provision changes as a result of the proposal, market efficiency might
be impacted. Additionally, the proposal would have mixed effects on
competition to provide liquidity, as current non-FINRA member firms may
be less likely to provide liquidity but current FINRA members may be
more likely to provide liquidity. The Commission believes that the
amendments would not likely have a meaningful effect on capital
formation.
1. Firm Response and Effect on Market Activity and Efficiency
    Although non-FINRA member firms could seek to comply with the
amendments in multiple ways, each route could involve changes to firms'
business models. Some non-FINRA member firms may limit their trading to
exchanges of which they are members, and the Commission believes that
some may not trade off-exchange other than to comply with Rule 611 of
Regulation NMS or the Options Linkage Plan,\244\ or to execute the
stock leg of a stock-option order.\245\ These firms would remain exempt
from the requirement to become a member of an Association, if they
comply with Section 15(b)(8) of the Act or the Rule as amended.\246\
Other firms would no longer be exempt, and would need to take action to
comply with the amended rule. Under the amended Rule, a non-FINRA
member firm that trades equities, options or fixed income securities
off-exchange, or upon exchanges of which it is not a member, can comply
in four ways. The first option would be to join an Association. The
second option would be to join all exchanges upon which the non-FINRA
member firm wishes to trade, and to cease any off-exchange trading,
other than off-exchange trading consistent with the routing exemption
and stock-option order exemption. Third, a non-FINRA member firm could
comply by trading solely upon those exchanges of which it is already a
member, consistent with the statutory exemption in Section
15(b)(8).\247\ Finally, a non-FINRA member firm could cease trading
securities.
---------------------------------------------------------------------------

    \244\ See supra section III.B.1.
    \245\ See supra section III.B.2.
    \246\ Changes to the exclusion are discussed in section III.B,
supra.
    \247\ 15 U.S.C. 78o(b)(8).
---------------------------------------------------------------------------

    The changes non-FINRA member firms make to their business model to
comply with the amendments may affect competition in the equity and
U.S. Treasury securities markets, particularly for off-exchange
liquidity provision. Non-FINRA member firms may be less willing to
compete to provide liquidity off-exchange, decreasing off-exchange
liquidity. For example, non-FINRA member firms may choose to cease
their off-exchange activity rather than join an Association--although
it is likely that firms that trade heavily in the off-exchange market
may find it more costly to cease their off-exchange activity than to
join an Association.\248\ In addition, non-FINRA member firms that
choose to join an Association may reduce their off-exchange trading
because joining an Association would increase variable costs to trade
in the off-exchange market, as these trades would incur TAF and
possibly additional Section 3 fees, although some Section 3 fees may
already be passed on from FINRA member firms to non-FINRA member
firms.\249\ An increase in cost would

reduce the profitability of off-exchange trading and thus potentially
reduce off-exchange trading. This sentiment was echoed by one commenter
who stated that FINRA registration ``would greatly impede'' the entry
of high frequency proprietary traders to the market.\250\ While the
Commission agrees that FINRA membership could act as a deterrent to new
high frequency trading firms entering the marketplace as broker-
dealers, the Commission also believes that access to our capital
markets generally requires a certain level of oversight. The Commission
believes that the proposal is consistent with the Exchange Act's
statutory framework for complementary exchange SRO and Association
oversight of broker-dealer trading activity and thus to the extent such
firms are required to register with FINRA as a result of the proposal,
the costs are justified as part of that regulatory oversight.
---------------------------------------------------------------------------

    \248\ Firms with very low ATS activity are unlikely to directly
connect to an ATS, instead accessing ATSs through a member firm. For
firms with very limited off-exchange activity, ceasing off-exchange
activity is likely to be less costly than joining an Association.
The costs of joining FINRA are discussed in detail in infra section
VI.C.2; for firms with very limited off-exchange activity, it is
unlikely that the profits generated from this activity would offset
FINRA membership costs. However, for firms that generate profits
from off-exchange activities that exceed FINRA membership costs, it
may be less costly to join FINRA than to cease their off-exchange
activity.
    \249\ After the 2015 proposal, FINRA considered reevaluating the
structure of the TAF to assure that it appropriately considered the
business model of certain non-FINRA member firms that might have
joined FINRA as a result of the proposed amendments. See supra note
153. The Commission's analysis of TAF is based on current TAF
structure as outlined in the FINRA By-Laws, Schedule A. TAF and
Section 3 fees are discussed further in Section VI.C.2.b, infra.
Firms would also face additional fixed costs both to establish and
maintain Association membership; those costs are discussed in
Section VI.C.2, infra.
    \250\ See Letter from Michelle Pav (April 16, 2015) (``Pav
Letter'') at 5. The commenter is concerned with how the duties of
best execution and general suitability would apply to proprietary
trading firms. Id. The commenter also states that the Commission
``clearly does not understand'' high frequency trading and FINRA
does not have ``any more insight into what is happening at [high
frequency trading] firms than the SEC.'' Id. at 2. Some proprietary
trading firms are already members of FINRA. As a result, FINRA has
experience addressing these issues. Additionally, the rule
amendments would provide FINRA and the Commission with greater
visibility into the activities of these firms.
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring membership in
an Association, consistent with Rule 15b9-1, could facilitate an
appropriate level of oversight. The Commission also recognizes that the
loss of liquidity provision in off-exchange trading may impose costs on
investors in the form of higher trading costs than they would otherwise
realize. These effects may differ across asset classes. In the case of
non-FINRA member broker-dealers trading U.S. Treasury securities, costs
to join an Association include the costs of establishing TRACE
reporting. Depending on the firm's activity level in that market, firms
may be more likely to withdraw from that market if their anticipated
profit levels from U.S. Treasury securities trading do not justify the
additional reporting requirements. The impact on liquidity in U.S.
Treasury securities markets is not likely to significantly impact
investor costs to trade these securities because U.S. Treasury
securities are generally very liquid and competition to provide this
liquidity is robust. If some non-FINRA member broker-dealers stop
competing in the market to provide this liquidity, other broker-dealers
are likely to increase their activity in this market, but the
Commission acknowledges that if liquidity decreases, investor costs to
trade U.S. Treasury securities could increase.
    Additionally, the removal of liquidity from the market could either
improve or degrade execution quality on off-exchange markets.\251\ Some
institutional investors transacting in off-exchange markets may seek
institutional investor counterparties and avoid transacting with
proprietary trading firms. To this extent, the removal of non-FINRA
member firm liquidity may be seen as improving liquidity quality within
ATSs by some institutional investors.\252\ It is also possible that
reducing the activity of non-FINRA member firms within ATSs may result
in more ATS liquidity, if non-FINRA member firms are acting as net
takers of liquidity within these systems.\253\ At a minimum, liquidity
levels in ATSs may change. In addition, these firms may reduce their
off-exchange trading outside of ATSs such as on single-dealer
platforms. It is possible that this would result in a transfer of
volume from off-exchange venues to exchanges, but it is also possible
that overall market trading volume would diminish if decreased volume
from off-exchange trading does not migrate to exchanges.
---------------------------------------------------------------------------

    \251\ Non-FINRA member firms are likely to also reduce their
off-exchange trading outside of ATSs, such as on single-dealer
platforms. However, non-FINRA member firms can only take (not make)
liquidity on these platforms. It is possible that additional off-
exchange liquidity may be available outside of ATSs for other market
participants as a result of the amendments to Rule 15b9-1 due to a
reduction in non-FINRA member firm trading on single-dealer
platforms.
    \252\ Industry white papers sometimes discuss the concept of
natural counterparties for institutional trades. These papers may
explicitly or implicitly identify proprietary automated trading
firms as sources of information leakage in dark pools. The
Commission understands that some ATSs segment orders so that
institutional investors do not trade with PTFs. See e.g., Hitesh
Mittal, Are You Playing in a Toxic Dark Pool? A Guide to Preventing
Information Leakage, J. Trading, Summer 2008, at 20 (ITG white
paper), available at https://jot.pm-research.com/content/3/3/20.
Other industry participants describe a more benign role for
automated trading firms as liquidity providers in ATSs. See Terry
Flanagan, High-Speed Traders Go Dark, Markets Media Commentary
(2012), available at https://www.marketsmedia.com/high-speed-traders-go-dark/.
    \253\ There is some evidence that some proprietary trading firms
are net takers rather than net suppliers of liquidity in equity
markets, although the evidence is not conclusive. Using Nasdaq data
from 2008-2010, Carrion estimates that these firms supply liquidity
to 41.2% of trading dollar volume and take liquidity in 42.2% of
trading dollar volume. See Allen Carrion, Very fast money: High-
frequency trading on the NASDAQ, 16 J. Fin. Mkts. 680 (2013).
Another study finds that electronic trading firms act as net
liquidity suppliers during periods of extreme price movements. See
Jonathan Brogaard, Allen Carrion, Thibaut Moyaert, Ryan Riordan,
Andriy Shkilko & Konstantin Sokolov, High Frequency Trading and
Extreme Price Movements, 128 J. Fin. Econ. 253 (2018).
---------------------------------------------------------------------------

    In response to the 2015 Proposal, several commenters expressed
liquidity concerns.\254\ One commenter stated that because it would be
costly for high frequency trading firms to comply with FINRA
regulations, these firms ``may not trade as frequently, reducing
overall market liquidity.'' \255\ Another commenter stated that
proprietary traders provide liquidity and order to the markets and that
disadvantaging small proprietary traders may harm the market
balance.\256\ A third commenter stated that it believes that
``unnecessary costs . . . could hinder competition among liquidity
providers, which could negatively impact market liquidity and
transaction costs.'' \257\ Finally, one commenter stated that the
current FINRA fee structure is imbalanced and risks stifling liquidity
in the markets and that there are fewer incentives to provide the same
liquidity under FINRA's proposed fee structure as there are under
Cboe's regulatory fee structure.\258\
---------------------------------------------------------------------------

    \254\ See Pav Letter, Hold Brothers Capital Letter, FIA 1
Letter, and PEAK6 Letter.
    \255\ See Pav Latter at 3.
    \256\ See Hold Brother Capital Letter at 4.
    \257\ See FIA 1 Letter at 3.
    \258\ See PEAK6 Letter at 3-4. This commenter further stated
that FINRA fees ``may discourage such firms from routing trades to
certain markets, thereby disrupting market efficiency.'' Id. at 4.
---------------------------------------------------------------------------

    Changes in business models for non-FINRA member firms may affect
market quality on exchanges as well. In addition to trading extensively
in the off-exchange market, many non-FINRA member firms are among the
most active participants on exchanges. Business model changes by these
firms may lead to less exchange liquidity for several reasons. First,
non-FINRA member firms that choose not to join an Association would no
longer be able to rely on the rule and trade indirectly on exchanges of
which they are not members, unless they comply with the routing or
stock-options order exemptions.\259\ Second, non-FINRA member firms
that do not join an Association would no longer be able to access off-
exchange liquidity to unwind positions acquired on exchanges, which may
reduce their

willingness to provide liquidity upon exchanges.\260\ Third, non-FINRA
member firms that choose to join an Association may be subject to
additional variable costs (primarily regulatory fees) on their
exchange-based trading as well as on their off-exchange trading.\261\
These firms may respond by trading less actively on exchanges. Finally,
non-FINRA member firms may choose to cease trading rather than join an
Association or change their business models. Reduced liquidity upon
exchanges can result in higher spreads and increased volatility.
Increased spreads on exchanges can lead to increased costs for off-
exchange investors as well as investors transacting on exchanges,
because most off-exchange transactions (including many retail
executions) are derivatively priced with reference to prevailing
exchange prices.
---------------------------------------------------------------------------

