Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend FINRA's Trading Activity Fee, 42404-42409 [2023-13894]
Download as PDF
<![CDATA[
42404
Federal Register / Vol. 88, No. 125 / Friday, June 30, 2023 / Notices
information collection by selecting
‘‘Currently under 30-day Review—Open
for Public Comments’’ or by using the
search function. Written comments and
recommendations for the proposed
information collection should be sent
within 30 days of publication of this
notice by July 31, 2023 to (i)
MBX.OMB.OIRA.SEC_desk_officer@
omb.eop.gov and (ii) David Bottom,
Director/Chief Information Officer,
Securities and Exchange Commission,
c/o John Pezzullo, 100 F Street NE,
Washington, DC 20549, or by sending an
email to: PRA_Mailbox@sec.gov.
Dated: June 27, 2023.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2023–13952 Filed 6–29–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97798; File No. SR–FINRA–
2023–009]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend FINRA’s
Trading Activity Fee
June 26, 2023.
ddrumheller on DSK120RN23PROD with NOTICES1
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 23,
2023, the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by FINRA. FINRA has
designated the proposed rule change as
‘‘establishing or changing a due, fee or
other charge’’ under Section
19(b)(3)(A)(ii) of the Act 3 and Rule 19b–
4(f)(2) thereunder,4 which renders the
proposal effective upon receipt of this
filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend Section
1(b) of Schedule A to the FINRA ByLaws to exempt from the Trading
Activity Fee (‘‘TAF’’) any transaction by
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
2 17
VerDate Sep<11>2014
19:33 Jun 29, 2023
Jkt 259001
a proprietary trading firm that occurs on
an exchange of which the proprietary
trading firm is a member.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
As a general matter, the most
significant sources of FINRA’s funding
are three core regulatory fees: the Gross
Income Assessment; the TAF; and the
Personnel Assessment.5 These
regulatory fees are used to substantially
fund FINRA’s regulatory activities,
including examinations, financial
monitoring, and FINRA’s policymaking,
rulemaking, and enforcement activities.6
As discussed in FINRA’s prior
Regulatory Notices, FINRA is proposing
an exemption from one of FINRA’s
regulatory fees—the TAF—for
transactions by ‘‘proprietary trading
firms,’’ which FINRA understands
would include firms currently operating
in compliance with existing SEA Rule
15b9–1 and that would be required to
become FINRA members in light of the
SEC’s proposed amendments to SEA
Rule 15b9–1, as further discussed
below.7 In this regard, FINRA proposes
to define ‘‘proprietary trading firm’’ as
a member that (i) trades exclusively its
5 See
FINRA By-Laws, Schedule A, Section 1.
Securities Exchange Act Release No. 90176
(October 14, 2020), 85 FR 66592 (October 20, 2020)
(Notice of Filing and Immediate Effectiveness of
File No. SR–FINRA–2020–032).
7 FINRA believes that proprietary trading firms
currently operating in compliance with existing
SEA Rule 15b9–1 that would join FINRA due to the
SEC’s proposed amendments to SEA Rule 15b9–1
would meet the proposed definition of ‘‘proprietary
trading firm’’ and would qualify for the proposed
exemption (assuming no changes to their business
models that would alter their eligibility), as well as
current FINRA members that meet the proposed
definition. See also infra notes 37 and 39.
6 See
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
own capital; (ii) does not have
‘‘customers,’’ which shall include any
person, other than a broker or dealer,
with whom the member engages, or
within the past six months has engaged,
in securities activities; and (iii)
conducts all trading through the firm’s
accounts by traders that are owners of,
employees of, or contractors to the firm,
or employees of an affiliate of the firm.
Under the Exchange Act, a registered
broker-dealer must become a member of
a national securities association
(currently, FINRA is the sole national
securities association) unless the brokerdealer effects transactions in securities
solely on a national securities exchange
of which it is a member.8 SEA Rule
15b9–1 provides an exemption to the
requirement that a broker-dealer become
a member of a national securities
association if the broker-dealer (i) is a
member of a national securities
exchange, (ii) carries no customer
accounts, and (iii) 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 (the $1,000 limitation is
known as the ‘‘de minimis allowance’’).9
The $1,000 gross income limitation does
not apply to income derived from
transactions for the dealer’s own
account with or through another
registered broker or dealer. Thus, for
example, income derived from over-thecounter trades through an alternative
trading system does not count toward
the $1,000 threshold. On July 29, 2022,
the SEC proposed amendments to SEA
Rule 15b9–1 to narrow the exemption
from association membership.10
As discussed in the Proposing
Release, the securities markets have
evolved dramatically since the adoption
of SEA Rule 15b9–1 and, today, the de
minimis allowance is relied upon by
proprietary trading firms that, in some
cases, engage in substantial crossexchange and off-exchange trading
activity, yet they are not subject to
FINRA oversight.11 The SEC therefore
proposed to eliminate the de minimis
allowance and instead provide that a
broker-dealer may effect transactions
otherwise than on a national securities
exchange of which it is a member in
8 15
U.S.C. 78o(b)(8).
CFR 240.15b9–1.
10 See Securities Exchange Act Release No. 95388
(July 29, 2022), 87 FR 49930 (August 12, 2022)
(‘‘Proposing Release’’). The SEC previously
proposed to amend SEA Rule 15b9–1 in 2015. See
Securities Exchange Act Release No. 74581 (March
25, 2015), 80 FR 18036 (April 2, 2015) (File No. S7–
05–15) (‘‘2015 Proposal’’).
11 See Proposing Release, supra note 10, 87 FR
49930, 49931.
9 17
E:\FR\FM\30JNN1.SGM
30JNN1
Federal Register / Vol. 88, No. 125 / Friday, June 30, 2023 / Notices
only two narrow circumstances: (i)
transactions that result solely from
orders routed by the exchange of which
the firm is a member to prevent tradethroughs consistent with Rule 611 of
Regulation NMS or the Options Order
Protection and Locked/Cross Market
Plan; and (ii) transactions that are solely
for the purpose of executing the stock
leg of a stock-option order, subject to
specified conditions.12
The SEC estimates that the proposed
amendments to SEA Rule 15b9–1 would
impact approximately 65 broker dealers
that are not currently FINRA
members.13 Thus, if adopted, the
proposed amendments to SEA Rule
15b9–1 would require additional brokerdealers to become a member of FINRA
(unless they limit their activities to the
contours of the amended exemption
from membership in a national
securities association), and such
member firms would become subject to
FINRA regulatory fees, among other
requirements.
Proprietary trading firms that
potentially could become members of
FINRA have expressed concern about
the TAF in particular. FINRA notes that
there currently are several exemptions
from the TAF, including for transactions
by floor brokers and for market making
transactions subject to Section 11(a) of
the Act.14 However, proprietary trading
firms do not function as floor brokers
and may only be registered market
makers in some, but not all, of the
securities that they trade. As a result, if
the proposed amendments to SEA Rule
15b9–1 are adopted by the SEC, those
proprietary trading firms that would
become FINRA members would be
subject to the TAF for much of their
trading activity, including transactions
on exchanges of which they are a
member. The SEC noted specifically
when proposing the amendments to
SEA Rule 15b9–1 that FINRA may want
to ‘‘evaluate its TAF to ensure that it
appropriately reflects the activities of,
and regulatory responsibilities towards,
broker-dealer proprietary trading firms
that would be required to join FINRA if
the proposed amendments to [SEA] Rule
15b9–1 are adopted.’’ 15 In light of the
Proposing Release, supra note 10.
Proposing Release, supra note 10, 87 FR
49930, 49954.
14 FINRA By-Laws, Schedule A, Section 1(b)(2)(F)
and (G).
15 See Proposing Release, supra note 10, 87 FR
49930, 49943. In the 2015 Proposal, the SEC made
a similar comment: ‘‘FINRA may need to consider
reassessing the structure of its fees, including its
Trading Activity Fee, in order to assure that it is
fairly and equitably applied to many of the [nonFINRA member firms] that, as a result of the
amendments to [SEA] Rule 15b9–1, may join
SEC’s proposed amendments to SEA
Rule 15b9–1, FINRA has considered the
application and potential impact of the
TAF to proprietary trading firms and
has concluded that it is appropriate to
provide an exemption from the TAF for
all proprietary trading firms for
transactions executed on an exchange of
which the proprietary trading firm is a
member.16 As FINRA regularly
evaluates its fees to ensure appropriate
funding for its regulatory mission,
FINRA expects to evaluate the TAF—
including with respect to proprietary
trading firms—more broadly in the
future.
FINRA has filed the proposed rule
change for immediate effectiveness.
FINRA will announce the
implementation date of the proposed
rule change in a Regulatory Notice. The
implementation date will be no earlier
than the date of adoption of the
Commission’s amendments to SEA Rule
15b9–1 eliminating the de minimis
allowance and no later than the effective
date of any such amendments.17
largely will relate to overseeing such
firms’ activity over the counter or across
exchanges.
