and
provisions of the federal securities laws governing matters other than
financial responsibility, including sales practices and trading
activities and practices, although the SROs may also allocate other
regulatory responsibilities.
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    \227\ See supra note 30.
    \228\ See supra note 30. See 17 CFR 240.17d-1. FINRA serves as
the DEA for the majority of member firms; there are exceptions,
mostly involving firms that have specialized business models that
focus on a particular exchange that is judged to be best situated to
supervise the member firm's activity. These firms are, however,
subject to the same supervision of their trading activity as other
member firms for whom FINRA does act as DEA, and the DEA stipulates
which SRO has responsibility to supervise the firm but does not
allow for less supervision. Under the amendments, non-FINRA member
firms that join FINRA may or may not be assigned to FINRA for DEA
supervision.
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    All registered brokers and dealers are required to join an
Association unless they effect transactions in securities solely on a
national securities exchange of which they are a member or are

exempt from the membership requirement pursuant to Rule 15b9-1. The
vast majority of brokers and dealers join an Association and, because
FINRA is the only Association, brokers and dealers are subject to
relatively uniform regulatory requirements and levels of surveillance
and supervision. Supervision by FINRA, which is currently the only
Association, covers a market that is fragmented across many trading
venues, including the more opaque off-exchange market.\229\
Additionally, FINRA oversees its member's activity in equity, fixed
income, and derivative markets and thus has the ability to supervise
asset classes that may be outside the expertise of certain exchange
SROs.
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    \229\ Comprehensive reporting requirements for all member firms
that trade off-exchange give FINRA information on market activity
levels and market conditions off-exchange. Because most off-exchange
venues do not publicly disseminate information on the liquidity
available in their systems, comprehensive information from all
participants through CAT allows FINRA to analyze and surveil the
off-exchange market. See supra notes 40-43.
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    The existing Association, FINRA, serves crucial functions in the
current regulatory structure.\230\ The Exchange Act's statutory
framework places responsibility for off-exchange trading with an
Association.\231\ Pursuant to that, FINRA has established a regulatory
regime for FINRA members, including FINRA members conducting business
in the off-exchange market for various asset classes, and developed
surveillance technology and specialized regulatory personnel to provide
surveillance, supervision, and enforcement of activity occurring off-
exchange. Consequently, the current regulatory structure achieves
cross-market and off-exchange supervision through the surveillance
actions of FINRA of the market generally and its examination of its
members.
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    \230\ See supra Section II for further discussion of the role of
Associations in market oversight.
    \231\ See supra note 8.
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    Additionally, despite the fact that FINRA does not have the
authority to monitor non-FINRA member firms that are not covered by RSA
or 17d-2 plans that include these services, the Commission understands
that FINRA operates a cross-market regulatory program that covers 100%
of equity trades and 45% of option trading.\232\ FINRA does not have
direct membership-based jurisdiction over non-FINRA member firms.
However, FINRA refers cases for enforcement to the SRO with
jurisdiction or to the Commission. If FINRA is performing regulatory
services for an exchange SRO pursuant to an RSA, FINRA may, on behalf
of the exchange SRO, investigate and bring an enforcement action
against an exchange SRO member that is not a FINRA member, assuming
that those services are covered by the RSA.\233\ However, each RSA is
independently negotiated and thus they are not standardized. Therefore,
FINRA's ability to provide oversight can vary based on the nature of
its regulatory services agreement with the exchange SRO. Additionally,
the ultimate responsibility for that regulatory oversight still rests
with the exchange SRO, not with FINRA.\234\ SROs may also use 17d-2
plans which allow SROs with common members to designate a DEA to
examine common members. However, 17d-2 plans do not confer jurisdiction
as they apply only to common firms of which each SRO would already have
jurisdiction.\235\ Exchange SROs may not be efficient at monitoring
off-exchange activity. Because of the historical reliance on FINRA as
the examination and surveillance authority over off-exchange trading,
exchanges have limited resources and may have incentives to prioritize
the following up on potential violations of on-exchange activity over
off-exchange activity. However, such incentives are likely curtailed by
the exchange SROs' legal responsibilities under the Exchange Act to
examine and enforce compliance by their members with the Exchange Act,
the rules thereunder, and the SRO's own rules and the reputational
damage they may experience if they do not.
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    \232\ See Cross-Market Regulatory Coordination Staff Paper,
supra note 31.
    \233\ In most but not all cases, FINRA is empowered to take such
actions.
    \234\ See supra note 109.
    \235\ See supra note 30.
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    Currently, some non-FINRA member firms transact heavily in the
course of normal business activities within venues regulated by SROs of
which they are not members. This activity is not limited to equities;
non-FINRA member firms play a large role in U.S. Treasury securities
markets as well.\236\ In 2021, there were four non-FINRA member firms
that together traded more than $7 trillion in U.S. Treasury securities
volume on covered ATSs, which accounted for 2% of total U.S. Treasury
securities trading volume \237\ reported to TRACE. In April 2022, the
Commission estimates that three non-FINRA member firms totaled $700
billion in U.S. Treasury securities volume executed on covered ATSs,
which accounted for 2.5% of total U.S. Treasury securities transaction
volume reported to TRACE that month.
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    \236\ See supra Section VI.A.1 and accompanying text for more
information on trading in U.S. Treasury securities markets.
    \237\ The Commission estimated that in July 2021 there were 626
total firms that traded U.S. Treasury securities. See Table 1 of
Securities Exchange Act Release No. 94524 (March 28, 2022), 87 FR
23054, 23081 (April 18, 2022).
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    This is very different from when Rule 15b9-1 was first adopted. The
Act provides for regulation of exchange trading by the exchanges
themselves; it further generally provides for supervision of off-
exchange trading by an Association.\238\
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    \238\ See supra note 8.
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    SRO rules require their members to report CAT data daily.\239\ This
data records the origination, receipt, execution, routing,
modification, or cancellation of every order a member firm handles for
NMS stocks and options, with the exception of primary market
transactions.
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    \239\ See generally FINRA Rule 6800 Series and 17 CFR 242.613.
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    Because non-FINRA member firms are not required to join an
Association if they qualify for an exemption, they are not required to
pay the costs of Association membership, which could be significant,
especially for non-FINRA member firms with substantial trading
activity. FINRA members currently pay fees associated with FINRA
membership including the annual Gross Income Assessment (GIA), the
annual personnel assessment; and the TAF and Section 3 fees.\240\ FINRA
members pay the TAF for all sales transactions of covered securities
that are not performed in the firm's capacity as a registered
specialist or market maker upon an exchange.\241\ FINRA members also
must pay Transaction Reporting Fees for TRACE reportable securities,
with the exception of U.S. Treasury securities.
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    \240\ See infra Section VI.C.2.b. for more information on the
fees.
    \241\ Covered securities include all equity, options and U.S.
Treasury securities. For an explanation of what is included and
exempt from the TAF, see FINRA Rules and Guidance, available at
https://www.finra.org/rules-guidance/rulebooks/corporate-organization/section-1-member-regulatory-fees. After the 2015
Proposal, FINRA proposed an exemption that ``would exempt from the
TAF transactions executed by proprietary trading firms on an
exchange of which the firm is a member (including non-market maker
trades).'' See FINRA Regulatory Notice 15-13, Trading Activity Fee
(May 2015), at 3, available at http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-13.pdf. FINRA stated
that the proposed exemption ``would result in a lower TAF for trades
executed on an exchange for which the proprietary trading firm is a
member than a trade executed elsewhere.'' Id. at 5. The proposed
exemption to the TAF is not effective.
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    The FINRA Section 3 fee is the second of two primary FINRA fees
(the other being TAF) that are assessed upon each off-exchange sale by
or through a FINRA member. Under Section 31 of the Act,\242\ SROs must
pay transaction fees based