    \259\ Currently, a non-FINRA member firm can indirectly access
an exchange of which it is not a member through a firm that is an
exchange member. In light of the elimination of the exclusion for
proprietary trading, this activity would not be consistent with the
amendments, unless the activity complies with the routing or stock-
option order exemptions. See supra sections III.B.1 and III.B.2.
    \260\ These firms could unwind positions on exchanges of which
they are a member, but the cost to do so may be higher than if all
liquidity, including off-exchange liquidity, were available.
    \261\ It is possible non-FINRA member firms that choose to join
an Association may avoid some additional costs by registering as
market makers on additional venues, mitigating these charges.
Furthermore, they may see a reduction in fees that were formerly
paid to their DEA if FINRA assumes that role.
---------------------------------------------------------------------------

    The Commission believes that the amendments are not likely to have
an economically meaningful effect on direct capital formation, which is
the assignment of financial resources to meet the funding requirements
of a profitable capital project, in this case, the provision of
liquidity to financial markets. However, the Commission believes that
the changes in allocation of regulatory fees and direct FINRA
supervision within the off-exchange market may result in improved
efficiency of capital allocation by the financial industry. The
proposed amendments may reduce the capital commitment of non-FINRA
member firms to liquidity provision. In response, it is possible that
current member firms may choose to commit additional capital to
liquidity provision when the trading environment has more uniform
regulatory requirements. The Commission believes that this may lead to
an overall increased commitment of liquidity both to exchanges and the
off-exchange market. This increased commitment is likely to have some
positive effects on capital market efficiency, such as lower quoted
spreads on exchanges. In addition to lowering immediate execution costs
on exchanges, lower exchange quoted spreads are likely to reduce
transaction costs off-exchange as well, because off-exchange trades are
typically priced with reference to quoted exchange prices.
    The Commission believes these effects are not likely to be
significant because the market to provide liquidity is very
competitive. These markets are served by a number of liquidity
providers with different business strategies and a strategic change by
relatively few competitors is unlikely to disturb liquidity provision
overall.
2. Effect on Competition To Provide Liquidity
    The proposed amendments may impact competition to provide liquidity
by increasing the regulatory cost for current non-FINRA member firms.
Currently, non-FINRA member firms do not bear the costs associated with
FINRA membership. As such, FINRA member firms bear a number of costs
not borne by non-FINRA member firms including a number of regulatory
fees and indirect costs that are assessed or imposed upon member
firms.\262\ These costs are a part of equity, options and fixed income
markets and include direct costs such as trading fees that are either
assigned only to member firms, such as TAF, or in the case of Section 3
fees, member firms may be assigned costs that could be assigned to non-
FINRA member firms selling securities off-exchange. There are indirect
costs of disparate regulatory regimes as well.\263\ Under the proposed
amendments current non-FINRA members would become subject to the
regulatory costs associated with FINRA membership, including TAF, GIA
and Section 3 fees. These changes to regulatory costs for non-FINRA
member firms may change competitive forces in the market for providing
liquidity as the current non-FINRA member broker-dealers have lower
regulatory costs, which may make it less costly for non-FINRA member
broker-dealers to provide liquidity.\264\ However, non-FINRA member
firms may already bear a portion, but not all, of these costs as FINRA
member firms may pass through their fees to non-FINRA member
counterparties. To the extent that non-FINRA member firms do have lower
cost for providing liquidity than FINRA member firms, the proposed
amendments may eliminate such an advantage, and lead to a reduction in
liquidity provided by current non-FINRA member firms.
---------------------------------------------------------------------------

    \262\ Exchange membership also imposes costs on broker-dealers.
Some non-FINRA member firms are members of many exchanges, but not
FINRA, while some FINRA-member firms are members of many exchanges
as well as FINRA. To the extent that a broker-dealer can avoid FINRA
membership, its fee burden may be lower than a broker-dealer that
cannot or does not avoid FINRA membership. The Commission
preliminarily believes that many non-FINRA member firms would retain
their exchange membership if the proposed amendments are adopted in
order to maintain the benefits of being a member of the exchange.
Therefore, the Commission only considers the additional cost to the
firms that are specific to joining FINRA. The Exchange SRO fees are
not considered as they are not expected to change. However, a firm
may decide to drop their exchange membership on exchanges where they
no longer wish to trade after joining FINRA, because maintaining
exchange memberships is costly and firms are unlikely to maintain
membership in exchanges where they do not plan to have activity. See
infra section VI.C.2, for more information on the fees associated
with FINRA membership.
    \263\ See section VI.C.2.f, infra.
    \264\ See section VI.B.1, supra for discussion of competitive
effects and investor costs.
---------------------------------------------------------------------------

    The existing differential regulatory cost burdens of FINRA member
firms and non-FINRA member firms may have consequences with respect to
market quality both for exchange-based and off-exchange trading. For
example, because non-FINRA member firms, all else equal, currently face
lower variable costs of trading compared to member firms, non-FINRA
member firms may be able to provide liquidity at a lower cost than
member firms. It may also reduce direct execution costs (such as quoted
and effective spreads) for both exchange and off-exchange trades, the
latter of which are normally derivatively priced with reference to
prevailing exchange quotes. The differential regulatory burden,
however, may also reduce depth at best prices because a member firm may
not be able to trade profitably at a price established by a non-FINRA
member firm that faces lower regulatory costs. Lower liquidity at best
exchange prices implies greater price effect of trades, which may
increase trading costs, particularly for large orders. For example, if
the best price on an exchange is associated with 100 shares of depth, a
200 share order will exhaust depth at the best price and the second 100
share lot may execute at an inferior price.\265\ If depth at the best
price tends to be larger, it is less likely that an order will exceed
the depth available at the best price. The change in the best price
associated with an execution that exhausts the depth available at the
best price is the price effect of the trade upon the exchange.
---------------------------------------------------------------------------

    \265\ This assumes no hidden depth at the best price. If non-
displayed depth is present at the best price, the remaining 100
shares will be filled at the best price if at least 100 shares of
hidden depth exist at the best price.
---------------------------------------------------------------------------

3. Competitive Effects on Off-Exchange Market Regulation
    Currently, FINRA is the only Association.\266\ It is possible,
however, for new Associations to enter the regulatory oversight market
and

compete with FINRA. The amendments to Rule 15b9-1 may create incentives
for a new Association (or Associations) to form. The large non-FINRA
member firms have commonalities in business models; for example, they
typically do not carry customer accounts. They may consider joining a
new Association together, which would allow the member of the new
Association to be subject to rules and regulations that better fit
their business practices. This may allow the new Association to more
efficiently provide oversight for current non-FINRA member firms. For
example, because these firms collectively conduct a significant portion
of off-exchange volume, the creation of a new Association tailored to
these firms may be economically viable.
---------------------------------------------------------------------------

    \266\ See supra note 9 and accompanying text.
---------------------------------------------------------------------------

    To be registered as a new Association, in addition to requirements
that parallel the requirements to be a national securities exchange, a
new Association must ``[b]y reason of the number and geographical
distribution of its members and the scope of their transactions'' be
able to carry out the purposes of Section 15A.\267\ Any new Association
would have to be approved by the Commission. Additionally, a new
Association must permit any registered broker or dealer that meets a
new Association's qualification standards to become a member.\268\ It
also must have rules regarding the form and content of quotations
relating to securities sold otherwise than on a national securities
exchange that are designed to produce fair and informative quotations,
to prevent fictitious or misleading quotations, and to promote orderly
procedures for collecting, distributing, and publishing
quotations.\269\ A new Association must also be so organized and have
the capacity to enforce compliance by its members and persons
associated with its members with, among other things, its own rules and
the Exchange Act and the rules and regulations thereunder.\270\
---------------------------------------------------------------------------

    \267\ See 15 U.S.C. 78o-3.
    \268\ See 15 U.S.C. 78o-3(b)(3). Section 15A of the Exchange Act
specifically states that an Association shall not be registered as a
national securities association unless the Commission determines,
among other things, that ``the rules of the association provide that
any registered broker or dealer may become a member of such
association and any person may become associated with a member
thereof.''
    \269\ See 15 U.S.C. 78o-3(b)(11).
    \270\ See 15 U.S.C. 78o-3(b)(2).
---------------------------------------------------------------------------

    The ability to form an Association is characterized by barriers to
entry. The proposed amendments include a one-year implementation
period, which may provide a significant time constraint to form a new
Association. A new Association would likely incur significant fixed
costs to create the infrastructure needed to perform the surveillance
and oversight requirements imposed on Associations by statute and
regulation. It may also incur substantial costs, including personnel,
training, travel, and other costs to provide for effective surveillance
and supervision of the off-exchange equity and U.S. Treasury securities
markets. Indeed, the only existing Association, FINRA, has resources
that enable it to surveil and supervise the off-exchange market.\271\
Additionally, while some costs may be lower because CAT already
collects information and makes it available to query; a new Association
would still have to build its own infrastructure, surveillance logics,
and analytical tools, which may create a substantial cost for a new
Association.\272\
---------------------------------------------------------------------------

    \271\ See supra note 9 and accompanying text.
    \272\ See Exchange Act Release No. 79318 (Nov. 15, 2016), 81 FR
84696, 84836-39 (Nov. 23, 2016) (``CAT NMS Approval Order''), for a
discussion on the benefits provided by CAT with regard to
surveillance by SROs.
---------------------------------------------------------------------------

    The amendments may increase barriers to entry and thus affect the
potential for competition among regulators of off-exchange markets.
Currently, the primary barrier to entry is the high fixed cost involved
in forming and operating an Association. As proposed, the amendments
bring nearly all off-exchange trading under the jurisdiction of an
Association, including the trading of firms that currently are not
members of an Association (non-FINRA member firms). If these firms join
the only existing Association, FINRA, any newly-formed Association may
have increased difficulty attracting the members needed to support the
high fixed costs associated with forming an Association because every
broker or dealer that participates in the off-exchange market would
already be a FINRA member. This increased difficulty results because
many firms may be reluctant to change Associations, either because of
the costs to change compliance infrastructures or uncertainty in the
regulatory environment of the new Association. Thus, if the amendments
result in more firms becoming members of the FINRA, a new Association
could face increased difficulties attracting members in the future. If
the new Association is introduced after implementation of the rule,
these stated effects would become more likely as the current non-FINRA
member firms would have already joined FINRA.
    The proposed amendments may create incentives to start a competing
Association. The amendments, as proposed, could cause a number of firms
with similar business models and substantial off-exchange volume to
concurrently contemplate Association membership. This may provide the
incentive to create a new Association and tailor it to the specific
business models of these firms. If a competing Association limited the
scope of its members or operations, it might not have to duplicate all
of the surveillance and supervision functions required to be provided
by an Association that does not have those limits. This may lower the
costs of forming an Association and alter the barriers to entry.\273\
---------------------------------------------------------------------------

    \273\ Some limitations on Association membership or operations
would require exemptive relief for the Association to register with
the Commission.
---------------------------------------------------------------------------

    When the Commission previously considered these amendments, some
commenters expressed their concern about a concentration of regulatory
oversight.\274\ One commenter stated that, although subjecting all
brokers and dealers to FINRA oversight could create standardized rules,
which would simplify compliance and allow for better regulatory
oversight and would eliminate the rationale for many exchange specific
requirements, it is necessary to weigh such benefits against potential
negatives associated with having a single regulator.\275\ A second
commenter worried about an ``imprudent concentration of regulatory
oversight responsibility with one self-regulatory organization.'' \276\
This commenter is concerned that the rule may achieve efficient
oversight but would ``do so at the certain cost of regulatory
resiliency and innovation.'' This commenter is also concerned that the
rule could lead to serious single point of failure concerns and
discourage innovation in regulatory surveillance and oversight
practices.\277\ One commenter believes that the proposal raises
``[m]onopoly and [a]nticompetitive considerations.'' \278\
---------------------------------------------------------------------------