Under the proposal, proprietary
trading firms (as defined in the
proposed rule) that are current FINRA
members would experience a reduction
in their TAF assessments to the extent
they conduct non-market making
transactions executed on exchanges of
which they are members. Proprietary
trading firms that become FINRA
members would incur a smaller TAF
assessment than they otherwise would
pay absent the proposal. Finally, FINRA
believes that the proposal is reasonable
in that the proposed exemption is clear,
simple, and cost effective for firms to
implement.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(5) of the Act,18 which
requires, among other things, that
FINRA rules provide for the equitable
allocation of reasonable dues, fees and
other charges among members and
issuers and other persons using any
facility or system that FINRA operates
or controls. FINRA believes that the
proposed TAF exemption will result in
an equitable allocation of fees to
proprietary trading firms in accord with
their activities and the regulatory
resources to oversee them with respect
to their trading activity on an exchange
of which they are a member.
FINRA believes it is reasonable to
propose this amendment in view of the
fact that regulatory costs for firms that
do not have customers are expected to
be less than the cost to oversee the
activity of firms with customers. FINRA
also believes that it is appropriate to
proceed with an exemption for
proprietary trading firms with respect to
their transactions on an exchange of
which they are a member because
FINRA anticipates that regulatory costs
Economic Impact Assessment
12 See
ddrumheller on DSK120RN23PROD with NOTICES1
13 See
VerDate Sep<11>2014
19:33 Jun 29, 2023
Jkt 259001
42405
FINRA.’’ See 2015 Proposal, supra note 10, 80 FR
18036, 18044 n.95.
16 FINRA notes that, in addition to any other
applicable FINRA fees, proprietary trading firms
would incur a TAF obligation on transactions
executed otherwise than on an exchange and on
transactions executed on an exchange of which the
firm is not a member. These transactions would be
subject to the TAF under the existing fee structure
and at existing rates.
17 See supra note 10.
18 15 U.S.C. 78o–3(b)(5).
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
1. Regulatory Need
As discussed above, the SEC is
proposing to amend SEA Rule 15b9–1 to
narrow the scope of the exemption from
FINRA membership. The proposed
amendments to SEA Rule 15b9–1, if
adopted, would generally require
proprietary trading firms to become
FINRA members if they engage in
trading otherwise than on exchanges of
which they are members.19
2. Economic Baseline
The economic baseline for FINRA’s
proposed rule change consists of the
regulatory framework under the SEC’s
proposed amendments to SEA Rule
15b9–1, if adopted, as well as FINRA’s
current TAF. In the Proposing Release,
the SEC notes that, under the amended
rule, a non-FINRA member firm that
trades equities, options or fixed income
securities off-exchange, or on exchanges
of which it is not a member, can comply
in four ways. One option is to join
FINRA. The other options are to cease
any off-exchange trading and either
trade solely upon the exchanges of
which the firm is already a member, or
join additional exchanges, or cease
trading securities altogether.20 The
discussion below briefly considers the
benefits, costs and other economic
impacts of the SEC proposed
amendments to SEA Rule 15b9–1, as
discussed by the SEC, to facilitate the
19 See
supra notes 10–12 and accompanying text.
Proposing Release, supra note 10, 87 FR
49930, 49958.
20 See
E:\FR\FM\30JNN1.SGM
30JNN1
42406
Federal Register / Vol. 88, No. 125 / Friday, June 30, 2023 / Notices
ddrumheller on DSK120RN23PROD with NOTICES1
consideration of the economic impacts
of FINRA’s proposed rule change to the
TAF.
FINRA expects that some firms that
are not currently FINRA members will
apply for FINRA membership due to the
SEC’s modifications to SEA Rule 15b9–
1, if adopted. These firms would
maintain the ability to effect securities
transactions on the same on and off
exchange venues on which they
currently effect such transactions. These
firms would incur the one-time and
ongoing costs of FINRA membership,
including the TAF and other regulatory
fees. The TAF would increase these
firms’ variable costs to trade, and the
SEC notes that this may lead certain
firms to reduce their trading both onexchange and off-exchange.21 These
firms may, however, mitigate some of
the disincentive that comes from being
liable for the TAF for trading on
exchanges by registering as market
makers.22 Membership by these firms in
FINRA would provide more stable and
uniform FINRA surveillance of offexchange and cross-exchange trading
activity than currently occurs.23
Other non-FINRA member firms may
choose to cease their off-exchange
activity rather than join FINRA. Some of
these firms may adjust their business
models to trade solely upon the
exchanges of which they are already a
member or join additional exchanges
upon which they wish to trade.
However, since these firms may
currently trade on exchanges of which
they are not members, they may also
cease trading on some of those
exchanges.24
The SEC also discusses how the
changes non-FINRA member firms make
to their business models to comply with
the proposed amendments to SEA Rule
15b9–1 may affect other activities,
including competition in the equity and
U.S. Treasury securities markets,
particularly for off-exchange liquidity
provision.25 As discussed above, nonFINRA member firms that join FINRA
may reduce trading off-exchange and
those that do not join FINRA will cease
trading off-exchange, with similar
impacts on their provision of offexchange liquidity. Non-FINRA member
firms may also reduce trading and
liquidity provision on exchanges,
21 See Proposing Release, supra note 10, 87 FR
49930, 49958–60, 49965.
22 See Proposing Release, supra note 10, 87 FR
49930, 49960, 49965.
23 See Proposing Release, supra note 10, 87 FR
49930, 49962.
24 See Proposing Release, supra note 10, 87 FR
49930, 49967.
25 See Proposing Release, supra note 10, 87 FR
49930, 49958.
VerDate Sep<11>2014
19:33 Jun 29, 2023
Jkt 259001
whether or not they join FINRA.26 A
loss in liquidity provision may impose
costs on investors in the form of higher
trading costs than they would otherwise
realize.27 However, current member
firms may increase their activity and
offset some of these impacts, both on
and off-exchange.28 The ultimate impact
on liquidity, execution quality and
trading volume for particular assets and
trading venues is generally not
determinate. Regarding the overall
provision of liquidity to financial
markets, however, the SEC argues that
the effect of the proposed rule is not
likely to be significant.29
Current FINRA members, including
proprietary trading firms, would not be
directly affected by the SEC proposal.30
However, to the extent that member
firms currently compete with nonmember firms that must become FINRA
members or change their historical
trading activities to avoid FINRA
membership, the current members may
benefit from having more uniform
regulatory requirements among
similarly situated competitors.
The SEC has estimated that there are
approximately 65 broker-dealers
registered with the Commission and
exchange members that are not FINRA
members. Each of these non-FINRA
member firms will assess the costs and
benefits of the options permitted by the
amendments the SEC may make to SEA
Rule 15b9–1. FINRA cannot determine
the number of firms that may choose to
become FINRA members or the
likelihood or magnitude of any
anticipated changes in trading behavior
because of the proposed SEC rule
amendments.31
FINRA estimates that approximately
66 member firms derive all or most of
their revenue from proprietary trading,
although not all of these firms would
meet the proposed definition of
‘‘proprietary trading firm’’ based on
their current business models.32 FINRA
26 See
Proposing Release, supra note 10, 87 FR
49930, 49959–60.
27 See Proposing Release, supra note 10, 87 FR
49930, 49959. The SEC also states that the removal
of liquidity from the market could either improve
or degrade execution quality on off-exchange
markets and reduced liquidity on exchanges can
result in higher spreads and increased liquidity. Id.
at 49960.
28 See Proposing Release, supra note 10, 87 FR
49930, 49960.
29 See supra note 28.
30 See Proposing Release, supra note 10, 87 FR
49930, 49963.
31 FINRA notes that the SEC Proposal also
discusses difficulties related to predicting changes
in trading behavior and associated competitive
impacts. See Proposing Release, supra note 10, 87
FR 49930, 49960.
32 Some of these 66 member firms may need to
adjust their business models if they seek to qualify
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
understands that, of the 66 firms that
clear their own trades, the TAF accounts
for over 85% of the regulatory fees paid
by these firms (GIA, PA and TAF).
However, most of the 66 firms do not
clear their own trades and so do not pay
TAF directly to FINRA.33 Whether these
firms conduct trades subject to TAF and
whether they reimburse their clearing
firm for the TAF, is not known to
FINRA. Overall, between 2015 and
2022, TAF as a proportion of regulatory
fees received by FINRA ranged from
41% to 56%. For the member firms that
are proprietary trading firms and
conduct trades subject to TAF, this may
be a closer approximation to the
maximum share of their regulatory fees
that would be subject to the proposed
TAF exemption.
