SEC Rule Amendment Impacts Proprietary Trading Firms

By Jeff Gearhart and Lisa Robinson

Financial Services Building Wealth Management

The SEC announced updates that narrow the exemptions from having to become a member of a registered national securities association. Currently, FINRA is the only registered national securities association. The amendments are focused on broker-dealer firms engaging in proprietary trading across markets, including off-member-exchange activity and off-exchange markets. Limiting the exemptions will bring more firms under FINRA oversight and, as noted by SEC Chair Gary Gensler, help enhance robust and consistent oversight. 

The gross income exemption that enabled firms to trade for their own account with other broker-dealer firms has been removed. Under the amendments, an SEC-registered broker-dealer will be required to join FINRA if it effects securities transactions other than on an exchange where it is a member, unless:

  • it is a member of a national securities exchange;
  • it carries no customer accounts; and
  • such transactions (i) result solely from orders that are routed by a national securities exchange of which the broker or dealer is a member to comply with Rule 611 of Regulation NMS or the Options Order Protection and Locked/Crossed Market Plan; or (ii) are solely for the purpose of executing the stock leg of a stock-option order.

What Your Firm Should Be Doing Now

Broker-dealers engaged in proprietary trading activities need to act now to assess the impact on their businesses. The rule changes are effective 60 days after the date of publication in the Federal Register with a compliance date 365 days afterwards. The FINRA application process itself can oftentimes be complicated and confusing.

Existing exchange members will have a framework to start but should complete a self-assessment to identify gaps from the firm’s current state vs. FINRA requirements. Below are some items to consider:

  • FINRA MAP group may consider firms that are already exchange members for expedited review via the “fast track” process. If available, this would be based on the facts and circumstances of each exchange member.  
  • Non-exchange members may be subject to standard timeframes for processing their New Member Application (NMA) with FINRA.
  • In all instances, firms should be well prepared as they submit their application to FINRA. Along with basic obligations of a broker-dealer, HFT firms seeking membership with FINRA should consider the impact to the firm’s written supervisory procedures, trade reporting, risk monitoring practices, disaster recovery and business continuity plans. Registration and licensing requirements need to be evaluated based on a firm’s trading activities. Principal licenses are required for the broker-dealer senior managers and supervisors. 
  • Existing clearing and operations functions must be evaluated to determine additional responsibilities. For example, FINRA members are required to report eligible transactions to TRACE. Key vendors will need to be engaged to coordinate any enhancements. 

Oyster’s Compliance team includes former regulators who are leading experts in the FINRA registration process, helping firms navigate the tricky application process. Oyster also has Trading and Capital Markets experts who understand this unique business and its associated regulatory requirements. Our consultants are experienced in all aspects of establishing and operating a broker-dealer as a FINRA member.  Our team will help you evaluate the impact of this rule change to your business model, complete a current state assessment and gap analysis, and support or manage the New Membership Application process. 

About The Authors
Photo of Jeff Gearhart

Jeffrey Gearhart

Jeffrey Gearhart is an intuitive, analytical leader with over 30 years of experience in banking and capital markets businesses. Prior to joining Oyster, he held senior leadership roles with The Bank of New York Mellon, including business line COO, CFO, business development and relationship management.

Photo of Lisa Robinson

Lisa Robinson

Lisa Robinson, former Senior Director of the FINRA Membership Application Program (MAP) group, brings to Oyster’s clients her expertise in Membership rules and processes, as well as guidance on policy-making decisions, program updates, and the impact of regulatory changes on all aspects of a broker-dealer operations.