    \274\ See HRT Letter at 9-11, CHX Letter at 1-2, and Hold
Brothers Capital Letter at 3.
    \275\ See HRT Letter at 9-10. HRT further believes that it is
appropriate to consider the potential negatives of concentrating
power in a single regulator while also considering the potential
positives associated with better standardization. Id. at 11.
    \276\ See CHX Letter at 1.
    \277\ Id. at 2. The commenter believes that effective regulation
of cross-market activity requires multiple reviews of the same data
from the unique vantage points of the respective SROs as is
currently done with cooperation among the SROs and statutorily
delegated regulatory authority.
    \278\ See Hold Brothers Capital Letter at 3.
---------------------------------------------------------------------------

    The existence of multiple Associations might provide benefits to
the market as a whole. If a new Association could provide high quality
services to members with a lower fee structure, all Associations would
have

incentives to reduce fees to attract members. This could result in cost
savings to brokers and dealers. Second, a new Association could
innovate to develop different surveillance and supervision methods that
could be more efficient than FINRA's methods.
    Competition among Associations could also entail substantial costs.
If the market for Associations is characterized by economies of scale,
aggregate costs for the same level of regulation would be higher in a
market with two Associations than in a market with a single
Association. These additional costs would ultimately be borne by the
broker and dealer members of either Association, and could be passed on
to investors. Second, Associations might compete on the basis of
providing ``light touch'' regulation, in essence surveilling less and
providing less supervision. As a result, the quality of market
supervision might decrease, although the Commission does itself oversee
self-regulatory organizations, such as Associations, and accordingly,
would not permit a ``race to the bottom.'' \279\ Furthermore, some of
the benefits of the proposed amendments would be diminished if current
non-FINRA member firms created a new Association as opposed to joining
FINRA. For example, the new Association would not have the experience
or expertise of FINRA in overseeing off-exchange market activity.
Additionally, the members of a new Association would not be required to
report their U.S. Treasury securities market trading activity to TRACE
if they are not FINRA members.
---------------------------------------------------------------------------

    \279\ See Section 19(g) and Section 19(h) of the Exchange Act.
---------------------------------------------------------------------------

C. Consideration of Costs and Benefits

    This section discusses costs and benefits of the amendments. While
the Commission has attempted, where possible, to provide estimated
quantifiable ranges, both costs and benefits are difficult to quantify
for this proposal for a number of reasons.
    The overall benefits of the amendments relate to more stable and
uniform surveillance of off-exchange activity by the direct,
membership-based Association oversight to oversee such activity. As
such, the benefits the Commission anticipates from the amendments are
largely qualitative and by their nature difficult to measure
quantitatively.
    The amendments would induce initial, ongoing and indirect costs
which would be similarly difficult to measure for a variety of reasons.
First, market participants are heterogeneous in their type, existing
exchange memberships, and activity level in the off-exchange market.
Consequently, compliance costs would vary across firms in a number of
dimensions. Second, estimating costs is complicated by the fact that
non-FINRA member firms can comply with the proposal in a number of
ways, and presumably each would choose to seek compliance in the manner
that minimizes the sum of its direct costs (related to joining and
maintaining memberships in additional SROs) and indirect costs (which
include forgone opportunities to trade profitably and costs associated
with revising business strategies). Furthermore, some firms are likely
to remain exempt but the Commission lacks data to identify those firms
with certainty.\280\ At the other end of the spectrum, the minority of
non-FINRA member firms that are large and contribute significantly to
both exchange and off-exchange trading are unlikely to remain
exempt.\281\ For the 65 non-FINRA member firms, the Commission believes
that most could lose their exempt status, but cannot estimate how those
firms would seek to comply with the amendments.\282\
---------------------------------------------------------------------------

    \280\ Non-FINRA member firms that provide liquidity on multiple
exchanges and trade heavily off-exchange are unlikely to be small in
terms of net capital, and are not low trading volume firms by
definition. However, as discussed in supra Section VI.A.1, many non-
FINRA member firms are small in terms of net capital and may be
members of a single exchange. Such firms are more likely to have
limited exposure to off-exchange markets. Such firms would either be
exempt from the rule by virtue of having no off-exchange trading or
no trading on exchanges of which they are not members, or be able to
rely on the stock-option order exemption to continue their limited
off-exchange trading related to their exchange-based brokerage
activities.
    \281\ The diversity of non-FINRA member firms is discussed in
supra Section VI.A.1.
    \282\ See supra Section VI.B.1., which discusses how firms may
change their business models in response to the rule.
---------------------------------------------------------------------------

1. Benefits
    As discussed above,\283\ some of the firms relying on the Rule
15b9-1 exemption are significant participants in both on and off-
exchange markets.\284\ For example, in September of 2021, $789 billion
in listed equities was traded off-exchange by non-FINRA member firms,
and $592.3 billion in listed equities was traded on an exchange that
the firm did not belong to.\285\ Thus, a substantial amount of off-
exchange volume is conducted outside of the regulatory jurisdiction of
FINRA, which under the Exchange Act has primary responsibility for
overseeing off-exchange activity. Although FINRA has the ability to
surveil 100% of cross-market and off-exchange equity trading activity,
it does not have enforcement jurisdiction for firms that are not FINRA
members, unless enforcement responsibility is covered under an RSA.
Association membership would supplement the oversight of the exchanges,
to the extent a firm remained an exchange member, and provide
consistent and ongoing application of rules, which could vary between
exchanges. Regarding off-exchange trading, under the current regulatory
structure using RSAs, FINRA applies the rules of the different
exchanges and the exchanges' interpretations of those rules to such
trading. This can result in different interpretations and FINRA
registration would promote consistent interpretations and efficiencies
in enforcement and regulation with respect to this growing part of the
market. As discussed above,\286\ the Commission believes the inclusion
of more non-FINRA member firms in an Association would improve such
Association's ability to supervise cross-exchange trading activity,
particularly in U.S. Treasury securities markets. This would enhance
FINRA's ability and--through the information FINRA shares with the
Commission--the Commission's ability to effectively oversee regulation
of trading on equity, fixed income, and option markets.
---------------------------------------------------------------------------

    \283\ See supra Section I.
    \284\ See supra Section VI.A.1.
    \285\ See supra Table 1.
    \286\ See supra Section I.
---------------------------------------------------------------------------

    The Commission believes that the amendments to Rule 15b9-1 would
improve supervision of non-FINRA member firms. FINRA, currently the
only Association, has substantial experience and expertise from
overseeing a large number of brokers and dealers that trade off-
exchange or across exchanges. This makes FINRA's potential regulation
of non-FINRA member firms with off-exchange or cross-market trading
activity particularly efficient.
    In addition, the amendments, as proposed, would enhance the
supervision and enforcement for equities and options beyond the
benefits from the CAT NMS Plan.\287\ While CAT improves data
accessibility for all SROs, it does not address FINRA's lack of
jurisdiction over non-FINRA member firms participating in the off-
exchange markets. Several commenters on the 2015 Proposal believed that
reporting of non-FINRA member identifying information and activity
pursuant to the CAT NMS Plan would eliminate the need for firms to join
FINRA and would provide FINRA a near complete picture

of off-exchange trading activity.\288\ However, another commenter noted
that even with non-FINRA member firm information, ``enforcement
activities would remain the responsibility of the individual exchanges
where broker-dealers are members'' even though FINRA would be best
positioned to regulate off-exchange activity.\289\ The Commission
agrees that, although FINRA now has additional information with respect
to non-FINRA member firm activity, it still lacks jurisdiction over
non-FINRA member firms, and the proposed amendments would provide such
jurisdiction.\290\
---------------------------------------------------------------------------

    \287\ See CAT NMS Approval Order, supra note 272.
    \288\ See HRT Letter at 3, CTC Letter at 3-4, and FIA 2 Letter
at 3.
    \289\ See FINRA Letter at 4.
    \290\ See supra section II.B.
---------------------------------------------------------------------------

    The benefits of the proposed amendments would be pronounced in the
U.S. Treasury securities markets. A significant amount of volume in
U.S. Treasury securities markets comes from broker-dealers that may be
newly required to become FINRA members as a result of the proposed
amendments.\291\ If these broker-dealers become FINRA members, they
would be required to comply with FINRA rules, including TRACE reporting
requirements. This could have a positive impact on market quality by
increasing coverage of data reported to TRACE as well as providing
additional market oversight. Non-FINRA member firms do not report to
TRACE, and they are only specifically identified by MPID in TRACE when
their U.S. Treasury securities trades occur on a covered ATS; they are
not identified by MPID for other trades of U.S. Treasury securities
that do not occur on covered ATSs, such as direct dealer-to-dealer
transactions. Thus, the proposed amendments would improve the quality
and coverage of TRACE data and increase regulatory transparency into
the U.S. Treasury securities markets.\292\ The extent of the benefits
of requiring non-FINRA members to report these transactions may be
limited because the Commission believes that the majority of U.S.
Treasury securities transactions are already reported to TRACE.\293\
However, the Commission is unable to estimate the extent of U.S.
Treasury securities trading activity that is not reported to TRACE.
---------------------------------------------------------------------------

    \291\ The Commission estimates that four such firms accounted
for $7 trillion in U.S. Treasury securities volume executed on
covered ATSs in 2021 that was reported to TRACE, which was more than
2% of the total U.S. Treasury securities volume traded in 2021 that
was reported to TRACE, and that three such firms' U.S. Treasury
securities volume executed on covered ATSs in April 2022 that was
reported to TRACE accounted for approximately 2.5% of total U.S.
Treasury securities volume in April 2022 that was reported to TRACE.
See supra Section II.B.
    \292\ One commenter stated that all off-exchange trades are
already being reported ``because all off-exchange trading needs to
go through a FINRA member with its own reporting obligations.'' See
FIA 1 Letter at 3. See also supra note 70.
    \293\ See id.
---------------------------------------------------------------------------

    The Commission believes that the proposed amendments could have
similar or additional benefits for other TRACE reported securities,
should current non-FINRA member firms also trade in such securities.
However, the Commission lacks the information necessary to discern the
degree of any such benefits because, as noted above, the Commission
does not have any data or other information available, unlike with U.S.
Treasury securities, to determine how many non-FINRA member firms, if
any, actively trade in these securities or to predict how many
additional trades would be reported under the proposal.\294\ In
addition to the potential market oversight benefits that would be
similar to U.S. Treasury securities, the potential transparency
improvements of TRACE reporting for other TRACE reportable securities
go further than transparency improvement in U.S. Treasury securities,
because the TRACE data for other TRACE reported securities is available
to the public in real time through data vendors.\295\ The additional
transparency from more public TRACE reporting could result in improved
price discovery, which would lead to lower transaction costs.\296\
---------------------------------------------------------------------------

    \294\ The information used to get a sense of the magnitude of
unreported transactions in U.S. Treasury securities is not available
for other fixed income securities. See supra Section VI.A.1.
    \295\ See supra note 218, for information on the difference
between the dissemination of TRACE for U.S. Treasury securities and
TRACE for other TRACE eligible securities.
    \296\ See Hendrik Bessembinder, Chester Spatt & Kumar
Venkataraman, A Survey of the Microstructure of Fixed-Income
Markets, 55 J. Fin. & Quantitative Anal. 1 (2020). See also infra
Section VI.C.2.f. for a related discussion of potential costs which
could apply to other FINRA reportable securities.
---------------------------------------------------------------------------

    While current members of an Association would not be directly
affected by this rule, they would benefit by having a more level
playing field in reporting trades in the U.S. Treasury securities
markets. With more uniform regulatory requirements, firms may compete
more equitably to supply liquidity both on exchanges and in the off-
exchange market.
    Although fewer firms will be able to rely on the proposed narrower
exemptions, the proposed narrower exemptions would continue to provide
benefits for non-FINRA members as well as other market participants.
These exemptions would continue to provide cost savings for non-FINRA
members as they would continue to not be required to join FINRA and
thus avoid the costs of doing so. Additionally, the routing exemption
would facilitate regulatory compliance designed to improve market
quality.\297\ The Commission also believes that the stock-option order
exemption would facilitate liquidity in both stock and options markets,
which could improve market quality.\298\
---------------------------------------------------------------------------