3. Economic Impacts
FINRA is proposing to amend the
TAF to exempt all transactions by a
FINRA member proprietary trading firm
executed on an exchange of which it is
a member.34 The proposed rule change
would directly impact member
proprietary trading firms by providing
them an exemption from the TAF for
such transactions. These member
proprietary trading firms include
current FINRA members as well as those
that would join FINRA due to the SEC’s
proposed amendments to SEA Rule
15b9–1. The FINRA proposed rule
change may also impact the number of
non-member proprietary trading firms
that choose to apply for FINRA
membership rather than use one of the
other options for compliance (as
described above). All comparisons
below are relative to the baseline, and
therefore assume that SEA Rule 15b9–1
is amended as proposed and that,
notionally, firms have adjusted their
business conduct taking into account
the SEC proposed rule and market
conditions, as described above.
a. Anticipated Benefits
FINRA believes that the proposed
TAF exemption is clear and simple for
firms to implement. In addition, the
for the proposed TAF exemption. Whether these
firms would eliminate disqualifying activity, move
it into a separate entity or decline to take the TAF
exemption depends on the value of this activity and
the extent to which the loss of scale economies in
conducting the activity in a separate entity would
affect the cost.
33 See Trading Activity Fee Frequently Asked
Questions, https://www.finra.org/rules-guidance/
guidance/faqs/trading-activity-fee (‘‘Data should be
submitted as monthly aggregates at the clearing firm
level’’ A100.6).
34 As noted above, the TAF currently provides an
exemption for proprietary transactions by a member
firm effected on an exchange of which it is a
member in its capacity as a specialist or market
maker in the security on that exchange.
E:\FR\FM\30JNN1.SGM
30JNN1
Federal Register / Vol. 88, No. 125 / Friday, June 30, 2023 / Notices
ddrumheller on DSK120RN23PROD with NOTICES1
proposed TAF exemption will likely
dampen potential competitive effects
and other market impacts as
participants determine how to respond
to proprietary trading firms’ change in
trading behaviors in response to the
amendments to SEA Rule 15b9–1, while
continuing to assess fees in a manner
that is fair, reasonable, and equitably
allocated among FINRA member firms.
FINRA anticipates that, by reducing the
fees associated with FINRA
membership, the proposed TAF
exemption may result in more
proprietary trading firms joining FINRA.
FINRA membership would allow these
firms increased flexibility in where and
how they trade.
Proprietary trading firms that are
current FINRA members would
experience a reduction in their TAF
assessments to the extent they conduct
non-market making transactions
executed on exchanges of which they
are members. Under the proposed TAF
exemption, proprietary trading firms
that become FINRA members would
incur a smaller TAF assessment than
they otherwise would pay absent the
proposal. FINRA cannot determine the
number of firms for which the proposed
TAF exemption will have an impact on
their determination of whether to
become FINRA members and the
likelihood or magnitude of any
anticipated changes in trading behavior.
There is significant diversity in the
business models of proprietary trading
firms. FINRA expects that the impacts of
the exemption would depend on the
level of trading activities proprietary
trading firms conduct other than on the
exchanges of which they are members.
The impacts may also vary with the
proportion of TAF to their overall
FINRA membership costs. When TAF is
expected to be a significant component
of their membership costs, the proposed
exemption is more likely to affect the
firm’s decision to become a FINRA
member under the baseline.
b. Anticipated Costs
As discussed above, FINRA
anticipates that the proposed TAF
exception may increase the number of
proprietary trading firms that choose to
become FINRA members relative to the
baseline. The costs to these firms, like
the benefits to these firms discussed
above, are qualitatively the same as
those incurred by proprietary trading
firms that would choose to become
FINRA members absent the proposed
TAF exemption. These firms
presumably choose to become FINRA
members because the overall financial
outcome is superior to that which
would occur without joining FINRA and
VerDate Sep<11>2014
19:33 Jun 29, 2023
Jkt 259001
complying with the SEC proposed rule
by restricting their trades to exchanges
of which they are members.
4. Other Economic Effects
Effects on Trading Activities
Proprietary trading firms that are
current FINRA members may alter their
trading strategies to take advantage of
the proposed TAF exemption, which
may impact the amount and allocation
of trading activity among exchange and
off-exchange trading venues from the
baseline. Likewise, the existence of the
TAF exemption may impact non-FINRA
member firms’ decision whether to
become FINRA members, and thus also
may impact the amount and allocation
of trading activity among exchange and
off-exchange trading venues from the
baseline.
These potential changes in trading
activity of proprietary trading firms may
affect liquidity, execution quality and
trading volume on the various trading
venues. However, the extent and
direction of the effect is generally not
determinate and depends on how other
market participants, including nonproprietary trading firms, respond to
proprietary firms’ actions.35 To the
extent the TAF exemption dampens a
decrease in liquidity that may otherwise
result as trading firms adjust to the
amendments to SEA Rule 15b9–1, such
an impact could help improve outcomes
for investors seeking to trade, including
lowering transaction costs or providing
greater immediacy in trading relative to
the baseline.
Effects on Competition
FINRA members that are proprietary
trading firms may compete to provide
liquidity with other FINRA members.
Since the proposed TAF exemption is
only available for proprietary trading
firms, it could provide those firms with
a competitive advantage over other
members that engage in similar trading
activity but do not qualify as proprietary
trading firms by changing the relative
costs of trading. However, this
advantage would not be greater than
what non-FINRA member proprietary
trading firms currently experience (prior
to the potential amendments of SEA
Rule 15b9–1).
In addition, to the extent the proposed
rule change leads to more proprietary
trading firms joining FINRA, the
proposed rule change may increase
competition by having a more level
playing field in terms of the costs
associated with FINRA membership and
regulatory requirements. As discussed
35 See Proposing Release, supra note 10, 87 FR
49930, 49959.
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
42407
in the SEC Proposal, competition in
liquidity provision may be distorted by
inequalities in regulatory
requirements.36 With more uniform
regulatory requirements and oversight
due to the potential increase in FINRA
membership, proprietary trading firms
could compete more equitably to supply
liquidity both on and off-exchange.
5. Alternatives Considered
FINRA considered alternatives to the
exemption proposed in this proposed
rule change. FINRA believes that the
proposed TAF exemption is preferable
to an exemption from other types of fees
and is directly related to the impacts on
the provision of liquidity that the SEC
discusses in its proposal.
FINRA also considered other
alternative changes to the TAF,
including adjusting the overall rate of
the TAF or implementing a tiered TAF
structure based on trading activity or
providing caps. However, such
alternatives could likely be more costly
to implement for both the affected firms
and FINRA, compared to the proposed
TAF exemption. Accordingly, FINRA
believes that the simple structure in this
proposed rule change would be more
cost effective to implement. FINRA will
have more information about the total
fees paid by proprietary trading firms,
and their impact on FINRA’s regulatory
programs and fees once these firms
become FINRA members.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Following the SEC’s 2015 Proposal to
amend SEA Rule 15b9–1, FINRA
published Regulatory Notice 15–13 to
solicit comment on a proposal to
exclude from FINRA’s TAF transactions
by a proprietary trading firm on
exchanges of which the firm is a
member.37 Four comment letters were
received in response to the 2015
Notice.38 Following the SEC’s re36 See Proposing Release, supra note 10, 87 FR
49930, 49960.
37 See Regulatory Notice 15–13 (May 2015) (‘‘2015
Notice’’).
38 Letter from Mary Ann Burns, Chief Operating
Officer, FIA Principal Traders Group (‘‘FIA PTG’’),
to Marcia E. Asquith, Corporate Secretary, FINRA,
dated June 19, 2015 (‘‘FIA PTG 2015 Letter’’); Letter
from Adam Nunes, Hudson River Trading LLC
(‘‘HRT’’), to Marcia E. Asquith, Corporate Secretary,
FINRA, dated June 19, 2015 (‘‘HRT 2015 Letter’’);
Letter from Rory O’Kane, Chairman of the Board &
James Toes, President and CEO, Security Traders
Association (‘‘STA’’), to Marcia E. Asquith,
Corporate Secretary, FINRA, dated June 19, 2015
(‘‘STA Letter’’); and Letter from Theodore R. Lazo,
Managing Director and Associate General Counsel,
Securities Industry and Financial Markets
E:\FR\FM\30JNN1.SGM
Continued
30JNN1
42408
Federal Register / Vol. 88, No. 125 / Friday, June 30, 2023 / Notices
proposal of amendments to SEA Rule
15b9–1 in December 2022, FINRA reopened the comment period for
Regulatory Notice 15–13 by publishing
Regulatory Notice 22–30.39 Four
additional comment letters were
received in response to the 2022
Notice.40 A copy of both Regulatory
Notices are available on FINRA’s
website at https://www.finra.org. Copies
of the comment letters received in
response to both Regulatory Notices are
also available on FINRA’s website.
FINRA received four generally
supportive comment letters in response
to Regulatory Notice 15–13.41 All of
these commenters also suggested
expanding the proposed TAF exemption
to cover additional proprietary trades.
