SEC expands FINRA’s jurisdiction

Most prop trading firms will have to join the U.S. Financial Industry Regulatory Authority Inc. (FINRA), and submit to its oversight, under new rules adopted by the U.S. Securities and Exchange Commission (SEC) today.

The new rules will narrow the existing exemption from self-regulatory oversight by requiring that all registered brokers have to join an SRO unless they only trade on one exchange.

Currently, firms can engage in unlimited prop trading without submitting to SRO oversight.

“Some of today’s broker-dealers continue to rely on an exemption from national securities association registration that’s older than the cell phone era. This has led to a regulatory gap whereby a number of firms that have cross-market, monthly trading volume valued in the hundreds of billions of dollars are exempt from national securities association oversight,” said SEC chair, Gary Gensler, in a release.

By shrinking that exemption, a greater share of prop trading will face SRO scrutiny, which Gensler said “will help enhance robust and consistent oversight, particularly with regard to cross-market and off-exchange oversight.”

Commissioner Mark Uyeda opposed the new rule, saying it could result in reduced liquidity, and that there’s no compelling justification for expanding FINRA’s jurisdiction.

“Given the lack of evidence supporting this mandatory extension of FINRA membership, coupled with the clear potential for the unintended negative consequence of a reduction in liquidity, I am unable to support it,” he said in a statement.

The new requirements will take effect 60 days after the final rule is published in the Federal Register. Firms will then have a year to comply.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.