    \297\ See supra Section III.B.1 for more information on the
purpose of the routing exemption.
    \298\ See supra Section III.B.2 for more information on the
stock-options order exemption.
---------------------------------------------------------------------------

2. Costs
    The amendments, by narrowing the existing exemption, would result
in brokers and dealers that no longer qualify for the exemption having
to comply with Section 15(b)(8) by either limiting their trading to
exchanges of which they are members, joining an Association or abiding
by one of the stated exemptions. Under the amendments, therefore, non-
FINRA member firms that choose to continue any off-member-exchange
activity will be faced with choices that would involve corresponding
costs. For example, non-FINRA member firms may incur costs related to
membership in an Association or costs necessitated by additional
exchange memberships. Additionally, some non-FINRA member firms may
incur the costs of losing the benefits of trading in the off-member-
exchange market if they decide not to join an Association. There could
also be indirect costs associated with the proposed amendments,
depending on if a non-FINRA member chooses to join an Association or
not.
    Most of the direct costs incurred in joining an Association and
maintaining membership therein are dependent on firm characteristics
and activity level. Furthermore, the Commission believes that some non-
FINRA member firms may comply by ceasing their off-member-exchange
trading activity, avoiding many of these costs but forgoing the
opportunity to trade profitably in some venues. If all 12 of the non-
FINRA member firms that have significant off-member-exchange trading
activities in equities were to join FINRA, the median aggregate cost of
the amendment for these firms would be about $95,000 in implementation
costs and median ongoing aggregate annual costs of about $2.7
million.\299\ The

aggregate costs for the subset of 12 represent the majority of the
aggregate costs. The Commission believes that smaller non-FINRA member
firms as well as new entrants would experience much lower costs. In
particular, the initial costs for such firms would be close to the
lower range discussed below, because these cost are largely dependent
on the size and complexity of the firms. Additionally, because smaller
firms and new entrants would have lower trading activity, the ongoing
costs would also be significantly lower as ongoing costs are highly
impacted by the trading activity.
---------------------------------------------------------------------------

    \299\ See Table 3 and Table 4, infra, for a breakdown of these
costs. The 2015 Proposing Release, supra note 6, estimated these
costs to be much higher as the estimates included costs for
reporting transactions for NMS stocks. These transactions are now
reported to CAT and are therefore not included in our estimates
here.
---------------------------------------------------------------------------

a. Costs of Joining an Association \300\
---------------------------------------------------------------------------

    \300\ The Commission recognizes that non-FINRA member firms
would incur compliance costs on an initial and ongoing basis to
comply with the proposed amendments. These costs include costs for
training and hiring new employees, as well as additional costs for
exams and licensing required by FINRA. The Commission does not
aggregate these costs across all non-FINRA member firms because the
Commission does not have necessary information about the majority of
the non-FINRA member firms and expects that costs would vary widely
across firms. Where possible, however, the Commission has provided
estimates based on a subset of large firms on which the Commission
has sufficient information. The Commission expects that smaller
firms likely will face lower costs.
---------------------------------------------------------------------------

    Based on discussions with FINRA,\301\ and industry participants,
the direct compliance costs on non-FINRA member firms of joining FINRA
are composed of FINRA membership application fees and any legal or
consulting costs necessary for effectively completing the application
to become a member of FINRA (e.g., ensuring compliance with FINRA rules
including drafting policies and procedures as may be required).
---------------------------------------------------------------------------

    \301\ See FINRA Letter at 5-7.
---------------------------------------------------------------------------

    The fees associated with a FINRA membership application can vary.
As an initial matter, the application fee to join FINRA is tier-based
according to the number of registered persons associated with the
applicant. This one-time application fee ranges from $7,500 to
$55,000.\302\ The initial membership fee for FINRA is $7,500 for firms
with ten or fewer representatives registered with FINRA, $12,500 for
firms with 11 to 100 representatives registered with FINRA, and $20,000
for firms with 101 to 150 representatives registered with FINRA.\303\
Based on its knowledge of the size and business models of non-FINRA
member firms, the Commission believes that the median application fee
for the 12 largest firms would be $12,500 and that most non-FINRA
member firms would not incur FINRA application fees exceeding
$20,000.\304\
---------------------------------------------------------------------------

    \302\ See FINRA By-Laws, Schedule A, Section 4.
    \303\ Id.
    \304\ Based on 2022 FOCUS data, no non-FINRA member firm has
more than 150 registered representatives.
---------------------------------------------------------------------------

    In addition to the application fees and data reporting costs, the
Commission has taken into account the cost of legal and other advising
necessary for effectively completing the application to be a member of
FINRA. Some firms may choose to perform this legal work internally
while others may use outside counsel for the initial membership
application. In making this choice, non-FINRA member firms would likely
take into account factors, such as the size and resources of the firm,
the complexity of the firm's business model, and whether the firm
previously used outside counsel to register with any exchanges. Based
on conversations with industry participants that assist with FINRA
membership, for non-FINRA member firms that choose to employ outside
counsel to assist with their FINRA membership application, the cost of
such counsel ranges from approximately $40,000 to $125,000, with a
midpoint of $82,500. Factors affecting the specific costs of a
particular firm include the number of associated persons, the level of
complexity or uniqueness of the firm's business plan, and whether the
firm has previously completed exchange membership applications with
similar requirements.

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

b. Costs of Maintaining an Association Membership
    With respect to ongoing costs, three components of such costs are
any ongoing fees associated with FINRA membership, costs of legal work
relating to FINRA membership, and costs associated with additional
compliance activities. The ongoing membership-related fees associated
with FINRA membership include the annual GIA; and the TAF and Section 3
fees, among others.\305\
---------------------------------------------------------------------------

    \305\ There are additional fees associated with maintaining a
FINRA membership. There are also additional continuing education and
testing requirements, which will impose costs upon firms joining
FINRA. Additionally, there are de minimis fees (branch registration
fee and system processing fee, among others). See FINRA By-Laws,
Schedule A. The Commission also believes that non-FINRA member firms
would not need to register additional associated persons because the
exchange SRO rules are already comprehensive in this regard. See
infra Section VI.C.2.d.
---------------------------------------------------------------------------

    With certain assumptions, the Commission attempted to estimate
direct compliance costs that a non-FINRA member firm is likely to face
to comply with the amendments. The estimate applies to the 12 non-FINRA
member firms that have significant off-member-exchange trading
activities; smaller firms should face lower costs compared to these 12
firms because they have less revenue and trading volume that would be
subject to GIA, TAF and Section 3 fees. Though non-FINRA member firms
may already indirectly bear some of these costs as they may be passed
through by FINRA member counterparties. Ongoing annual cost estimates
(one time and annual) are broken down in Table 2.
    The annual GIA generally requires members to pay a percentage of
the member firm's total annual revenue based on a graduated scale.\306\
The magnitude of the annual GIA is based on the total annual revenue,
excluding commodities income, reported by the member firm on its FOCUS
Form Part II or IIA.\307\ Based on FOCUS Form data from 12 non-FINRA
member firms in 2022, the Commission has determined that the average
annual total revenue of non-FINRA member firms, excluding commodities
income, is approximately $1.3 billion, with a median of $906
million.\308\ For the 12 large firms, FINRA's graduated GIA scale
results in a median GIA of $459,849.51.\309\
---------------------------------------------------------------------------

    \306\ See FINRA By-Laws, Schedule A. For example, FINRA imposes
a GIA as follows: (1) $1,200 on a member firm's annual gross revenue
up to $1 million; (2) a charge of 0.1215% on a member firm's annual
gross revenue between $1 million and $25 million; (3) a charge of
0.2599% on a member firm's annual gross revenue between $25 million
and $50 million; and so on as provided in Schedule A. When a firm's
annual gross revenue exceeds $25 million, the maximum of current
year's revenue and average of the last three years' revenue is used
as the basis for the income assessment.
    \307\ See FINRA By-Laws, Schedule A, Section 2. See also FOCUS
Report Form X-17A-5, Part II and IIA.
    \308\ Based on 2022 FOCUS data.
    \309\ ($1,200 for the first $1 million of revenue) + (0.1346% x
annual revenue greater than $1 million up to $25 million) + (0.2880%
x annual revenue greater than $25 million up to $50 million) +
(0.0574% of annual revenue greater than $50 million up top $100
million) + (0.0404% of annual revenue greater than $100 million to
$5 billion) + (0.0440% of annual revenue greater than $5 billion up
to $25 billion) + (0.0948% of annual revenue greater than $25
billion). Although the average annual total revenue exceeds the
median annual total revenue, there are a number of firms that have
low GIA, which causes the midpoint of GIA to exceed the average GIA.
Non-FINRA member firms vary in size. GIA for the 12 largest firms
used in these calculations, is anticipated to be far larger than for
the 65 remaining non-FINRA member firms. See FINRA By-Laws, Schedule
A, Section 1(c).

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

    The magnitude of the TAF depends on the transaction volume of a
FINRA member that is covered by the TAF as described in the FINRA By-
Laws.\310\ To the extent FINRA changes the structure of the TAF to take
into account the business models of non-FINRA member firms that may
join FINRA as a result of the proposed amendments, these costs may
change.\311\ The Commission has identified 12 non-FINRA member firms
that have significant off-member-exchange trading activity in September
of 2021. The Commission estimates that trading activity fees for off-
member-exchange equity trading incurred by these 12 large non-FINRA
member firms due to their off-member-exchange activity would have an
average incurred TAF of around $273,677.87 with a median TAF of
$132,744.50.\312\ However, this cost is likely to be underestimated, as
the estimate only accounts for off-exchange equity activity, and the
magnitude of the underestimate may be significant.\313\ The Commission
believes that the TAF for non-FINRA member firms not among the 12
identified would be far lower because the median non-FINRA member firm
has far lower trading volume than the typical firm of the 12 identified
in the data.
---------------------------------------------------------------------------

    \310\ See FINRA By-Laws, Schedule A, Section 1(b).
    \311\ FINRA proposed amendments to the TAF in May of 2015. See
supra note 241.
    \312\ Estimated TAF includes only the off-exchange equity
portion of the TAF and does not include any TAF related to a firm's
exchange-based trading activity. If a firm's activity on an exchange
is related to normal market making operations, the activity does not
incur the TAF. The Commission is unable to estimate the proportion
of these firms' exchange trading that would incur the TAF because
the Commission does not have information on what proportion of non-
FINRA member firm exchange activity would qualify for exemption from
the TAF under FINRA By-Laws. Because other elements of the TAF are
not included in this calculation, it underestimates the actual TAF
that firms would incur if they joined FINRA. The magnitude of the
underestimation may be significant, but firms that join FINRA may be
able to reduce their TAF cost by registering as market makers upon
additional exchanges. (The TAF is not assessed for certain trades
related to registered market-making.) See FINRA By Laws, Schedule A,
Section (1)(b)(2)(F). Estimates of the TAF are based on the off-
exchange sell volume reported to CAT for each of the 12 large non-
FINRA member firms. The estimated TAF is equal to estimated off-
exchange sell volume x $0.00013. The $0 minimum is associated with a
firm that has almost no off-exchange volume.
    \313\ FINRA members are required to pay the TAF for on and off-
exchange trading activity across multiple asset classes. However,
there are exemptions for certain trading activity and the Commission
is unable to identify all trades that are subject to such
exemptions. See https://www.finra.org/rules-guidance/rulebooks/corporate-organization/section-1-member-regulatory-fees for an
explanation of the TAF and the relevant exceptions.
---------------------------------------------------------------------------

    Some off-exchange trading that non-FINRA member firms engage in
currently may no longer be profitable when TAF is incurred.
Consequently, non-FINRA member firms may reduce their trading both on
exchanges and off-exchange after joining an Association.\314\
---------------------------------------------------------------------------

    \314\ See supra section VI.B.1 for more information on how firms
may change their trading practices in response to the rule.
---------------------------------------------------------------------------