FINRA received three supportive 42 and
one unsupportive 43 comment letter in
response to Regulatory Notice 22–30.
ddrumheller on DSK120RN23PROD with NOTICES1
Supportive Comments
The FIA PTG 2023 Letter, HRT 2023
Letter, and Group One Letter stated that
the proposed TAF exemption would
help address the significant increase in
costs that affected firms would
otherwise face in light of the SEC’s
proposed amendments. HRT and FIA
PTG further stated that the proposed
exemption from TAF appropriately
recognizes the differences in the
activities between proprietary trading
businesses and customer businesses,
and the accompanying costs related to
regulating each type of business.44
Group One added that implementing the
proposed TAF exemption would
support the ability of proprietary trading
firms to continue to provide liquidity in
the least disruptive manner possible.45
HRT, FIA PTG, and Group One also
Association (‘‘SIFMA’’), to Marcia E. Asquith,
Corporate Secretary, FINRA, dated June 22, 2015
(‘‘SIFMA Letter’’).
39 See Regulatory Notice 22–30 (December 2022)
(‘‘2022 Notice’’).
40 Letter from Adam Nunes, Hudson River
Trading LLC, to Jennifer Piorko Mitchell, Office of
the Corporate Secretary, FINRA, dated February 13,
2023 (‘‘HRT 2023 Letter’’); Letter from Joanna
Mallers, Secretary, FIA PTG, to Jennifer Piorko
Mitchell, Office of Corporate Secretary, FINRA,
dated March 8, 2023 (‘‘FIA PTG 2023 Letter’’);
Letter from John Kinahan, Chief Executive Officer,
Group One Trading, LP (‘‘Group One’’), to Jennifer
Piorko Mitchell, Office of Corporate Secretary,
FINRA, dated March 15, 2023 (‘‘Group One Letter’’);
and Letter from University of Pittsburgh, School of
Law (‘‘Pittsburgh University’’) to Jennifer Piorko
Mitchell, Office of Corporate Secretary, FINRA,
dated March 17, 2023 (‘‘University of Pittsburgh
Letter’’).
41 See FIA PTG 2015 Letter; HRT 2015 Letter;
SIFMA Letter; and STA Letter.
42 See FIA PTG 2023 Letter; Group One Letter;
and HRT 2023 Letter.
43 See University of Pittsburgh Letter.
44 See HRT 2023 Letter, at 1–2; FIA PTG 2023
Letter.
45 See Group One Letter, at 1.
VerDate Sep<11>2014
19:33 Jun 29, 2023
Jkt 259001
asserted that implementing the TAF
exemption would achieve an equitable
allocation of fees and be in line with
FINRA’s actual cost of regulating its
members.46 SIFMA also generally
supported the proposed TAF exemption
and stated that FINRA should not assess
TAF on any principal transactions
executed on exchanges of which the
firm is a member, regardless of the type
of firm.47
Requests for Modifications
The FIA PTG 2015 Letter and SIFMA
Letter requested that the proposed TAF
exemption be broadened to include all
principal trades done on an exchange of
which a firm is a member, rather than
just trades by proprietary trading
firms.48 Similarly, STA recommended
that FINRA ‘‘reduce the TAF rates for
equity transactions by proprietary firms
on over-the-counter and exchanges of
which they are not a member.’’ 49
HRT proposed that all principal
trades executed on any exchange be
exempt from the TAF, adding that ‘‘offexchange trades, as well as Agency and
Riskless Principal trades executed on an
exchange, should continue to be
charged the TAF.’’ 50 HRT stated that, as
proposed, the TAF exemption may
discourage firms from engaging in
customer-based business 51 or,
alternatively, could result in such firms
operating multiple broker-dealers to
avoid the proprietary firm business
46 See HRT 2023 Letter; FIA PTG 2023 Letter; and
Group One Letter.
47 See SIFMA Letter, at 2.
48 Some comments also addressed the potential
restructuring of the TAF as well as issues related
to other FINRA fees. For example, STA suggested
that FINRA reduce the current TAF rate for equity
securities and, in particular, consider reducing the
rate for over-the-counter and exchange trades by
proprietary trading firms. SIFMA requested that
FINRA review its fees more broadly and provide
more transparency into how it uses and allocates
the revenues it receives from fees and other sources
of income. While these comments are not germane
to the instant proposal—which seeks to provide an
exemption from the TAF for a proprietary trading
firm for transactions on an exchange of which it is
a member—FINRA notes that it reviews its revenues
as part of its budgeting process and revises fees as
appropriate, both their application and their rates.
In this regard, on October 14, 2020, FINRA
amended various regulatory fees to increase the
revenues that FINRA, as a not-for-profit selfregulatory organization, relies upon to fund its
regulatory mission. The proposed fee increases
were designed to better align FINRA’s revenues
with its costs while preserving the existing
equitable allocation of fees among FINRA members.
See Securities Exchange Act Release No. 90176
(October 14, 2020), 85 FR 66592 (October 20, 2020)
(Notice of Filing and Immediate Effectiveness of
File No. SR–FINRA–2020–032).
49 See STA Letter, at 4.
50 See HRT 2015 Letter, at 2.
51 See supra note 50.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
incurring a TAF obligation on exempt
exchange transactions.52
As discussed above, FINRA believes
that it is appropriate to proceed with an
exemption from TAF for proprietary
trading firms with respect to their
transactions on an exchange of which
they are a member because FINRA
anticipates that regulatory costs largely
will relate to overseeing such firms’
activity over the counter or across
exchanges.
The FIA PTG 2015 Letter requested
that, should the TAF exemption be
limited to ‘‘proprietary trading firms’’ as
proposed, FINRA provide guidance
regarding the scope of the term
‘‘proprietary trading firm’’ to clarify: (i)
the scope of the term ‘‘customer’’ for
purposes of the exemption, and (ii) the
requirement that traders be owners of,
employees of, or contractors to the firm.
Specifically, the FIA PTG 2015 Letter
requested that FINRA clarify that the
criteria ‘‘does not have customers’’ only
applies to customers that are engaged in
transactions in securities that are subject
to the TAF, and not to ‘‘non-securities
transactions, fixed-income transactions,
and other businesses such as stocklending and licensing of technology.’’ 53
FIA PTG also asked that FINRA specify
what time period is relevant for
purposes of determining whether a firm
is engaged in a customer business.54
Further, FIA PTG requested that FINRA
clarify that traders or other associated
persons could be employed by an
affiliate of the firm (rather than firm
itself) without losing the ability to rely
on the proposed exemption.55 FIA PTG
asserted that such employment
arrangements are ‘‘a common structure’’
for such firms.56
In response to these comments,
FINRA is clarifying that the relevant
activities for purposes of the proposed
definition of ‘‘proprietary trading firm’’
are securities activities. The term
‘‘securities activities’’ would include
transactions in any security (including
fixed income) and also would include
securities lending transactions.
However, the term would not include
non-securities activities such as
licensing of technology or non-securities
transactions. In addition, FINRA is
modifying the definition of ‘‘proprietary
trading firm’’ to clarify that ‘‘customer’’
would include ‘‘any person, other than
a broker or dealer, with whom the
member engages, or within the past six
52 See supra note 50; see also FIA PTG 2015
Letter, at 3.
53 See FIA PTG 2015 Letter, at 4.
54 See supra note 53.
55 See supra note 53, at 5.
56 See supra note 53, at 5.
E:\FR\FM\30JNN1.SGM
30JNN1
Federal Register / Vol. 88, No. 125 / Friday, June 30, 2023 / Notices
months has engaged, in securities
activities.’’ FINRA believes that the sixmonth proposed timeframe will provide
additional clarity as to the application
of the rule as members’ businesses may
evolve over time. Thus, for example, if
a member restructures its business such
that it ceases engaging in securities
activities with customers, the member
would be able to avail itself of the
proposed proprietary trading firm
exemption after a six-month period
(assuming that the other conditions of
the exemption are met). The six-month
timeframe would be assessed on an
ongoing basis; therefore, any securities
activity with a customer would cause
the firm to be ineligible for the
exemption for six months from the time
the firm ceases to engage in such
customer activity. Finally, FINRA is
proposing to include within the scope of
‘‘proprietary trading firm’’ a firm that (in
addition to the other criteria) conducts
all trading through the firm’s accounts
by traders that are owners of, employees
of, or contractors to the firm ‘‘or
employees of an affiliate of the firm.’’
Unsupportive Comments
ddrumheller on DSK120RN23PROD with NOTICES1
Pittsburgh University stated that
proprietary trading firms engage in
significant trading in the marketplace,
which pose a substantial risk to the
market, and that there is a related cost
for FINRA to supervise and oversee
proprietary trading firm activity and
that, therefore, FINRA should apply a
TAF rate to proprietary trading firms
that is proportional to the cost of
regulating such firms.57 Pittsburgh
University also stated that ‘‘[w]hile the
cost to regulate proprietary trading firms
is less than the cost to regulate firms
which trade on behalf of customers,
proprietary trading firms should not be
entirely exempt from the TAF when
trading on an exchange on which they
are members.’’ 58
FINRA agrees that regulating
proprietary trading firm trading activity
will involve a cost. For this reason,
FINRA is not proposing to exempt
proprietary trading firms from the TAF
altogether. As discussed above, FINRA
believes it is appropriate to exempt
proprietary trading firms from the TAF
for transactions on an exchange of
57 See
University of Pittsburgh Letter, at 6.
