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Statement at Open Meeting on Rule 15b9-1

Commissioner Daniel M. Gallagher

March 25, 2015

Today the Commission is proposing to amend SEC Rule 15b9-1.  I would like to join my colleagues in thanking the staff in the Division of Trading and Markets, DERA and Office of the General Counsel for their efforts on this rulemaking.  In particular, I would like to thank David Michehl, Nicholas Shwayri, and Charles Sommers.

As the release notes, there are approximately 125 broker-dealers registered with the SEC that claim an exemption to mandatory membership with a registered national securities association pursuant to Rule 15b9-1.[1]  Should the Commission move forward and ultimately adopt the amendments proposed today, the vast majority of these proprietary firms would be required to register with such an Association.  The only national securities association currently registered with the SEC is FINRA.  To become a member of FINRA, these firms will have to complete an application, pay yearly membership dues, comply with FINRA’s weighty rulebook, and of course be subject to FINRA’s oversight and inspection. 

Although I support the proposal, I have some reservations about this proposal.  I am not convinced that proprietary dealers that avail themselves of the current exemption are a threat to investors or the market.  I am also wary of this type of “one size fits all” regulation.  When Congress created SROs in the 1930s, it didn’t mandate that all broker-dealers join a single SRO.  And, as I have stated many times in the past, the NASD’s original mandate was much simpler than FINRA’s current business model, but we should not treat FINRA as the SEC’s deputy federal regulator.  However, I appreciate that the proprietary exemption was added in 1976.  The markets have obviously evolved since then. 

I’ve pushed for the Commission to retrospectively review existing rules in other areas, such as our regulation of transfer agents and shareholder proposals.  It is good policy, and it should be done, unlike today’s proposal, without preconceived notions of needed amendments.  It should be data-driven and balanced.  Now that we have some momentum with 15b9-1, maybe we can finish our work on Rule 15a-6.[2]

Eliminating the proprietary exemption from 15b9- will impose additional regulatory costs and burdens on these firms.[3]  At a time when we’re losing broker-dealers on a regular basis due to the crushing load of regulation, we must be sure that the benefits of this proposal outweigh the costs.[4]  To that end, I encourage market participants to comment on this aspect of the proposal.  And, I will note for prospective commenters that the proposal contains several substantive questions that rise to the level of what I call “shadow proposals.” [5]  Ignore them at your peril. 

It is my hope that with this rulemaking now checked off the Division of Trading and Markets to-do list, the Commission can move forward with actual market structure initiatives, focusing on core market structure issues such as Reg NMS, SRO status, and revisiting the 1975 Act Amendments.[6]

And one last point before I conclude.  As the debate about a possible fiduciary duty for brokers rages on, I will point out that in today’s rulemaking we are proposing to make SRO oversight of broker-dealers, a construct not present in the adviser world, more comprehensive.  Broker-dealers are overseen by the SEC, FINRA, the exchanges and the States.  And, there are about a third as many broker-dealers as advisers registered with the Commission.  The broker-dealer regulatory paradigm is incredibly comprehensive, if not suffocating.  The notion that this oversight regime pales in comparison to the Adviser’s Act fiduciary duty regime is, I believe, preposterous.



[1] Section 15(b)(8) of the Exchange Act which requires a broker-dealer to become a member of an Association unless it effects transactions solely on an exchange of which it is a member.  Section 15(b)(9) of the Exchange Act,[1] provides the Commission with authority to exempt any broker-dealer from the requirements of Section 15(b)(8), if that exemption is consistent with the public interest and the protection of investors.  Pursuant to Section 15(b)(9), the Commission adopted Rule 15b9-1, which generally provides an exemption for certain broker-dealers from the Exchange Act requirement to become a member of an Association.  Specifically, the Rule exempts a broker-dealer from the requirement to become a member of an Association if it is a member of a national securities exchange, carries no customer accounts, and has annual gross income of no more than $1,000 that is derived from securities transactions effected otherwise than on a national securities exchange of which it is a member.  However, income derived from proprietary transactions does not count toward the $1,000 de minimis allowance.

[2]  See Exchange Act Release No. 58047 (June 27, 2008), 73 Fed.Register 39182 (July 8, 2008); available at http://www.sec.gov/rules/proposed/2008/34-58047fr.pdf.  

[3] The release notes that as a consequence of this rulemaking – once adopted – that FINRA may need to reassess the structure of its fees, including its Trading Activity Fee to assure that it is fairly and equitably applied to the many firms that may join FINRA.  I agree with this position and that the SEC should do whatever is necessarily to limit the additional costs imposed upon the firms

[4] See Daniel M. Gallagher, “Statement on the Aggregate Impact of Financial Services Regulation,” (March 2, 2015); available at http://www.sec.gov/news/statement/aggregate-impact-of-financial-services-regulation.html.

[5] See Daniel M. Gallagher and Harvey L. Pitt, When rule-makers don’t follow the rules, The Washington Times (June 9, 2014); available at http://www.washingtontimes.com/news/2014/jun/9/gallagher-pitt-when-ruler-makers-dont-follow-the-r/.

[6] See e.g., Daniel M. Gallagher, “Remarks to the Georgetown University Center for Financial Markets and Policy Conference on Financial Markets Quality,” (September 16, 2014); available at http://www.sec.gov/News/Speech/Detail/Speech/1370542966151;  “Market 2012: Time for a Fresh Look at Equity Market Structure and Self-Regulation,” (October 4, 2012) (“Market Structure 2012 Speech”); available at http://www.sec.gov/News/Speech/Detail/Speech/1365171491376#.VAdXsvldXqM.

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