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SEC Proposes Amendments to Close Exemption Used by High-Frequency Traders

The SEC proposed amendments that would narrow an exemption from FINRA registration for certain broker-dealers. The proposal, which primarily targets high-frequency traders, passed unanimously. Currently, broker-dealers that are members of a national security exchange, have no customer accounts, and derive no more than $1,000 per year from transactions occurring outside of exchanges in which they hold membership (though orders routed through other broker-dealers do not count towards the limit) are not required to be members of a national securities association. The SEC’s press release notes that the exemption was originally intended “to accommodate exchange specialists and other floor members that might need to conduct limited hedging or other off-exchange activities ancillary to their floor-based business.” The proposed language would make clear that the exemption only accommodates dealers trading “solely for the purpose of hedging the risks of its floor-based activities.”

Though the Commission voted unanimously to release the proposal, several commissioners expressed concerns. Commissioner Luis Aguilar noted that the SEC currently has no data on the hedging activities of floor members to use to properly define the scope the exemption. Further, he worried that “the release includes questions suggesting that the Commission may consider expanding the hedging exemption to include other, as yet unspecified, activities.” Such an expansion “would not be prudent . . . unless commenters demonstrate a legitimate need for such an expansion, and justify that need with reliable data.”

Commissioner Michael Piwowar questioned the need and appropriateness of the proposal, but supported it nonetheless for the benefit of gathering public comment. He posed his own questions regarding the need for updating the rule in response to market activity, the burdens associated with claiming the exemption, and the appropriateness of the Commission de facto requiring membership in FINRA. Lastly, Piwowar noted that the proposal is one affecting regulatory structure and not market structure, a focus that has opportunity costs for advancing issues of market structure.

Commissioner Daniel Gallagher also expressed reservations, questioning whether those firms that currently utilize the exemption are a “threat to investors or the market.” Gallagher also questioned the priorities of the Commission in focusing on the rule and argued that the SEC should not treat FINRA as “the SEC’s deputy federal regulator.”