University of Pittsburgh Letter. Pittsburgh
University added that ‘‘[t]o exempt proprietary
trading firms from TAFs would alter the balance
between the TAF and other FINRA fees that fund
FINRA’s operations, due to an increased cost in
regulation without a similar increase of resources.’’
58 See
VerDate Sep<11>2014
19:33 Jun 29, 2023
Jkt 259001
which they are a member because
FINRA anticipates that regulatory costs
largely will relate to overseeing such
firms’ activity over the counter or across
exchanges.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 59 and paragraph (f)(2) of Rule
19b–4 thereunder.60 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
FINRA–2023–009 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–FINRA–2023–009. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of
FINRA. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–FINRA–2023–009 and should be
submitted on or before July 21, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.61
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2023–13894 Filed 6–29–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97800; File No. SR–MRX–
2023–11]
Self-Regulatory Organizations; Nasdaq
MRX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the Pricing
Schedule at Options 7, Section 3
June 26, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 12,
2023, Nasdaq MRX, LLC (‘‘MRX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
61 17
59 15
U.S.C. 78s(b)(3)(A).
60 17 CFR 240.19b–4(f)(2).
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
42409
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\30JNN1.SGM
30JNN1
]]>Agencies
[Federal Register Volume 88, Number 125 (Friday, June 30, 2023)]
[Notices]
[Pages 42404-42409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13894]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97798; File No. SR-FINRA-2023-009]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend FINRA's Trading Activity Fee
June 26, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 23, 2023, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. FINRA has
designated the proposed rule change as ``establishing or changing a
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal
effective upon receipt of this filing by the Commission. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend Section 1(b) of Schedule A to the FINRA
By-Laws to exempt from the Trading Activity Fee (``TAF'') any
transaction by a proprietary trading firm that occurs on an exchange of
which the proprietary trading firm is a member.
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
As a general matter, the most significant sources of FINRA's
funding are three core regulatory fees: the Gross Income Assessment;
the TAF; and the Personnel Assessment.\5\ These regulatory fees are
used to substantially fund FINRA's regulatory activities, including
examinations, financial monitoring, and FINRA's policymaking,
rulemaking, and enforcement activities.\6\ As discussed in FINRA's
prior Regulatory Notices, FINRA is proposing an exemption from one of
FINRA's regulatory fees--the TAF--for transactions by ``proprietary
trading firms,'' which FINRA understands would include firms currently
operating in compliance with existing SEA Rule 15b9-1 and that would be
required to become FINRA members in light of the SEC's proposed
amendments to SEA Rule 15b9-1, as further discussed below.\7\ In this
regard, FINRA proposes to define ``proprietary trading firm'' as a
member that (i) trades exclusively its own capital; (ii) does not have
``customers,'' which shall include any person, other than a broker or
dealer, with whom the member engages, or within the past six months has
engaged, in securities activities; and (iii) conducts all trading
through the firm's accounts by traders that are owners of, employees
of, or contractors to the firm, or employees of an affiliate of the
firm.
---------------------------------------------------------------------------
\5\ See FINRA By-Laws, Schedule A, Section 1.
\6\ See Securities Exchange Act Release No. 90176 (October 14,
2020), 85 FR 66592 (October 20, 2020) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2020-032).
\7\ FINRA believes that proprietary trading firms currently
operating in compliance with existing SEA Rule 15b9-1 that would
join FINRA due to the SEC's proposed amendments to SEA Rule 15b9-1
would meet the proposed definition of ``proprietary trading firm''
and would qualify for the proposed exemption (assuming no changes to
their business models that would alter their eligibility), as well
as current FINRA members that meet the proposed definition. See also
infra notes 37 and 39.
---------------------------------------------------------------------------
Under the Exchange Act, a registered broker-dealer must become a
member of a national securities association (currently, FINRA is the
sole national securities association) unless the broker-dealer effects
transactions in securities solely on a national securities exchange of
which it is a member.\8\ SEA Rule 15b9-1 provides an exemption to the
requirement that a broker-dealer become a member of a national
securities association if the broker-dealer (i) is a member of a
national securities exchange, (ii) carries no customer accounts, and
(iii) 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 (the $1,000 limitation
is known as the ``de minimis allowance'').\9\ The $1,000 gross income
limitation does not apply to income derived from transactions for the
dealer's own account with or through another registered broker or
dealer. Thus, for example, income derived from over-the-counter trades
through an alternative trading system does not count toward the $1,000
threshold. On July 29, 2022, the SEC proposed amendments to SEA Rule
15b9-1 to narrow the exemption from association membership.\10\
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78o(b)(8).
\9\ 17 CFR 240.15b9-1.
\10\ See Securities Exchange Act Release No. 95388 (July 29,
2022), 87 FR 49930 (August 12, 2022) (``Proposing Release''). The
SEC previously proposed to amend SEA Rule 15b9-1 in 2015. See
Securities Exchange Act Release No. 74581 (March 25, 2015), 80 FR
18036 (April 2, 2015) (File No. S7-05-15) (``2015 Proposal'').
---------------------------------------------------------------------------
As discussed in the Proposing Release, the securities markets have
evolved dramatically since the adoption of SEA Rule 15b9-1 and, today,
the de minimis allowance is relied upon by proprietary trading firms
that, in some cases, engage in substantial cross-exchange and off-
exchange trading activity, yet they are not subject to FINRA
oversight.\11\ The SEC therefore proposed to eliminate the de minimis
allowance and instead provide that a broker-dealer may effect
transactions otherwise than on a national securities exchange of which
it is a member in
[[Page 42405]]
only two narrow circumstances: (i) transactions that result solely from
orders routed by the exchange of which the firm is a member to prevent
trade-throughs consistent with Rule 611 of Regulation NMS or the
Options Order Protection and Locked/Cross Market Plan; and (ii)
transactions that are solely for the purpose of executing the stock leg
of a stock-option order, subject to specified conditions.\12\
---------------------------------------------------------------------------
\11\ See Proposing Release, supra note 10, 87 FR 49930, 49931.
\12\ See Proposing Release, supra note 10.
---------------------------------------------------------------------------
The SEC estimates that the proposed amendments to SEA Rule 15b9-1
would impact approximately 65 broker dealers that are not currently
FINRA members.\13\ Thus, if adopted, the proposed amendments to SEA
Rule 15b9-1 would require additional broker-dealers to become a member
of FINRA (unless they limit their activities to the contours of the
amended exemption from membership in a national securities
association), and such member firms would become subject to FINRA
regulatory fees, among other requirements.
---------------------------------------------------------------------------
\13\ See Proposing Release, supra note 10, 87 FR 49930, 49954.
---------------------------------------------------------------------------
Proprietary trading firms that potentially could become members of
FINRA have expressed concern about the TAF in particular. FINRA notes
that there currently are several exemptions from the TAF, including for
transactions by floor brokers and for market making transactions
subject to Section 11(a) of the Act.\14\ However, proprietary trading
firms do not function as floor brokers and may only be registered
market makers in some, but not all, of the securities that they trade.
As a result, if the proposed amendments to SEA Rule 15b9-1 are adopted
by the SEC, those proprietary trading firms that would become FINRA
members would be subject to the TAF for much of their trading activity,
including transactions on exchanges of which they are a member. The SEC
noted specifically when proposing the amendments to SEA Rule 15b9-1
that FINRA may want to ``evaluate its TAF to ensure that it
appropriately reflects the activities of, and regulatory
responsibilities towards, broker-dealer proprietary trading firms that
would be required to join FINRA if the proposed amendments to [SEA]
Rule 15b9-1 are adopted.'' \15\ In light of the SEC's proposed
amendments to SEA Rule 15b9-1, FINRA has considered the application and
potential impact of the TAF to proprietary trading firms and has
concluded that it is appropriate to provide an exemption from the TAF
for all proprietary trading firms for transactions executed on an
exchange of which the proprietary trading firm is a member.\16\ As
FINRA regularly evaluates its fees to ensure appropriate funding for
its regulatory mission, FINRA expects to evaluate the TAF--including
with respect to proprietary trading firms--more broadly in the future.
---------------------------------------------------------------------------
\14\ FINRA By-Laws, Schedule A, Section 1(b)(2)(F) and (G).
\15\ See Proposing Release, supra note 10, 87 FR 49930, 49943.
In the 2015 Proposal, the SEC made a similar comment: ``FINRA may
need to consider reassessing the structure of its fees, including
its Trading Activity Fee, in order to assure that it is fairly and
equitably applied to many of the [non-FINRA member firms] that, as a
result of the amendments to [SEA] Rule 15b9-1, may join FINRA.'' See
2015 Proposal, supra note 10, 80 FR 18036, 18044 n.95.
\16\ FINRA notes that, in addition to any other applicable FINRA
fees, proprietary trading firms would incur a TAF obligation on
transactions executed otherwise than on an exchange and on
transactions executed on an exchange of which the firm is not a
member. These transactions would be subject to the TAF under the
existing fee structure and at existing rates.
