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Statement at Open Meeting on Rule 15b9-1

Commissioner Kara M. Stein

March 25, 2015

First, I would like to echo my thanks to the staff who have worked hard on this release.   

Today’s proposal addresses the lack of uniform oversight of broker-dealers.[1]  Generally, a registered broker-dealer must be a member of a securities association unless it conducts its trades solely on an exchange.[2]  A securities association serves as a self-regulatory organization, or SRO, which provides important oversight and a regulatory framework to safeguard investors.  In 1976, the Commission issued a provision that provided a conditional exemption for certain exchange members from this membership requirement.[3]  

Nearly a decade later, the staff of the Commission noticed a disparity in the application of the exemption and the fact that the conditional exemption was not being used as it was intended.  Accordingly, in 2001, the Commission added a proposed rule amendment to its calendar to re-examine the exemption and propose an amendment that “would clarify that this exemption is not available for broker-dealers that are routinely engaged in a public securities market…”[4]

We take this proposed amendment up today, with some important new considerations for today’s securities markets.  Essentially, the proposal would require broker-dealers that conduct their trading away from exchanges to become members of the Financial Industry Regulatory Authority (FINRA), which is currently the only registered national securities association in the U.S.

In particular, the proposal would require broker-dealers that are engaged in proprietary trading to become members of FINRA, become subject to FINRA’s oversight, and provide trade reports to FINRA.   The proposed rule would ensure that all broker-dealers conducting their business off exchange are subject to the same rules and oversight.   Currently, certain firms, many of which employ automatic trading strategies and have become an increasingly large source of order volume, have been relying on the exemption.  It seems clear that this exemption was never intended to accommodate these firms or this activity.  The new rule would also ensure that all broker-dealers, whether operating on or off an exchange are members of an SRO. 

The rule proposal also would provide a new, narrow exemption that would be restricted to those exchange members that engage solely in hedging activity off the exchange.  However, I’m concerned that hedging is not adequately defined in the current proposal, and I look forward to receiving input from commenters on this point.

I am pleased to support this proposal, and I look forward to receiving comments.

Thank you.

[1] Brokers and dealers are subject to registration requirements and a regulatory framework to safeguard investors.  See Section 15 of the Securities Exchange Act of 1934. 

[2] Section 15(b)(8) of the Exchange Act, “No broker or dealer registered under section 15 of this title shall, during any period when it is not a member of a securities association registered with the Commission under section 15A of this title, effect any transaction in, or induce the purchase or sale of, any security (otherwise than on a national securities exchange) unless such broker or dealer and all natural persons associated with such broker or dealer meet such specified and appropriate standards with respect to training, experience, and such other qualifications as the Commission finds necessary or desirable . . . .”  Pub. L. No. 88-467, 78 Stat. 565, 572-73 (1964).

[3] See Securities Exchange Act Release No. 12160.   In 1983, the Commission amended and renumbered Rule 15b8-1, which became Rule 15b9-1, “Any broker or dealer required by Section 15(b)(8) of the Act to become a member of a registered national securities association shall be exempt from such requirement if it: (1) Is a member of a national securities exchange, (2) carries no customer accounts, and (3) has annual gross income derived from purchases and sales of securities otherwise than on a national securities exchange of which it is a member in an amount no greater than $1,000.”  17 CFR 240.15b9-1

[4] See Federal Register Vol. 66, No. 93, at 26634.

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