    In May of 2015, FINRA issued a Regulatory Notice proposing to amend
the TAF such that it would not apply to transactions by a proprietary
trading firm effected on exchanges of which the firm is a member, to
coincide with originally proposed changes to 15b9-1.\315\ To the extent
FINRA contemplates proposing similar changes to the TAF, if approved,
this could lower the cost for non-FINRA member firms.\316\ FINRA's
previously proposed TAF amendments would exempt proprietary trading
firms when they trade securities on exchanges of which they are a
member, which several commenters supported.\317\
---------------------------------------------------------------------------

    \315\ See supra note 153.
    \316\ In the 2015 Proposing Release, supra note 6, the
Commission solicited comment on the effect of the proposed TAF
amendments, including the effect should the TAF be assessed to non-
FINRA member firms that choose to become FINRA members. With regard
to the TAF, one Commenter stated that ``it is impossible. . . to
estimate the impact of this potentially significant cost.'' See CTC
Letter at 5. Another commenter shared similar thoughts. See FIA 1
Letter at 2. However, of the commenters that discussed this issue,
most were in support of the TAF amendments. See FIA 2 Letter at 2,
CTC Letter at 5, IEX Letter at 3, and HRT Letter at 11. For example,
one commenter believes that ``[c]hanges to TAF fees alone could
potentially reduce the total costs of the Proposal to some firms by
90% or more.'' See FIA 2 Letter at 2.
    \317\ See IEX Letter at 3, PEAK6 Letter at 3, and HRT Letter at
5.
---------------------------------------------------------------------------

    In addition to the TAF, non-FINRA member firms that choose to join
FINRA may incur additional Section 3 fees. Using data on off-exchange
trading during September 2021, the Commission estimated that Section 3
fees incurred by the 12 large non-FINRA member firms due to their off-
exchange trading would have an average incurred Section 3 fee of
$4,541,719.31 annually, with a median incurred Section 3 fee of
$2,150,069.99.\318\ Some of these fees may already be paid by non-FINRA
member firms that engage the services of a member firm clearing broker.
However, FINRA lacks the authority to assess Section 3 fees against
non-FINRA member firms, in which case FINRA may assess the fee to the
member firm counterparty to the transaction. In these cases, the FINRA-
member may pass-through a portion of the fee to the non-FINRA member
counterparty. While these fees would represent a cost to non-FINRA
member firms, the cost would be largely offset to the industry as a
whole by a reduction of Section 3 fees incurred by member firms (or
clearing brokers acting on behalf of a member firm) when they buy from
a self-clearing, non-FINRA member firm.\319\
---------------------------------------------------------------------------

    \318\ Section 3 fees are estimated using non-FINRA member firm
off-exchange sell dollar volume calculated in CAT. The Section 3 fee
obligation is calculated as: Non-FINRA member firm Sell Dollar
Volume x $22.90/$1,000,000. The $22.90/$1,000,000 is the FINRA fee
rate for Fiscal Year 2022. See FINRA By-Laws of the Corporation,
Schedule A to the By-Laws of the Corporation, Section 3--Regulatory
Transaction Fee. See also Exchange Act Release No. 94644 (April 8,
2022), 87 FR 21931 (April 13, 2022) and press release, Commission,
Fee Rate Advisory #1 for Fiscal Year 2022 (April 8, 2022), available
at https://www.sec.gov/news/press-release/2022-60.
    \319\ Currently, when the sell side of an off-exchange
transaction is a non-FINRA member firm, FINRA may assess the Section
3 fees on the buy side counterparty. See the discussion of Section 3
fees in Section VI.A.2, supra, for more information.
---------------------------------------------------------------------------

    Ongoing compliance costs would depend on the business circumstances
of each firm and the types of issues that could arise. As in the case
of the initial membership, some non-FINRA member firms may choose to
conduct ongoing compliance activities in-house while others may seek to
outsource this work.\320\ Based on discussions with industry
participants, the Commission estimated that the ongoing compliance cost
for firms that outsource this work would range from $24,000 to $96,000
per year, with a median of $60,000.\321\ In the case of some non-FINRA
member firms, i.e., those that are affiliates of FINRA members, this
cost is likely to be lower as they may be able to leverage compliance
work already being performed.
---------------------------------------------------------------------------

    \320\ Ongoing compliance activities may include core accounting
functions, updating policies and procedures, and updating forms
filed with regulators.
    \321\ For firms that choose to do this work in-house, the
Commission estimates that the costs of ongoing compliance may be
less than $96,000. This figure assumes non-FINRA member firms may
have experience in ongoing compliance work with SROs through their
exchange membership(s) and, therefore, only captures the incremental
cost of compliance with Association rules.
---------------------------------------------------------------------------

    FINRA members may also be required to pay the median Personnel
Assessment.\322\ The annual Personnel Assessment fee ranges from $130
to $150 per employee and applies to principals or representatives in
the FINRA member's organization. Using FOCUS data the Commission
estimates that the average non-FINRA member firm would incur a
Personnel Assessment fee of no more than $1,960, and the median non-
FINRA member

firm would incur a Personnel Assessment fee of $0.\323\ The Commission
further estimates that the maximum Personnel Assessment fee incurred by
one of these non-FINRA member firms would be $18,330.
---------------------------------------------------------------------------

    \322\ See FINRA By-Laws, Schedule A, Section 1(e).
    \323\ Based on 2022 FOCUS data, the number of registered
representatives of non-FINRA member firms that connect directly to
ATSs ranges from 0-163, with an average of 29 and a median of 0.
---------------------------------------------------------------------------

    The Commission estimates that the median ongoing cost for non-FINRA
member firms would be $2,742,664. However, as discussed above, these
costs could vary. The Section 3 fees which make up a large portion of
these costs are likely to be overestimated for reasons stated above.
Additionally, the TAF is likely to be underestimated.

              Table 4--Median Firm Ongoing Annual Costs \1\
------------------------------------------------------------------------
                                                             Median or
                          Cost                                average
------------------------------------------------------------------------
Gross Income:
    Assessment..........................................     $459,849.51
    Trading Activity Fee................................      132,744.50
    Personnel Assessment................................               0
    Section 3 fee.......................................    2,150,069.99
    Compliance work.....................................          60,000
                                                         ---------------
        Total...........................................      $2,742,664
------------------------------------------------------------------------
\1\ See infra note 312 and accompanying text. The TAF cost also
  represents a transfer from current non-FINRA member firms to current
  member firms. The TAF is calculated using off-exchange sell volume
  from CAT. The Section 3 fee estimate assumes that the firms currently
  pay no Section 3 fees. It is likely that firms that clear through a
  member firm are currently assessed these fees indirectly. Median
  Personnel Assessment Fees are estimated to be zero based on analysis
  using FOCUS data. See supra note 323.

    In addition to the cost estimates discussed above, the Commission
recognizes that both non-FINRA member firms and SROs would incur other
direct and indirect costs because of the increased regulatory
requirements of the amendments. Specifically, there would be compliance
costs associated with regulation by FINRA.\324\ Additional costs would
include actions that are required to accommodate normal supervision and
examination by an Association. To the extent that they do not already
do so, firms would face additional costs related to coming into
compliance with Association rules. The Commission was not able to
estimate these costs, although the costs would vary among non-FINRA
member firms.
---------------------------------------------------------------------------

    \324\ However, non-FINRA member firms that choose to join an
Association may have FINRA assigned as their DEA. Such an assignment
could eliminate separate DEA fees that the non-FINRA member firms
may pay to their current DEA.
---------------------------------------------------------------------------

    Two commenters on the 2015 Proposal submitted estimates for the
cost of becoming FINRA members.\325\ In addition, many commenters
stated that FINRA fees would be substantial and constitute a
considerable sum,\326\ believing that FINRA fees would be unduly
burdensome and outweigh perceived benefits.\327\ Several commenters
believed in particular that FINRA membership would be costly to
proprietary trading firms with no customer business.\328\ One commenter
noted generally that FINRA should review its fees to ensure that those
fees are proportionate to the actual costs of regulation.\329\ By
contrast, one commenter noted that additional regulatory costs
associated with FINRA membership would be ``manageable'' compared to
the cost of the TAF.\330\ As stated above, to the extent FINRA amends
the TAF consistent with what was previously proposed, the ongoing costs
could be lower than these estimates.
---------------------------------------------------------------------------

    \325\ See CTC Letter at 5 (Estimating initial costs of $3.5
million and ongoing annual costs of $1.5 million per year), and FIA
2 Letter at 5 (Estimating initial costs of between $200,000 and
$250,000 and ongoing costs of $100,000 per year).
    \326\ See FIA 1 Letter at 1 (``FINRA Membership would be costly
to most proprietary trading firms''); PEAK6 Letter at 2 (``FINRA
registration process 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, CTC Letter at 6, D&D Letter at 2,
and PTR Letter at 2.
    \327\ See Peak6 Letter at 2, D&D and PTR Letters at 2, Hold
Brothers Capital Letter at 2, Lakeshore Letter at 3, and FIA 1
Letter at 2.
    \328\ See FIA 1 Letter at 1, FIA 2 Letter at 2, and Hold
Brothers Capital Letter at 2.
    \329\ See SIFMA Letter at 3.
    \330\ See HRT Letter at 5.
---------------------------------------------------------------------------

    One commenter was concerned that FINRA's membership fees would only
rise with no competitive forces to restrain the increase of such
fees.\331\ Furthermore, another commenter stated that FINRA membership
fees are substantially higher than fees charged by some of the
exchanges for DEA services.\332\ Several 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.\333\ However, FINRA fees must be filed with the Commission
and such fees must be consistent with the Exchange Act.\334\
---------------------------------------------------------------------------

    \331\ See CTC Letter at 6.
    \332\ See HRT Letter at 5.
    \333\ See CTC Letter at 6, SIFMA Letter at 3, D&D Letter at 2,
and Lakeshore Letter at 3.
    \334\ See supra note 154.
---------------------------------------------------------------------------

c. Costs of TRACE Reporting for Non-FINRA Member Firms That Trade U.S.
Treasury Securities
    Additionally, to the extent that a firm trades fixed income
securities, they would also have implementation and ongoing costs
associated with TRACE reporting. The Commission believes that four non-
FINRA member firms have significant trading activities in U.S. Treasury
securities markets. The Commission estimates that these firms will each
have an initial cost of $2,025, associated with setting up systems for
TRACE reporting. This cost includes the Direct Circuit Connectivity Fee
for TRACE reporting through Nasdaq, in which Nasdaq facilitates the
reporting to TRACE. FINRA does not charge a Transaction Reporting Fee
for trading activity in U.S. Treasury securities markets.\335\ The
Commission estimates an aggregate ongoing cost for each firm of
$125,100. There are three ways for firms to connect into TRACE. First,
firms may directly report with the FIX protocol through Nasdaq, who is
the vendor. Second, firms may use a third party service bureau with FIX
protocols to submit to TRACE. The costs of reporting via FIX protocols
are outlined in Tables 3 and 4. The Commission does not have estimates
for the cost of third party reporting to TRACE. Finally, firms with
lower reporting requirements have the option of reporting using the
Secure Web Interface known as FINRA TRAQS for a fee of $20 per month,
which would allow these firms to avoid port fees and connection fees to
Nasdaq's FIX reporting system. Additionally, costs for these firms
could be significantly lower for firms with low volume, as the
reporting cost is based on the volume. To the extent that non-FINRA
member firms trade in other TRACE reportable securities, such firms
would also have higher reporting costs. If those firms trade U.S.
Treasury securities, their implementation costs would be included in
the Commission's estimates above and they would incur only the
additional marginal costs caused by their volume in other TRACE-
reportable securities. However, to the extent that some non-FINRA
member firms trade in other TRACE reportable securities but not U.S.
Treasury securities, those firms would each incur implementation costs
as described above. The Commission

cannot estimate how many firms would be in this group of non-FINRA
member firms that trade TRACE-reportable securities but not U.S.
Treasury securities because the Commission can identify non-FINRA
member counterparties in TRACE only for U.S. Treasury securities
transactions that occur on covered ATSs, as discussed previously.\336\
---------------------------------------------------------------------------

    \335\ TRACE charges a Transaction Reporting Fee for TRACE
reported securities other than U.S. Treasury securities. The fee is
as follows: $0.475/trade for trade size up to and including $200,000
par value; $0.000002375 times the par value of the transaction
(i.e., $0.002375/$1000) for trade size over $200,000 and up to and
including $999,999.99 par value; $2.375/trade for trade size of
$1,000,000 par value or more.
    \336\ See supra Section VI.A.1.