---------------------------------------------------------------------------
FINRA has filed the proposed rule change for immediate
effectiveness. FINRA will announce the implementation date of the
proposed rule change in a Regulatory Notice. The implementation date
will be no earlier than the date of adoption of the Commission's
amendments to SEA Rule 15b9-1 eliminating the de minimis allowance and
no later than the effective date of any such amendments.\17\
---------------------------------------------------------------------------
\17\ See supra note 10.
---------------------------------------------------------------------------
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(5) of the Act,\18\ which requires, among
other things, that FINRA rules provide for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system that FINRA operates or
controls. FINRA believes that the proposed TAF exemption will result in
an equitable allocation of fees to proprietary trading firms in accord
with their activities and the regulatory resources to oversee them with
respect to their trading activity on an exchange of which they are a
member.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------
FINRA believes it is reasonable to propose this amendment in view
of the fact that regulatory costs for firms that do not have customers
are expected to be less than the cost to oversee the activity of firms
with customers. FINRA also believes that it is appropriate to proceed
with an exemption for proprietary trading firms with respect to their
transactions on an exchange of which they are a member because FINRA
anticipates that regulatory costs largely will relate to overseeing
such firms' activity over the counter or across exchanges.
Under the proposal, proprietary trading firms (as defined in the
proposed rule) that are current FINRA members would experience a
reduction in their TAF assessments to the extent they conduct non-
market making transactions executed on exchanges of which they are
members. Proprietary trading firms that become FINRA members would
incur a smaller TAF assessment than they otherwise would pay absent the
proposal. Finally, FINRA believes that the proposal is reasonable in
that the proposed exemption is clear, simple, and cost effective for
firms to implement.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
1. Regulatory Need
As discussed above, the SEC is proposing to amend SEA Rule 15b9-1
to narrow the scope of the exemption from FINRA membership. The
proposed amendments to SEA Rule 15b9-1, if adopted, would generally
require proprietary trading firms to become FINRA members if they
engage in trading otherwise than on exchanges of which they are
members.\19\
---------------------------------------------------------------------------
\19\ See supra notes 10-12 and accompanying text.
---------------------------------------------------------------------------
2. Economic Baseline
The economic baseline for FINRA's proposed rule change consists of
the regulatory framework under the SEC's proposed amendments to SEA
Rule 15b9-1, if adopted, as well as FINRA's current TAF. In the
Proposing Release, the SEC notes that, under the amended rule, a non-
FINRA member firm that trades equities, options or fixed income
securities off-exchange, or on exchanges of which it is not a member,
can comply in four ways. One option is to join FINRA. The other options
are to cease any off-exchange trading and either trade solely upon the
exchanges of which the firm is already a member, or join additional
exchanges, or cease trading securities altogether.\20\ The discussion
below briefly considers the benefits, costs and other economic impacts
of the SEC proposed amendments to SEA Rule 15b9-1, as discussed by the
SEC, to facilitate the
[[Page 42406]]
consideration of the economic impacts of FINRA's proposed rule change
to the TAF.
---------------------------------------------------------------------------
\20\ See Proposing Release, supra note 10, 87 FR 49930, 49958.
---------------------------------------------------------------------------
FINRA expects that some firms that are not currently FINRA members
will apply for FINRA membership due to the SEC's modifications to SEA
Rule 15b9-1, if adopted. These firms would maintain the ability to
effect securities transactions on the same on and off exchange venues
on which they currently effect such transactions. These firms would
incur the one-time and ongoing costs of FINRA membership, including the
TAF and other regulatory fees. The TAF would increase these firms'
variable costs to trade, and the SEC notes that this may lead certain
firms to reduce their trading both on-exchange and off-exchange.\21\
These firms may, however, mitigate some of the disincentive that comes
from being liable for the TAF for trading on exchanges by registering
as market makers.\22\ Membership by these firms in FINRA would provide
more stable and uniform FINRA surveillance of off-exchange and cross-
exchange trading activity than currently occurs.\23\
---------------------------------------------------------------------------
\21\ See Proposing Release, supra note 10, 87 FR 49930, 49958-
60, 49965.
\22\ See Proposing Release, supra note 10, 87 FR 49930, 49960,
49965.
\23\ See Proposing Release, supra note 10, 87 FR 49930, 49962.
---------------------------------------------------------------------------
Other non-FINRA member firms may choose to cease their off-exchange
activity rather than join FINRA. Some of these firms may adjust their
business models to trade solely upon the exchanges of which they are
already a member or join additional exchanges upon which they wish to
trade. However, since these firms may currently trade on exchanges of
which they are not members, they may also cease trading on some of
those exchanges.\24\
---------------------------------------------------------------------------
\24\ See Proposing Release, supra note 10, 87 FR 49930, 49967.
---------------------------------------------------------------------------
The SEC also discusses how the changes non-FINRA member firms make
to their business models to comply with the proposed amendments to SEA
Rule 15b9-1 may affect other activities, including competition in the
equity and U.S. Treasury securities markets, particularly for off-
exchange liquidity provision.\25\ As discussed above, non-FINRA member
firms that join FINRA may reduce trading off-exchange and those that do
not join FINRA will cease trading off-exchange, with similar impacts on
their provision of off-exchange liquidity. Non-FINRA member firms may
also reduce trading and liquidity provision on exchanges, whether or
not they join FINRA.\26\ A loss in liquidity provision may impose costs
on investors in the form of higher trading costs than they would
otherwise realize.\27\ However, current member firms may increase their
activity and offset some of these impacts, both on and off-
exchange.\28\ The ultimate impact on liquidity, execution quality and
trading volume for particular assets and trading venues is generally
not determinate. Regarding the overall provision of liquidity to
financial markets, however, the SEC argues that the effect of the
proposed rule is not likely to be significant.\29\
---------------------------------------------------------------------------
\25\ See Proposing Release, supra note 10, 87 FR 49930, 49958.
\26\ See Proposing Release, supra note 10, 87 FR 49930, 49959-
60.
\27\ See Proposing Release, supra note 10, 87 FR 49930, 49959.
The SEC also states that the removal of liquidity from the market
could either improve or degrade execution quality on off-exchange
markets and reduced liquidity on exchanges can result in higher
spreads and increased liquidity. Id. at 49960.
\28\ See Proposing Release, supra note 10, 87 FR 49930, 49960.
\29\ See supra note 28.
---------------------------------------------------------------------------
Current FINRA members, including proprietary trading firms, would
not be directly affected by the SEC proposal.\30\ However, to the
extent that member firms currently compete with non-member firms that
must become FINRA members or change their historical trading activities
to avoid FINRA membership, the current members may benefit from having
more uniform regulatory requirements among similarly situated
competitors.
---------------------------------------------------------------------------
\30\ See Proposing Release, supra note 10, 87 FR 49930, 49963.
---------------------------------------------------------------------------
The SEC has estimated that there are approximately 65 broker-
dealers registered with the Commission and exchange members that are
not FINRA members. Each of these non-FINRA member firms will assess the
costs and benefits of the options permitted by the amendments the SEC
may make to SEA Rule 15b9-1. FINRA cannot determine the number of firms
that may choose to become FINRA members or the likelihood or magnitude
of any anticipated changes in trading behavior because of the proposed
SEC rule amendments.\31\
---------------------------------------------------------------------------
\31\ FINRA notes that the SEC Proposal also discusses
difficulties related to predicting changes in trading behavior and
associated competitive impacts. See Proposing Release, supra note
10, 87 FR 49930, 49960.
---------------------------------------------------------------------------
FINRA estimates that approximately 66 member firms derive all or
most of their revenue from proprietary trading, although not all of
these firms would meet the proposed definition of ``proprietary trading
firm'' based on their current business models.\32\ FINRA understands
that, of the 66 firms that clear their own trades, the TAF accounts for
over 85% of the regulatory fees paid by these firms (GIA, PA and TAF).
However, most of the 66 firms do not clear their own trades and so do
not pay TAF directly to FINRA.\33\ Whether these firms conduct trades
subject to TAF and whether they reimburse their clearing firm for the
TAF, is not known to FINRA. Overall, between 2015 and 2022, TAF as a
proportion of regulatory fees received by FINRA ranged from 41% to 56%.
For the member firms that are proprietary trading firms and conduct
trades subject to TAF, this may be a closer approximation to the
maximum share of their regulatory fees that would be subject to the
proposed TAF exemption.
---------------------------------------------------------------------------
\32\ Some of these 66 member firms may need to adjust their
business models if they seek to qualify for the proposed TAF
exemption. Whether these firms would eliminate disqualifying
activity, move it into a separate entity or decline to take the TAF
exemption depends on the value of this activity and the extent to
which the loss of scale economies in conducting the activity in a
separate entity would affect the cost.
\33\ See Trading Activity Fee Frequently Asked Questions,
https://www.finra.org/rules-guidance/guidance/faqs/trading-activity-fee (``Data should be submitted as monthly aggregates at the
clearing firm level'' A100.6).
