SEC consults on NYSE’s proposal to remove FINRA membership requirement for registered broker-dealers

Maria Nikolova

NYSE wants to remove a requirement that a registered broker-dealer seeking to be a member organization be a member of FINRA or another national securities exchange.

The United States Securities and Exchange Commission (SEC) is inviting comments on a rule change proposed by the New York Stock Exchange LLC (NYSE).

The Exchange proposes to amend the definition of “member organization” under Rule 2 to remove a requirement that a registered broker-dealer seeking to be a member organization be a member of FINRA or another national securities exchange.

NYSE explains that the reasons behind initially requiring FINRA membership no longer exist. As it does today, and as was the case prior to 2007, the Exchange performs the necessary regulatory oversight of member organizations as outlined above. As of January 1, 2016, the Exchange began to perform certain of the market surveillance, investigation and enforcement functions that FINRA was retained to perform in 2010.

As a result of the reintegration of these various regulatory functions, the Exchange proposes to make membership more readily available to registered broker-dealers that are not FINRA members or members of another national securities exchange.

Under the proposals, the term “member organization” under Rule 2(i) would be defined as “a registered broker or dealer (unless exempt pursuant to the Securities Exchange Act of 1934) (the ‘Act’), including sole proprietors, partnerships, limited liability partnerships, corporations, and limited liability corporations, approved by the Exchange pursuant to Rule 311.”

The Exchange proposes to include a cross reference to Rule 311, which is the rule that governs formation and approval of an exchange member organization.

NYSE believes that the proposed change to the “member organization” definition can be made without any regulatory impact because member organizations will continue to be subject to a comprehensive regulatory regime regardless of whether they are a member of another SRO or not.

The Exchange stresses it did not require member organizations to also be members of FINRA prior to 2007 and only required FINRA membership as part of the combination of NASD and NYSE Regulation staff to form FINRA. The Exchange later contracted with FINRA to perform certain market surveillance, investigation and enforcement functions on behalf of the Exchange. However, since January 1, 2016, the Exchange is once again directly performing certain of those previously outsourced regulatory functions.

NYSE notes that for those member organizations that are FINRA members, they will continue to be regulated pursuant to the terms of an existing allocation plan pursuant to Rule 17d-2 of the Act between FINRA and the Exchange for compliance with common FINRA and Exchange rules. Under the oversight of the NYSE’s regulatory unit, FINRA will continue to perform certain regulatory services pursuant to the Regulatory Services Agreement, including certain membership application review services, registration, testing, and continuing education services, education and training services, examination services, surveillance and investigation services, disciplinary services, ancillary regulatory services, and audit services for the Exchange.

In line with the proposed change, Rule 2(i) would also no longer require that a member organization that conducts business on the Floor of the NYSE to be a FINRA member.

NYSE believes that the proposed rule change is set to prevent fraudulent and manipulative acts and practices because member organization will continue to be subject to a comprehensive, mature, and rigorous regulatory program, regardless of whether they are members of FINRA or another SRO.

Furthermore, NYSE notes that the proposed rule change is not without a precedent. For instance, the rules of the Cboe do not require membership in FINRA or on another SRO to be a Trading Permit Holder on Cboe. Finally, no federal securities law requires that a broker-dealer be a member of more than one national securities exchange or SRO (e.g., FINRA).

Those willing to submit a comment may do so by any of the following methods:

  • Electronic comments: Use SEC’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an e-mail to rule-comments(at)sec.gov. Please include File Number SR-NYSE- 2018-33 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-NYSE-2018-33. This file number should be included on the subject line if e-mail is used.

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