        Table--Average Firm TRACE Reporting Implementation Costs
------------------------------------------------------------------------
                                                             Median or
                          Cost                              average \1\
------------------------------------------------------------------------
FIX Port fee............................................            $575
Direct Circuit Connectivity Fee for TRACE reporting                1,500
 through Nasdaq.........................................
                                                         ---------------
    Total...............................................           2,025
------------------------------------------------------------------------
\1\ Medians are used where possible. Direct Circuit Connection Fees can
  be found at http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2.

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

d. Costs of Joining Additional Exchanges Under the Rule as Amended
    Non-FINRA member firms must be members of all exchanges upon which
they transact business if they decide not to join an Association. With
limited exceptions for some excluded activity, some non-FINRA member
firms may choose to join additional exchanges to be excluded from the
requirement to become a member of an Association. Alternatively, these
firms may cease trading on exchanges of which they are not members.
    Based on discussions with FINRA and industry participants, the
Commission understands that completing a membership application with an
additional exchange is generally less complicated and time consuming
than completing a membership application with FINRA. Consequently, the
Commission believes that the compliance burden on non-FINRA member
firms for joining an additional exchange is likely to be significantly
less than that of joining FINRA as those non-FINRA member firms that
choose to join an additional exchange are likely able to perform this
work internally, given that they are already members of at least one
exchange, and that such work should take less time than the time
required to complete an application with FINRA. However, the aggregate
cost of joining multiple exchanges would likely be more costly than the
cost of joining FINRA.
    In addition to the legal burden, non-FINRA member firms joining
additional exchanges as a result of the proposed amendments would incur
membership and related fees. To the extent that non-FINRA member firms
choose to become members of additional exchanges, the fees associated
with such memberships would vary depending on the type of access sought
and the exchanges of which non-FINRA member firms choose to become
members.
    The Commission also believes that the exchange membership fees that
would apply to non-FINRA member firms joining such exchanges would be
those fees that apply to either introducing brokers or dealers or
proprietary trading firms. This assumption is consistent with the fact
that any brokers or dealers carrying customer accounts could not
qualify for the current exemption of Rule 15b9-1. Thus, any exchange
membership fees that apply to firms that provide clearing services or
conduct a public business would not apply to non-FINRA member firms.
    Furthermore, because all non-FINRA member firms are members of at
least one exchange,\337\ they would have already completed a Form U4,
to register associated persons.\338\ The Commission believes non-FINRA
member firms would not need to register additional associated persons
because the exchange SRO rules already require them to register
associated persons. The Commission understands that all exchanges can
access the Form U4 filings within the CRD which is maintained by FINRA.
---------------------------------------------------------------------------

    \337\ For a broker or dealer to possibly be exempt from the
requirement to be an Association member currently or under the
amendments, the broker or dealer must be a member of at least one
exchange.
    \338\ Form U4 is the Uniform Application for Securities Industry
Registration or Transfer. Representatives of brokers and dealers,
investment advisers, or issuers of securities use Form U4 to become
registered in the appropriate jurisdictions and/or with SROs. All
SROs currently use Form U4. See, e.g., Cboe BYX Rule 2.5
Interpretations and Policies .01(c), and Nasdaq PHLX Rule General 3,
Section 7.
---------------------------------------------------------------------------

    To obtain estimates of the cost of joining additional exchanges,
the Commission reviewed the membership-related fee structures of all
twenty-four national securities exchanges. In assuming that the
potential burden of joining additional exchanges would likely be less
than that of joining FINRA, the Commission assumes that the costs
imposed on non-FINRA member firms by the amendments would be membership
fees, and not costs relating to trading, such as trading permit fees
and connectivity fees. The Commission recognizes that membership alone
in an exchange may not guarantee the ability to trade because many
exchanges charge fees for trading rights, ports, various degrees of
connectivity, and floor access and equipment, should those be desired.
The fees associated with trading on an exchange are not the result of
the amendments because, under the amendments, a non-FINRA member firm
could continue to trade through another broker or dealer on an exchange
as long as that non-FINRA member firm is a member of every exchange on
which it trades or is a member of FINRA. In other words, the amendments
themselves do not impose the cost of connectivity and related fees, but
only the costs associated with membership on exchanges on which non-
FINRA member firms could trade. To the extent, therefore, that non-
FINRA member firms continue to trade through other brokers or dealers
in a manner consistent with how they currently operate, the amendments
impose only the costs associated with membership.
    To arrive at estimates of the cost of joining additional exchanges,
the Commission aggregated any fees associated with a firm's initial
application to an exchange (``initial fee'') and separately aggregated
the fees associated with any monthly or annual membership costs to
obtain a separate annual cost (``annual fee''). Based on these
aggregations, the Commission obtained a range for both the initial fee
and the annual fee across exchanges. The initial fee is as low as $0
for some exchanges. Most exchanges have an

initial fee that is greater than $0 and no more than $5,000.\339\
---------------------------------------------------------------------------

    \339\ IEX does not assess any initial fees. See IEX Exchange Fee
Schedule, available at https://exchange.iex.io/resources/trading/fee-schedule/(last visited July 22, 2022) (omitting any mention of
an initial membership fee). Other exchanges do have initial
application fees. See, e.g., Nasdaq ISE Fee Schedule, Options 7,
Section 9, available at https://listingcenter.nasdaq.com/rulebook/ise/rules/ise-options-7 (last visited July 22, 2022) (assessing a
one-time application fee of $3,500 for an ``Electronic Access
Member''); Membership Application for New York Stock Exchange LLC
and NYSE American LLC at 2 (Oct. 2019), available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_and_American_Membership_Application.pdf (last visited July 22,
2022) (discussing the Non-Public Firm Application Fee of $2,500);
Nasdaq Price List, available at http://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 (last visited July 22, 2022)
(discussing the Nasdaq Application Fee of $2,000); Cboe Fee Schedule
at 10 (June 30, 2022), available at https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf (last visited July 22, 2022)
(typically assessing a trading permit holder organization
application fee on all of its members of $5,000). If a firm is
organized as a sole proprietorship, the application fee for Cboe is
only $3,000. Id.
---------------------------------------------------------------------------

    Regarding monthly or annual membership fees, most exchanges'
ongoing monthly or annual membership fees generally range from $1,500
to $7,200.\340\ Again, these ongoing exchange membership costs are
generally lower than the annual costs estimated for being a member of
FINRA.
---------------------------------------------------------------------------

    \340\ See, e.g., Cboe BYX Exchange, Inc. Fee Schedule (eff. May
2, 2022), available at https://www.cboe.com/us/equities/membership/fee_schedule/byx/ (last visited July 22, 2022) (noting an annual
membership fee of $2,500); Cboe EDGA Exchange, Inc. Fee Schedule
(eff. Apr. 1, 2022), https://www.cboe.com/us/equities/membership/fee_schedule/edga/ (last visited July 22, 2022) (same); NYSE
Chicago, Inc. Fee Schedule (updated Jan. 2, 2022), available at
https://www.nyse.com/publicdocs/nyse/NYSE_Chicago_Fee_Schedule.pdf
(last visited July 22, 2022) (assessing an annual membership fee of
$7,200); MIAX Fee Schedule at 20 (Mar. 1, 2022), available at
https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_03012022.pdf (last visited July 22, 2022)
(assessing a monthly trading permit fee for an ``Electronic Exchange
Member'' of $1,500).
---------------------------------------------------------------------------

e. Policies and Procedures Related to the Narrowed Criteria for
Exemption From Association Membership
    Non-FINRA member firms that choose not to join an Association but
wish to continue to trade off-exchange (or on exchanges of which they
are not members) must do so in a manner that conforms to the routing or
stock-option order exemptions. To rely on the stock-option order
exemption, the proposal would require non-FINRA member firms to
establish, maintain, and enforce policies and procedures as discussed
above.\341\ The Commission estimates that firms would incur a burden of
8 hours in initially preparing these policies and procedures.\342\
Furthermore, the burden of maintaining and enforcing such policies and
procedures, including a review of such policies at least annually,
would be approximately 48 hours.\343\ The Commission estimated an
initial implementation cost of approximately $2,561 and an annual
ongoing cost of approximately $15,708 for non-FINRA member firms that
wish to utilize the exemptions and perform this work internally; for
firms that outsource this work, costs are likely to be higher.\344\
Firms that choose to join FINRA would not incur these costs as the
exemptions would not be relevant.
---------------------------------------------------------------------------

    \341\ See supra section III.B.2.
    \342\ This figure is based on the following: (Compliance Manager
at 5 hours) + (Compliance Attorney at 2.5 hours) + (Director of
Compliance at 0.5 hours) = 8 burden hours per dealer. See infra note
357. As is discussed in more detail in the Paperwork Reduction Act
discussion, the Commission based this estimate on the estimated
burdens imposed by other rules applicable to brokers and dealers,
such as Regulation SBSR. See also infra note 359.
    \343\ This figure is based on the following: (Compliance Manager
at 30 hours) + (Compliance Attorney at 12 hours) + (Director of
Compliance at 6 hours) = 48 burden hours per broker or dealer. See
infra note 358.
    \344\ For firms that perform this work internally, the initial
cost estimate assumes 5 hours of work performed by a Compliance
Manager at an hourly rate of $293, 2.5 hours performed by Compliance
Attorneys at an hourly rate of $346, and 0.5 hour of work performed
by the Director of Compliance at an hourly rate of $461. The annual
cost estimate assumes 30 hours of work by a Compliance Manager at an
hourly rate of $293, 12 hours by Compliance Attorneys at an hourly
rate of $346, and 6 hours by the Director of Compliance at an hourly
rate of $461. Hourly salary figure is from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1800 hour work-year and inflation
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
---------------------------------------------------------------------------

f. Indirect Costs
    In addition to possibly incurring costs related to joining
exchanges, non-FINRA member firms that choose not to join an
Association would lose the benefits of trading in off-member-exchange
markets. As mentioned above, non-FINRA member firms are significant
participants in off-exchange activity. Much of this trading is
attributed to 12 non-FINRA member firms, and the activity level across
those firms varies widely. The Commission estimates that those 12 non-
FINRA member firms executed $744 billion in off-exchange volume in
September of 2021, while the remaining non-FINRA member firms executed
$46 billion. The Commission cannot estimate the likelihood of these
firms choosing to cease off-exchange activity rather than joining an
Association. One commenter echoed these concerns when it stated that
non-members may ``curtail all off-exchange trading'' if the high costs
of FINRA membership outweigh the profits.\345\ The commenter believes
that some firms may withdraw their broker or dealer registration and
trade as a customer of a broker or dealer in order to eliminate other
membership costs.\346\ The Commission believes that this is a
possibility and could result in less competition and could degrade
market quality and regulatory oversight.\347\
---------------------------------------------------------------------------

    \345\ See HRT Letter at 10.
    \346\ Id.
    \347\ Id.
---------------------------------------------------------------------------

    Finally, those firms that choose not to join an Association would
be limited in their ability to route their own transactions to comply
with the requirements of Regulation NMS and the Options Linkage
Plan.\348\ Their transactions would have to be routed through a broker
or dealer of an exchange of which they are a member, or routed by a
broker or dealer only to those exchanges of which they are members. The
routing of orders of non-FINRA member firms that do not join an
Association would be determined by the routing broker or dealer of the
exchanges of which they are members. This loss in choice could lead to
higher costs for routing and costs associated with increased latency
because the exchange's routing broker or dealer may have a
telecommunications infrastructure that is inferior to that of the
broker or dealer that previously provided connectivity to that exchange
to the non-FINRA member firm.\349\
---------------------------------------------------------------------------