on the volume of their covered sales. These fees are designed to offset
the costs of regulation incurred by the government--including the
Commission--for supervising and regulating the securities markets and
securities professionals. FINRA obtains money to pay its Section 31
fees from its membership, in accordance with Section 3 of Schedule A to
the FINRA By-Laws. FINRA assesses these Section 3 fees on the sell side
of each off-exchange trade, when possible. When the sell side of an
off-exchange transaction is a non-FINRA member firm and the seller
engages the services of a clearing broker that is a member firm, FINRA
can assess the Section 3 fee against the member firm clearing
broker.\243\ When the seller is a non-FINRA member firm that self-
clears, FINRA has no authority to assess the Section 3 fee against the
seller. In such case, FINRA would seek to assess the fee against the
buyer, if the buyer includes a member firm counterparty or a member
firm acting as clearing broker for a non-FINRA member firm buy side
counterparty. Firms that carry customer accounts are required to be a
member of an Association and thus these firms bear the aforementioned
fees. These costs may be passed on in part or in whole to the investing
public or the non-FINRA member counterparty.
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    \242\ 15 U.S.C. 78ee.
    \243\ The seller's clearing broker may pass that fee on to the
non-FINRA member firm.
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3. Current Competition To Provide Liquidity
    The market for liquidity provision on equity exchanges is
competitive. In September 2021 across all exchanges, each equity
security had between 1 to 47 registered market makers providing
liquidity. The median equity security had 3 registered market makers,
and 75% of securities had 2 or more registered market makers. Twenty-
five percent of equity securities had 6 or more registered market
makers. Additionally, while the number of market makers provides a good
indication as to the number of firms in the business of providing
liquidity, it does not necessarily indicate whether each market maker
is an active competitor. However, the Commission believes that many
market makers actively compete to provide liquidity.
    As stated above, non-FINRA member firms do not have the same
regulatory costs as FINRA member firms, which may give non-FINRA member
firms a competitive advantage in providing liquidity. As such, non-
FINRA member firms may be able to provide liquidity at a lower cost
than FINRA member firms given that non-FINRA member firms have a lower
variable cost, all else equal, for trading compared to FINRA member
firms.
    The Commission believes that non-FINRA member firms are active
participants in the market to provide liquidity in off-exchange
markets. The Commission estimates that non-FINRA member firms account
for between 4.6% and 9.8% of off-exchange dollar volume in equities.
Additionally, nearly 10% of all non-FINRA member equity trading
activity occurs in off-exchange markets. In U.S. Treasury securities
markets, non-FINRA member firms trading activity that is reported by
covered ATSs account for 2.5% of all transaction volume.

B. Effects on Efficiency, Competition, and Capital Formation

    In addition to the specific, individual benefits and costs
discussed below, the Commission expects the amendments may have varying
effects on efficiency, competition, and capital formation. These
effects are described in this section. The proposal may result in
improved efficiency of capital allocation. To the extent that liquidity