---------------------------------------------------------------------------
3. Economic Impacts
FINRA is proposing to amend the TAF to exempt all transactions by a
FINRA member proprietary trading firm executed on an exchange of which
it is a member.\34\ The proposed rule change would directly impact
member proprietary trading firms by providing them an exemption from
the TAF for such transactions. These member proprietary trading firms
include current FINRA members as well as those that would join FINRA
due to the SEC's proposed amendments to SEA Rule 15b9-1. The FINRA
proposed rule change may also impact the number of non-member
proprietary trading firms that choose to apply for FINRA membership
rather than use one of the other options for compliance (as described
above). All comparisons below are relative to the baseline, and
therefore assume that SEA Rule 15b9-1 is amended as proposed and that,
notionally, firms have adjusted their business conduct taking into
account the SEC proposed rule and market conditions, as described
above.
---------------------------------------------------------------------------
\34\ As noted above, the TAF currently provides an exemption for
proprietary transactions by a member firm effected on an exchange of
which it is a member in its capacity as a specialist or market maker
in the security on that exchange.
---------------------------------------------------------------------------
a. Anticipated Benefits
FINRA believes that the proposed TAF exemption is clear and simple
for firms to implement. In addition, the
[[Page 42407]]
proposed TAF exemption will likely dampen potential competitive effects
and other market impacts as participants determine how to respond to
proprietary trading firms' change in trading behaviors in response to
the amendments to SEA Rule 15b9-1, while continuing to assess fees in a
manner that is fair, reasonable, and equitably allocated among FINRA
member firms. FINRA anticipates that, by reducing the fees associated
with FINRA membership, the proposed TAF exemption may result in more
proprietary trading firms joining FINRA. FINRA membership would allow
these firms increased flexibility in where and how they trade.
Proprietary trading firms that are current FINRA members would
experience a reduction in their TAF assessments to the extent they
conduct non-market making transactions executed on exchanges of which
they are members. Under the proposed TAF exemption, proprietary trading
firms that become FINRA members would incur a smaller TAF assessment
than they otherwise would pay absent the proposal. FINRA cannot
determine the number of firms for which the proposed TAF exemption will
have an impact on their determination of whether to become FINRA
members and the likelihood or magnitude of any anticipated changes in
trading behavior. There is significant diversity in the business models
of proprietary trading firms. FINRA expects that the impacts of the
exemption would depend on the level of trading activities proprietary
trading firms conduct other than on the exchanges of which they are
members. The impacts may also vary with the proportion of TAF to their
overall FINRA membership costs. When TAF is expected to be a
significant component of their membership costs, the proposed exemption
is more likely to affect the firm's decision to become a FINRA member
under the baseline.
b. Anticipated Costs
As discussed above, FINRA anticipates that the proposed TAF
exception may increase the number of proprietary trading firms that
choose to become FINRA members relative to the baseline. The costs to
these firms, like the benefits to these firms discussed above, are
qualitatively the same as those incurred by proprietary trading firms
that would choose to become FINRA members absent the proposed TAF
exemption. These firms presumably choose to become FINRA members
because the overall financial outcome is superior to that which would
occur without joining FINRA and complying with the SEC proposed rule by
restricting their trades to exchanges of which they are members.
4. Other Economic Effects
Effects on Trading Activities
Proprietary trading firms that are current FINRA members may alter
their trading strategies to take advantage of the proposed TAF
exemption, which may impact the amount and allocation of trading
activity among exchange and off-exchange trading venues from the
baseline. Likewise, the existence of the TAF exemption may impact non-
FINRA member firms' decision whether to become FINRA members, and thus
also may impact the amount and allocation of trading activity among
exchange and off-exchange trading venues from the baseline.
These potential changes in trading activity of proprietary trading
firms may affect liquidity, execution quality and trading volume on the
various trading venues. However, the extent and direction of the effect
is generally not determinate and depends on how other market
participants, including non-proprietary trading firms, respond to
proprietary firms' actions.\35\ To the extent the TAF exemption dampens
a decrease in liquidity that may otherwise result as trading firms
adjust to the amendments to SEA Rule 15b9-1, such an impact could help
improve outcomes for investors seeking to trade, including lowering
transaction costs or providing greater immediacy in trading relative to
the baseline.
---------------------------------------------------------------------------
\35\ See Proposing Release, supra note 10, 87 FR 49930, 49959.
---------------------------------------------------------------------------
Effects on Competition
FINRA members that are proprietary trading firms may compete to
provide liquidity with other FINRA members. Since the proposed TAF
exemption is only available for proprietary trading firms, it could
provide those firms with a competitive advantage over other members
that engage in similar trading activity but do not qualify as
proprietary trading firms by changing the relative costs of trading.
However, this advantage would not be greater than what non-FINRA member
proprietary trading firms currently experience (prior to the potential
amendments of SEA Rule 15b9-1).
In addition, to the extent the proposed rule change leads to more
proprietary trading firms joining FINRA, the proposed rule change may
increase competition by having a more level playing field in terms of
the costs associated with FINRA membership and regulatory requirements.
As discussed in the SEC Proposal, competition in liquidity provision
may be distorted by inequalities in regulatory requirements.\36\ With
more uniform regulatory requirements and oversight due to the potential
increase in FINRA membership, proprietary trading firms could compete
more equitably to supply liquidity both on and off-exchange.
---------------------------------------------------------------------------
\36\ See Proposing Release, supra note 10, 87 FR 49930, 49960.
---------------------------------------------------------------------------
5. Alternatives Considered
FINRA considered alternatives to the exemption proposed in this
proposed rule change. FINRA believes that the proposed TAF exemption is
preferable to an exemption from other types of fees and is directly
related to the impacts on the provision of liquidity that the SEC
discusses in its proposal.
FINRA also considered other alternative changes to the TAF,
including adjusting the overall rate of the TAF or implementing a
tiered TAF structure based on trading activity or providing caps.
However, such alternatives could likely be more costly to implement for
both the affected firms and FINRA, compared to the proposed TAF
exemption. Accordingly, FINRA believes that the simple structure in
this proposed rule change would be more cost effective to implement.
FINRA will have more information about the total fees paid by
proprietary trading firms, and their impact on FINRA's regulatory
programs and fees once these firms become FINRA members.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Following the SEC's 2015 Proposal to amend SEA Rule 15b9-1, FINRA
published Regulatory Notice 15-13 to solicit comment on a proposal to
exclude from FINRA's TAF transactions by a proprietary trading firm on
exchanges of which the firm is a member.\37\ Four comment letters were
received in response to the 2015 Notice.\38\ Following the SEC's re-
[[Page 42408]]
proposal of amendments to SEA Rule 15b9-1 in December 2022, FINRA re-
opened the comment period for Regulatory Notice 15-13 by publishing
Regulatory Notice 22-30.\39\ Four additional comment letters were
received in response to the 2022 Notice.\40\ A copy of both Regulatory
Notices are available on FINRA's website at https://www.finra.org.
Copies of the comment letters received in response to both Regulatory
Notices are also available on FINRA's website.
---------------------------------------------------------------------------
\37\ See Regulatory Notice 15-13 (May 2015) (``2015 Notice'').
\38\ Letter from Mary Ann Burns, Chief Operating Officer, FIA
Principal Traders Group (``FIA PTG''), to Marcia E. Asquith,
Corporate Secretary, FINRA, dated June 19, 2015 (``FIA PTG 2015
Letter''); Letter from Adam Nunes, Hudson River Trading LLC
(``HRT''), to Marcia E. Asquith, Corporate Secretary, FINRA, dated
June 19, 2015 (``HRT 2015 Letter''); Letter from Rory O'Kane,
Chairman of the Board & James Toes, President and CEO, Security
Traders Association (``STA''), to Marcia E. Asquith, Corporate
Secretary, FINRA, dated June 19, 2015 (``STA Letter''); and Letter
from Theodore R. Lazo, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets Association
(``SIFMA''), to Marcia E. Asquith, Corporate Secretary, FINRA, dated
June 22, 2015 (``SIFMA Letter'').
\39\ See Regulatory Notice 22-30 (December 2022) (``2022
Notice'').
\40\ Letter from Adam Nunes, Hudson River Trading LLC, to
Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA,
dated February 13, 2023 (``HRT 2023 Letter''); Letter from Joanna
Mallers, Secretary, FIA PTG, to Jennifer Piorko Mitchell, Office of
Corporate Secretary, FINRA, dated March 8, 2023 (``FIA PTG 2023
Letter''); Letter from John Kinahan, Chief Executive Officer, Group
One Trading, LP (``Group One''), to Jennifer Piorko Mitchell, Office
of Corporate Secretary, FINRA, dated March 15, 2023 (``Group One
Letter''); and Letter from University of Pittsburgh, School of Law
(``Pittsburgh University'') to Jennifer Piorko Mitchell, Office of
Corporate Secretary, FINRA, dated March 17, 2023 (``University of
Pittsburgh Letter'').