    \348\ The exemption related to routing to comply with Regulation
NMS and the Options Linkage Plan is discussed in supra section
III.B.1.
    \349\ Firms in the business of providing connectivity to
exchanges are likely to compete on the basis of their technology.
The Commission assumes that some firms that do not join FINRA will
have some orders (those governed under the Regulation NMS or the
Options Linkage Plan provisions to prevent trade-throughs) routed
using technology inferior to the technology of their firm of choice.
---------------------------------------------------------------------------

D. Alternatives

1. Include a Floor Member Hedging Exemption
    The Commission could provide an exemption from Association
membership if a dealer that meets the criteria of paragraphs (a) and
(b) of the rule, conducts business on the floor of a single exchange,
and its trading elsewhere is proprietary and solely for the purpose of
hedging its floor-based exchange trading activity on its member
exchange. The hedging exemption could be limited to firms that trade on
the floor of a national securities exchange. Specifically, the
alternative would provide that a dealer that conducts

business on the floor of only a single national securities exchange may
affect transactions in securities otherwise than on that exchange, for
the dealer's own account with or through another registered broker or
dealer, that are solely for the purpose of hedging the risks of its
floor-based exchange activity, by reducing or otherwise mitigating the
risks thereof. The alternative proposal also could require a dealer
seeking to rely on this exemption to establish, maintain, and enforce
written policies and procedures reasonably designed to ensure and
demonstrate that such hedging transactions reduce or otherwise mitigate
the risks of the financial exposure the dealer incurs as a result of
its floor-based activity, and to preserve a copy of its policies and
procedures in a manner consistent with 17 CFR 240.17a-4 until three
years after the date the policies and procedures are replaced with
updated policies and procedures.
    The Commission believes that this alternative could provide a
limited exemption from Association membership that is consistent with
the original design of Rule 15b9-1's exclusion for proprietary trading.
Today, few dealers limit their quoting and other non-hedging trading
activities to a particular exchange. Under this alternative, the
registered dealers among this group that limit their primary trading
business to a single exchange floor may continue to hedge the risk of
that business by effecting securities transactions on another exchange
or in the off-exchange market that are solely for the purpose of
hedging the dealers' on-exchange activity, without such transactions
triggering a requirement to join an Association.
    The Commission also believes that this alternative approach, and in
particular the limitation of its coverage to dealers that engage in
floor trading and are a member of only a single exchange, could be
consistent with the public interest and the protection of investors. A
dealer's hedging activity resulting from its trading activity on
multiple exchanges of which the dealer is a member presents cross-
market surveillance concerns as previously discussed, and therefore
FINRA would be in the best position to conduct regulatory oversight to
the extent that the dealer's hedging transactions take place elsewhere
than on exchanges of which it is a member. By contrast, so long as a
dealer's hedging activity results from floor trading activity that is
confined to a single exchange of which the dealer is a member, that
exchange could be able to adequately supervise the hedging activities
of the dealer, consistent with the public interest and protection of
investors.
    In addition, requiring written policies and procedures, as
described above, would facilitate exchange supervision of dealers
relying on such floor member hedging exemption, as it could provide an
efficient and effective way for the relevant exchange to assess
compliance with the proposed exemption. This could further serve the
public interest and help protect investors.
    Because the alternative hedging exemption for floor traders is
intended to allow a dealer to reduce or otherwise mitigate its risk,
such as position risk, incurred in connection with its exchange-based
dealer activities, it would be limited to transactions for the dealer's
own account. In addition, because the dealer would not itself be a
member of any other national securities exchange on which hedging
transactions may be effected, or of an Association, such transactions
would need to be conducted with or through another registered broker or
dealer that is a member of such other national securities exchange or a
member of an Association (or of both).
    However, the Commission believes that this alternative exemption
would currently apply to very few and as little as zero non-FINRA
member firms. Given that so few non-FINRA member firms would qualify
for the exemption, the Commission believes that there is little value
in including such an exemption. Additionally, by including the
exemption the Commission believes that unforeseen circumstances could
allow for firms to take advantage of the exemption in the future in
ways that are not consistent with the original intent of the exemption,
much like firms currently rely on Rule 15b9-1 in ways that are not
consistent with the original intent.
2. Exchange Membership Alternative
    The amendments, in accordance with Section 15(b)(8), preclude any
firm that is not a member of an Association from trading on exchanges
of which it is not a member.\350\ Further, under the amendments, if a
firm becomes a member of an Association, it would not have to become a
member of each exchange upon which it trades.\351\ The Commission has
also considered requiring brokers and dealers to become a member of
every exchange on which they trade and to become a member of an
Association to trade off-exchange (``Exchange Membership
Alternative'').
---------------------------------------------------------------------------

    \350\ The amendments provide limited exemptions for order
routing to satisfy certain provisions of Regulation NMS and the
Options Linkage Plan and for executing the stock leg of a stock-
option order.
    \351\ In order to trade on exchanges of which it is not a
member, the firm would have to trade with or through another broker
or dealer that is a member of that exchange.
---------------------------------------------------------------------------

    In considering the Exchange Membership Alternative, the Commission
weighed whether the same issue of off-exchange activity not being
subject to effective regulatory oversight that exists when a non-FINRA
member firm trades off-exchange is present when a member or non-FINRA
member firm trades on an exchange of which it is not a member (through
a member of that exchange). The Commission continues to believe that
the amendments adequately address the issue of establishing effective
oversight of off-exchange activity and that the more onerous Exchange
Membership Alternative would not provide any additional regulatory
benefit beyond the benefits the amendments provide for several reasons.
First, while some exchanges may lack specialized regulatory personnel
to directly surveil their members' trading off-exchange, FINRA has
these resources to surveil the activity of member firms both on
exchanges and off-exchange. Accordingly, requiring member firms to also
become members of each exchange on which they effect transactions,
including indirectly, would be unnecessarily duplicative because FINRA
already has the resources necessary to surveil the activity of a member
firm trading on an exchange of which it is not a member. In addition,
while some exchanges do not have a specialized rule set to govern their
members' activity in the off-exchange market, FINRA's rules are often
consistent with the trading rules of exchanges on which members
transact.\352\ If a member firm were to violate an exchange rule on an
exchange of which it is not a member, FINRA would have the jurisdiction
needed to address the resulting violation. Therefore, not requiring
that the member firm also become a member of that exchange would not
prevent FINRA from exercising jurisdiction over the matter.
---------------------------------------------------------------------------

    \352\ See supra notes 53-54 and accompanying text.
---------------------------------------------------------------------------

    The Exchange Membership Alternative might have required firms to
become members of more SROs than required under the proposed
amendments, which would impose additional costs. In particular, some
non-FINRA member firms that would become member firms under the
proposed amendments would also need to become members of additional
exchanges or cease trading on those exchanges. In addition, some
current

member firms would also need to become members of additional exchanges.
3. Retaining the De Minimis Allowance
    The Commission considered retaining the $1,000 de minimis allowance
for trading other than on an exchange of which the non-FINRA member
firm is a member but removing the exception for proprietary trading
conducted with or through another registered broker or dealer. As
discussed above,\353\ the Commission continues to believe that the
magnitude of the de minimis allowance is no longer economically
meaningful. Furthermore, the Commission continues to believe that the
commission sharing arrangements discussed previously \354\ are rarely,
if ever, used.
---------------------------------------------------------------------------

    \353\ See supra section III.A.
    \354\ Id.
---------------------------------------------------------------------------

4. Eliminate the Rule 15b9-1 Exemption
    The Commission could eliminate Rule 15b9-1 altogether, leaving no
exemption from Section 15(b)(8) of the Act. This would cause all
current non-FINRA member firms that effect off-member-exchange
securities transactions to be required by Section 15(b)(8) to join
FINRA, which could improve FINRA's ability to surveil activity of
member firms both on and off exchange, as well as investigate
potentially violative behavior. Though, the Commission believes that
such violative behavior by such firms may be easily identifiable under
the proposed amendments, due to the fact that the proposed exemptions
are narrow. However, eliminating the exemption for firms that would
qualify for the routing exemption or the stock-option order exemption
may prove to unnecessarily increase the costs for such firms. The
Commission also believes that the routing exemption and stock-option
order exemption will provide important avenues for providing liquidity
and, therefore, eliminating the exemptions may drive these firms from
the market and lead to a reduction in liquidity and market quality.

E. Request for Comment on Economic Analysis

    The Commission requests comment on all aspects of this Economic
Analysis, including whether the analysis has: (1) identified all
benefits and costs, including all effects on efficiency, competition,
and capital formation; (2) given due consideration to each benefit and
cost, including each effect on efficiency, competition, and capital
formation; and (3) identified and considered reasonable alternatives to
the proposed rule amendments. We request and encourage any interested
person to submit comments regarding the proposed rules, our analysis of
the potential effects of the proposed amendments, and other matters
that may have an effect on the proposed rules. We request that
commenters identify sources of data and information as well as provide
data and information to assist us in analyzing the economic
consequences of the proposed rules and proposed amendments. We also are
interested in comments on the qualitative benefits and costs we have
identified and any benefits and costs we may have overlooked. In
addition to our general request for comments on the Economic Analysis
associated with the proposed rules and proposed amendments, we request
specific comment on certain aspects of the proposal:
    61. Regulatory Structure and Activity Levels of Non-FINRA Member
Firms. The Economic Analysis discusses the current landscape for non-
FINRA member firms.
     Is the Commission's description of the current activity
levels of non-FINRA member firms accurate? If not, can you provide
additional data to better describe non-FINRA member firms' activity
levels?
     Is there information or data on the trading activity level
of non-FINRA member firms, in TRACE reportable securities other than
U.S. Treasury securities? If so, please provide data.
    62. Current Market Oversight. The Economic Analysis describes the
current structure of market oversight for non-FINRA member firms:
     Is the Commission's description of current market
oversight accurate? Why or why not?
    63. Effects on Regulatory Supervision. Under the amendments, some
non-FINRA member firms would be required to join an Association and be
subject to additional market oversight.
     Would the proposed amendment improve regulatory oversight
of current non-FINRA member firms? If not, is there currently adequate
oversight of non-FINRA member firms?
     Would improved regulatory oversight improve market quality
in financial markets?
     Would the proposed rules improve transparency for non-
FINRA member firms that have significant trading activities in U.S.
Treasury securities markets?
     Are there significant limitations, beyond those discussed
above, in the economic analysis of the effect on regulatory
supervision?
    64. Firm Response and Effect on Market Activity. Under the proposed
amendment, non-FINRA member firms would be required to either join an
Association or change their trading practices to qualify for an
exemption.
     Will some non-FINRA member firms change their business
practices, including ceasing to trade securities, as opposed to joining
an Association as a result of the proposed amendments? Why or why not?
     Will some non-FINRA member firms join each exchange on
which they trade as opposed to joining an Association as a result of
the proposed amendments? Why or why not?
     Will the proposed amendments lead to a reduction of
liquidity as a result of non-FINRA member firms changing their business
practices as due to the proposed amendments? Why or why not?
    65. Competitive Effects on Off-Exchange Market Regulation. The
proposed amendments may create an incentive for the creation of another
Association to compete with FINRA.
     Could the proposed amendments provide a strong enough
incentive for the creation of a second Association? Why or why not? Do
you believe that there are barriers to entry that would prevent a
second Association from being formed?
    66. Effects on Current FINRA Member Firms. The proposed amendments
are likely to have indirect effects on FINRA member firms as well.
     Would the proposed amendments create a more level
regulatory playing field for FINRA member firms relative to non-FINRA
member firms?
    67. Effects on Price Discovery
     Would the proposed amendments decrease competitive
advantages and reduce costs borne by the investing public through
increased price discovery? Why or why not?
    68. Costs. The proposed amendments will have several direct costs
for non-FINRA member firms.
     Has the proposal accurately described the costs to non-
FINRA member firms? Why or why not?
     Has the proposal accurately estimated the fees assessed by
FINRA? If not, can you provide estimates?
     In 2015 FINRA proposed amendments to the TAF in response
to a previous Commission proposal to amend the 15b9-1 exemption. If the
proposed FINRA amendments are adopted, how would this change the
economic effects?
    69. Alternatives. The Commission listed several reasonable
alternatives.
     Do you believe that the economic effects of each of the
provided

alternatives has been accurately described and evaluated?
     Are there other alternatives?
     How many non-FINRA members would qualify for a floor
trading hedging exemption? Is zero accurate?

