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Statement at Open Meeting on Rule 15b9-1

Commissioner Michael S. Piwowar

March 25, 2015

Thank you, Chair White.

As with any rulemaking, this one raises a serious threshold question:  why it is necessary and appropriate.  I am not convinced that today’s proposal clears that hurdle.  But, despite my reservations, I will be voting in favor of the Staff’s recommendation.  I believe there is value in seeking public input about the current nature and state of regulatory oversight of certain market participants and the potential for enhancements to our regulatory structure.  I hope that interested parties will provide robust comment on the proposal to help inform our decision on whether to proceed with adopting these rule amendments.  Of course, all comments are welcome; each and every one of the questions we pose should generate responses and data that will be of great benefit to us.  But I want to identify three issues on which I expect feedback will be particularly helpful. 

First, the proposal would modify the regulatory structure to account for the evolution of the markets since Rule 15b9-1 was adopted.  Please tell us whether changes in market activity translate to a need for rulemaking, especially in light of anticipated informational enhancements such as the consolidated audit trail.  Once we augment regulatory transparency, does it automatically follow that the regulatory authority of self-regulatory organizations should be expanded?

Second, as the Staff and my colleagues have described, the proposal includes an exemption for an exchange member that effects transactions off-exchange “solely” for the purpose of hedging the risks of its floor-based activities.  I am concerned that the proposal may impose too many conditions on the exemption, such that as a practical matter firms will not be able to reasonably rely upon it.  The questions we ask about possible additional burdens in connection with the exemption, such as certifications, reporting obligations, and trade-by-trade recordkeeping requirements, exacerbate my doubts.  I therefore encourage specific comment on this topic.

Third, by requiring membership in a national securities association (“Association”), we will de facto be requiring membership in FINRA, which is currently the only Association.  In the release we ask whether the proposed rule amendments would create an additional barrier to entry for a new Association.  The answer to that question is of particular interest to me, because I am concerned that further entrenchment of FINRA as the sole Association creates its own regulatory risks and distorted incentives.  The Commission does not set FINRA’s agenda, salaries, or budget, so I worry that FINRA could use the increased fee revenue that will be generated by an influx of membership pursuant to this rulemaking in a manner that would not translate to better regulatory oversight for the new members.  That would run counter to the objectives underlying the proposal, and thus undermine efforts to enhance the regulatory environment. 

Before I close, let me put this rulemaking in context.  This is a proposal about regulatory structure, not market structure.  In my many years as a market microstructure researcher, I have not seen one research paper on Rule 15b9-1 or requiring FINRA membership for proprietary trading firms, and I have never even heard it come up in a discussion of market structure.  And, since I have been a Commissioner, I have received countless suggestions for enhancing our current market structure; this rulemaking has not been on the list.  The document we are voting on today also does not articulate any link between the proposal and equity market structure.  We need to be mindful that the opportunity cost of this rulemaking is the valuable time that we could have spent on issues that are more clearly related to, and impactful on, market structure. 

I would like to join my fellow Commissioners in thanking the Staff for their work on this rulemaking.  I have no questions.

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