---------------------------------------------------------------------------
FINRA received four generally supportive comment letters in
response to Regulatory Notice 15-13.\41\ All of these commenters also
suggested expanding the proposed TAF exemption to cover additional
proprietary trades. FINRA received three supportive \42\ and one
unsupportive \43\ comment letter in response to Regulatory Notice 22-
30.
---------------------------------------------------------------------------
\41\ See FIA PTG 2015 Letter; HRT 2015 Letter; SIFMA Letter; and
STA Letter.
\42\ See FIA PTG 2023 Letter; Group One Letter; and HRT 2023
Letter.
\43\ See University of Pittsburgh Letter.
---------------------------------------------------------------------------
Supportive Comments
The FIA PTG 2023 Letter, HRT 2023 Letter, and Group One Letter
stated that the proposed TAF exemption would help address the
significant increase in costs that affected firms would otherwise face
in light of the SEC's proposed amendments. HRT and FIA PTG further
stated that the proposed exemption from TAF appropriately recognizes
the differences in the activities between proprietary trading
businesses and customer businesses, and the accompanying costs related
to regulating each type of business.\44\ Group One added that
implementing the proposed TAF exemption would support the ability of
proprietary trading firms to continue to provide liquidity in the least
disruptive manner possible.\45\ HRT, FIA PTG, and Group One also
asserted that implementing the TAF exemption would achieve an equitable
allocation of fees and be in line with FINRA's actual cost of
regulating its members.\46\ SIFMA also generally supported the proposed
TAF exemption and stated that FINRA should not assess TAF on any
principal transactions executed on exchanges of which the firm is a
member, regardless of the type of firm.\47\
---------------------------------------------------------------------------
\44\ See HRT 2023 Letter, at 1-2; FIA PTG 2023 Letter.
\45\ See Group One Letter, at 1.
\46\ See HRT 2023 Letter; FIA PTG 2023 Letter; and Group One
Letter.
\47\ See SIFMA Letter, at 2.
---------------------------------------------------------------------------
Requests for Modifications
The FIA PTG 2015 Letter and SIFMA Letter requested that the
proposed TAF exemption be broadened to include all principal trades
done on an exchange of which a firm is a member, rather than just
trades by proprietary trading firms.\48\ Similarly, STA recommended
that FINRA ``reduce the TAF rates for equity transactions by
proprietary firms on over-the-counter and exchanges of which they are
not a member.'' \49\
---------------------------------------------------------------------------
\48\ Some comments also addressed the potential restructuring of
the TAF as well as issues related to other FINRA fees. For example,
STA suggested that FINRA reduce the current TAF rate for equity
securities and, in particular, consider reducing the rate for over-
the-counter and exchange trades by proprietary trading firms. SIFMA
requested that FINRA review its fees more broadly and provide more
transparency into how it uses and allocates the revenues it receives
from fees and other sources of income. While these comments are not
germane to the instant proposal--which seeks to provide an exemption
from the TAF for a proprietary trading firm for transactions on an
exchange of which it is a member--FINRA notes that it reviews its
revenues as part of its budgeting process and revises fees as
appropriate, both their application and their rates. In this regard,
on October 14, 2020, FINRA amended various regulatory fees to
increase the revenues that FINRA, as a not-for-profit self-
regulatory organization, relies upon to fund its regulatory mission.
The proposed fee increases were designed to better align FINRA's
revenues with its costs while preserving the existing equitable
allocation of fees among FINRA members. See Securities Exchange Act
Release No. 90176 (October 14, 2020), 85 FR 66592 (October 20, 2020)
(Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-
2020-032).
\49\ See STA Letter, at 4.
---------------------------------------------------------------------------
HRT proposed that all principal trades executed on any exchange be
exempt from the TAF, adding that ``off-exchange trades, as well as
Agency and Riskless Principal trades executed on an exchange, should
continue to be charged the TAF.'' \50\ HRT stated that, as proposed,
the TAF exemption may discourage firms from engaging in customer-based
business \51\ or, alternatively, could result in such firms operating
multiple broker-dealers to avoid the proprietary firm business
incurring a TAF obligation on exempt exchange transactions.\52\
---------------------------------------------------------------------------
\50\ See HRT 2015 Letter, at 2.
\51\ See supra note 50.
\52\ See supra note 50; see also FIA PTG 2015 Letter, at 3.
---------------------------------------------------------------------------
As discussed above, FINRA believes that it is appropriate to
proceed with an exemption from TAF for proprietary trading firms with
respect to their transactions on an exchange of which they are a member
because FINRA anticipates that regulatory costs largely will relate to
overseeing such firms' activity over the counter or across exchanges.
The FIA PTG 2015 Letter requested that, should the TAF exemption be
limited to ``proprietary trading firms'' as proposed, FINRA provide
guidance regarding the scope of the term ``proprietary trading firm''
to clarify: (i) the scope of the term ``customer'' for purposes of the
exemption, and (ii) the requirement that traders be owners of,
employees of, or contractors to the firm. Specifically, the FIA PTG
2015 Letter requested that FINRA clarify that the criteria ``does not
have customers'' only applies to customers that are engaged in
transactions in securities that are subject to the TAF, and not to
``non-securities transactions, fixed-income transactions, and other
businesses such as stock-lending and licensing of technology.'' \53\
FIA PTG also asked that FINRA specify what time period is relevant for
purposes of determining whether a firm is engaged in a customer
business.\54\ Further, FIA PTG requested that FINRA clarify that
traders or other associated persons could be employed by an affiliate
of the firm (rather than firm itself) without losing the ability to
rely on the proposed exemption.\55\ FIA PTG asserted that such
employment arrangements are ``a common structure'' for such firms.\56\
---------------------------------------------------------------------------
\53\ See FIA PTG 2015 Letter, at 4.
\54\ See supra note 53.
\55\ See supra note 53, at 5.
\56\ See supra note 53, at 5.
---------------------------------------------------------------------------
In response to these comments, FINRA is clarifying that the
relevant activities for purposes of the proposed definition of
``proprietary trading firm'' are securities activities. The term
``securities activities'' would include transactions in any security
(including fixed income) and also would include securities lending
transactions. However, the term would not include non-securities
activities such as licensing of technology or non-securities
transactions. In addition, FINRA is modifying the definition of
``proprietary trading firm'' to clarify that ``customer'' would include
``any person, other than a broker or dealer, with whom the member
engages, or within the past six
[[Page 42409]]
months has engaged, in securities activities.'' FINRA believes that the
six-month proposed timeframe will provide additional clarity as to the
application of the rule as members' businesses may evolve over time.
Thus, for example, if a member restructures its business such that it
ceases engaging in securities activities with customers, the member
would be able to avail itself of the proposed proprietary trading firm
exemption after a six-month period (assuming that the other conditions
of the exemption are met). The six-month timeframe would be assessed on
an ongoing basis; therefore, any securities activity with a customer
would cause the firm to be ineligible for the exemption for six months
from the time the firm ceases to engage in such customer activity.
Finally, FINRA is proposing to include within the scope of
``proprietary trading firm'' a firm that (in addition to the other
criteria) conducts all trading through the firm's accounts by traders
that are owners of, employees of, or contractors to the firm ``or
employees of an affiliate of the firm.''
Unsupportive Comments
Pittsburgh University stated that proprietary trading firms engage
in significant trading in the marketplace, which pose a substantial
risk to the market, and that there is a related cost for FINRA to
supervise and oversee proprietary trading firm activity and that,
therefore, FINRA should apply a TAF rate to proprietary trading firms
that is proportional to the cost of regulating such firms.\57\
Pittsburgh University also stated that ``[w]hile the cost to regulate
proprietary trading firms is less than the cost to regulate firms which
trade on behalf of customers, proprietary trading firms should not be
entirely exempt from the TAF when trading on an exchange on which they
are members.'' \58\
---------------------------------------------------------------------------
\57\ See University of Pittsburgh Letter, at 6.
\58\ See University of Pittsburgh Letter. Pittsburgh University
added that ``[t]o exempt proprietary trading firms from TAFs would
alter the balance between the TAF and other FINRA fees that fund
FINRA's operations, due to an increased cost in regulation without a
similar increase of resources.''
---------------------------------------------------------------------------
FINRA agrees that regulating proprietary trading firm trading
activity will involve a cost. For this reason, FINRA is not proposing
to exempt proprietary trading firms from the TAF altogether. As
discussed above, FINRA believes it is appropriate to exempt proprietary
trading firms from the TAF for transactions on an exchange of which
they are a member because FINRA anticipates that regulatory costs
largely will relate to overseeing such firms' activity over the counter
or across exchanges.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \59\ and paragraph (f)(2) of Rule 19b-4
thereunder.\60\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78s(b)(3)(A).
\60\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-FINRA-2023-009 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-FINRA-2023-009. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of FINRA. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-FINRA-2023-009 and should be submitted
on or before July 21, 2023.
---------------------------------------------------------------------------
\61\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\61\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2023-13894 Filed 6-29-23; 8:45 am]
BILLING CODE 8011-01-P