VII. Paperwork Reduction Act

    Certain provisions of the proposed amendments to Rule 15b9-1
contain ``collection of information requirements'' within the meaning
of the Paperwork Reduction Act of 1995 (``PRA'').\355\ As discussed in
Section III.B, the proposed amendments to Rule 15b9-1, if adopted,
would require brokers or dealers relying on the stock-option order
exemption to establish, maintain, and enforce certain written policies
and procedures. Compliance with these collections of information
requirements would be mandatory for firms relying on the amended rule.
The Commission is submitting these collections of information to the
Office of Management and Budget (``OMB'') for review in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11. The title of this new collection
of information is ``Rule 15b9-1 Exemptions.'' An agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless the agency displays a currently valid control
number.
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    \355\ 44 U.S.C. 3501 et seq.
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A. Summary of Collection of Information

    The proposed amendments to Rule 15b9-1 include a collection of
information within the meaning of the PRA for brokers or dealers
relying on the stock-option order exemption under the amended rule. The
stock-option order exemption under the amendments to Rule 15b9-1 would
permit a qualifying broker or dealer to effect securities transactions
otherwise than on an exchange where it is a member, with or through
another broker or dealer, that are solely for the purpose of executing
the stock leg of a stock-option order. Brokers or dealers relying on
this exemption would be required to establish, maintain, and enforce
written policies and procedures reasonably designed to ensure and
demonstrate that such transactions are solely for the purpose of
executing the stock leg of a stock-option order. In addition, such
brokers or dealers would be required to preserve a copy of their
policies and procedures in a manner consistent with Rule 17a-4 until
three years after the date the policies and procedures are replaced
with updated policies and procedures.

B. Proposed Use of Information

    The policies and procedures required under amended Rule 15b9-1
would be used by the Commission and SROs to understand how brokers and
dealers relying on the exemption evaluate whether the securities
transactions that they effect elsewhere than an exchange where they are
a member are solely for the purpose of executing the stock leg of a
stock-option order and, more generally, how such brokers and dealers
are complying with the requirements of the exemption and Rule 15b9-1.
These policies and procedures would be used generally by the Commission
as part of its ongoing efforts to monitor and enforce compliance with
the federal securities laws, including Section 15(b)(8) of the Act and
Rule 15b9-1 thereunder. In addition, SROs may use the information to
monitor and enforce compliance by their members with applicable SRO
rules and the federal securities laws.

C. Respondents

    The Commission believes that a small number of brokers or dealers
would rely on the stock-option order exemption. The Commission
estimates that, based on publicly available information reviewed
covering the end of April 2022, there are approximately 65 brokers-
dealers registered with the Commission that are currently a member of
an exchange but not a member of an Association. The Commission believes
that some, but not all, of these brokers-dealers would likely choose to
avail themselves of the stock-option order exemption, because not all
of them handle stock-option orders or, for those that do handle stock-
option orders, they may effect the execution of stock leg components of
those orders on exchanges where they are a member. The Commission
estimates that seven firms could potentially rely on the stock-option
order exemption and would therefore be required to comply with the
policies and procedures requirement.\356\ The Commission believes that
some of these firms could want the ability to effect securities
transactions elsewhere than an exchange where they are a member that
are not for the purpose of executing the stock leg of a stock-option
order, and may, accordingly, choose to join an Association as a result
of the amendments to Rule 15b9-1.
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    \356\ See supra section III.B.2.
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D. Total Initial and Annual Reporting and Recordkeeping Burdens

    The Commission estimates that the one-time, initial burden for a
broker or dealer to establish written policies and procedures as
required under amended Rule 15b9-1 would be approximately 8 hours.\357\
This figure is based on the estimated number of hours to develop a set
of written policies and procedures, including review and approval by
appropriate legal personnel. The Commission notes that the policies and
procedures proposed in the amended rule are limited to those
transactions that are solely for the purpose of executing the stock leg
of a stock-option order. In addition, the Commission estimates that the
annual burden of maintaining and enforcing such policies and
procedures, including a review of such policies at least annually,
would be approximately 48 hours for each broker or dealer.\358\ This
figure includes an estimate of hours related to reviewing existing
policies and procedures, making necessary updates, conducting ongoing
training, maintaining relevant systems and internal controls,
performing necessary testing and monitoring of stock-leg transactions
as they relate to the broker's or dealer's activities and maintaining
copies of the policies and procedures for the period of time required
by the amended rule.
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    \357\ This figure is based on the following: (Compliance Manager
at 5 hours) + (Compliance Attorney at 2.5 hours) + (Director of
Compliance at 0.5 hour) = 8 burden hours per broker or dealer.
    \358\ This figure is based on the following: (Compliance Manager
at 30 hours) + (Compliance Attorney at 12 hours) + (Director of
Compliance at 6 hours) = 48 burden hours per broker or dealer.
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    The Commission estimates that the initial, first year burden
associated with amended Rule 15b9-1 would be 56 hours per broker or
dealer, which corresponds to an initial aggregate burden of 392
hours.\359\ The Commission estimates that the ongoing annualized burden
associated with Rule 15b9-1 would be 48 hours per broker or dealer,
which corresponds to an ongoing

annualized aggregate burden of 336 hours.\360\
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    \359\ This figure is based on the following: ((8 burden hours
per broker or dealer) + (48 burden hours per broker or dealer)) x (7
brokers and dealers) = 392 burden hours during the first year. In
estimating these burden hours, the Commission also examined the
estimated initial and ongoing burden hours imposed on registered
security-based swap dealers under Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information. See Exchange Act
Release No. 74244 (February 11, 2015) 80 FR 14564, 14683 (March 19,
2015) (``Regulation SBSR''). Regulation SBSR requires registered
security-based swap dealers to establish, maintain, and enforce
written policies and procedures that are reasonably designed to
ensure compliance with any security-based swap transaction reporting
obligations. Id. The estimated initial and ongoing compliance burden
on registered security-based swap dealers under Regulation SBSR were
216 burden hours and 120 burden hours, respectively. Id. The
policies and procedures under the proposed amendments to Rule 15b9-1
are much more limited in nature.
    \360\ This figure is based on the following: (48 burden hours
per broker or dealer) $x (7 brokers and dealers) = 336 ongoing,
annualized aggregate burden hours.
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E. Collection of Information Is Mandatory

    All of the collection of information discussed above would be
mandatory.

F. Confidentiality of Responses to Collection of Information

    To the extent that the Commission receives confidential information
pursuant to the collection of information, such information will be
kept confidential, subject to the provisions of applicable law.\361\
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    \361\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing
the public availability of information obtained by the Commission).
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G. Retention Period for Recordkeeping Requirements

    Brokers or dealers seeking to take advantage of the stock-option
order exemption would be required to preserve a copy of their policies
and procedures in a manner consistent with Rule 17a-4 \362\ until three
years after the date the policies and procedures are replaced with
updated policies and procedures.
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    \362\ 17 CFR 240.17a-4. Registered brokers and dealers are
already subject to existing recordkeeping and retention requirements
under Rule 17a-4. However, amended Rule 15b9-1 contains a
requirement that a broker or dealer relying on the stock-option
order exemption preserve a copy of its policies and procedures in a
manner consistent with Rule 17a-4 until three years after the date
the policies and procedures are replaced with updated policies and
procedures. The burdens associated with this recordkeeping
obligation have been accounted for in the burden estimates discussed
above for amended Rule 15b9-1.
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H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comment to:
    70. Evaluate whether the proposed collection of information is
necessary for the proper performance of our functions, including
whether the information shall have practical utility;
    71. Evaluate the accuracy of our estimate of the burden of the
proposed collection of information;
    72. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
    73. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
    Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with
reference to File Number S7-05-15. Requests for materials submitted to
OMB by the Commission with regard to this collection of information
should be in writing, with reference to File Number S7-05-15 and be
submitted to the Securities and Exchange Commission, Office of FOIA/PA
Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication.

VIII. Consideration of Impact on Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, (``SBREFA''),\363\ the Commission requests comment on the
potential effect of the proposed amendments to Rule 15b9-1 on the
United States economy on an annual basis. The Commission also requests
comment on any potential increases in costs or prices for consumers or
individual industries, and any potential effect on competition,
investment, or innovation. Commenters are requested to provide
empirical data and other factual support for their views to the extent
possible.
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    \363\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note
to 5 U.S.C. 601).
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IX. Regulatory Flexibility Act Certification

    Section 3(a) of the Regulatory Flexibility Act of 1980 \364\
(``RFA'') requires the Commission to undertake an initial regulatory
flexibility analysis of the impact of the rule amendments on small
entities unless the Commission certifies that the rule would not have a
significant economic impact on a substantial number of small
entities.\365\ For purposes of Commission rulemaking in connection with
the RFA,\366\ a small entity includes a broker or dealer that: (1) had
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\367\ or, if not required to file such statements, a
broker or dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and (2) is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\368\
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    \364\ 5 U.S.C. 603(a).
    \365\ 5 U.S.C. 605(b).
    \366\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
rulemaking, are set forth in Rule 0-10 under the Exchange Act, 17
CFR 240.0-10. See Exchange Act Release No. 18451 (January 28, 1982),
47 FR 5215 (February 4, 1982) (File No. AS-305).
    \367\ 17 CFR 240.17a-5(d).
    \368\ See 17 CFR 240.0-10(c).
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    The Commission examined recent FOCUS data for the 3,528 active
brokers and dealers overseen by the Commission, including 3,454 brokers
and dealers that are FINRA members and the 65 non-FINRA member firms as
of April 2022 and estimates that not more than four of the affected
entities have net capital of $500,000 or less and are not affiliates of
larger organizations. The Commission oversees approximately 3,528
brokers and dealers, of which 740 have net capital of $500,000 or less
and are not affiliates of larger organizations.\369\ Because the
Commission estimates that not more than four small entities out of 740
total small entities currently registered with the Commission would be
required to become FINRA members as a result of the proposed rule
changes, the Commission certifies that the proposed amendments to Rule
15b9-1 would not, if adopted, have a significant economic impact on a
substantial number of small entities.\370\
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    \369\ Data from FOCUS for Quarter 4 of 2021.
    \370\ One commenter to the 2015 Proposal disagreed with the
Commission's certification in the 2015 Proposal and stated that the
amended rule would have a significant economic impact on a
substantial number of small entities. Specifically, the commenter
stated that 12 options exchange member firms that were not FINRA
members in reliance on current Rule 15b9-1 conduct off-exchange
trading on behalf of their clients, were likely small entities, and
would not be eligible for the then-proposed dealer hedging
exemption. See NYSE/NASDAQ Letter at 4 and n. 5. Since the
Commission no longer is including a hedging exemption in amended
Rule 15b9-1, these firms could still be impacted by the amended
rule. But the Commission preliminarily believes that these options
exchange member firms' off-exchange trading could be stock trading
in relation to their handling of stock-option orders and, therefore,
these firms may be able to rely on the stock-option order exemption
that the Commission is proposing today. Moreover, as noted above,
the Commission now estimates that not more than four small entities
would be impacted by the proposed amendments to Rule 15b9-1. As a
result, the Commission believes that the proposed amendments to Rule