NYSE Proposes to Drop FINRA Membership Requirement

The Securities and NYSE Commission (SEC) has published notice to solicit comments on a proposed rule change from the New York Stock NYSE LLC (NYSE) to amend Rule 2 to remove a requirement that a registered broker-dealer be a member of the Financial Industry Regulatory Authority, Inc. (FINRA) or another national securities exchange.

The NYSE believes that the reasons behind initially requiring FINRA membership no longer exist. As it does today, and as was the case prior to 2007, the NYSE performs the necessary regulatory oversight of member organizations.  In 2007, the NYSE amended Rule 2 to require FINRA membership as part of the consolidation of member firm regulatory functions of then NASD and NYSE Regulation, Inc. (NYSE Regulation) that resulted in a combined self-regulatory organization (SRO) that is now known as FINRA.  As part of that consolidation, NYSE Regulation and NASD sought to harmonize certain of their member firm rules. At that time, it was anticipated that the rule harmonization would not be completed by the time NASD and NYSE Regulation completed their combination. Therefore, the combination contemplated a transition period during which FINRA would apply to NYSE member organizations the member firm rules of the NYSE. A necessary part of this transition was for NYSE to require all NYSE member organizations to become FINRA members.  Prior to this time, FINRA membership was not a condition to become member organizations on the NYSE.

On June 14, 2010, the NYSE, NYSE Regulation, and FINRA entered into a Regulatory Services Agreement, whereby FINRA was retained to perform the market surveillance and enforcement functions that had previously been performed by the NYSE.  Pursuant to the Regulatory Services Agreement, FINRA had been performing NYSE enforcement-related regulatory services, including investigating and enforcing violations of NYSE rules, and conducting disciplinary proceedings arising out of such enforcement actions, including those relating to NYSE-only rules and against dual members and non-FINRA members.  In October 2014, the NYSE announced that, upon expiration of the current Regulatory Services Agreement on December 31, 2015, certain market surveillance, investigation and enforcement functions performed on behalf of the NYSE would be reintegrated. Accordingly, as of January 1, 2016, the NYSE 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 NYSE proposes to make membership more readily available to registered broker-dealers that are not FINRA members or members of another national securities exchange.  As proposed, the term “member organization” under Rule 2(i) would be defined as a registered broker or dealer (unless exempt pursuant to the Securities NYSE Act of 1934), including sole proprietors, partnerships, limited liability partnerships, corporations, and limited liability corporations, approved by the NYSE pursuant to Rule 311.  The NYSE believes that the proposed change to the definition of member organization 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.  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 Securities Exchange Act of 1934 (the “Act”) between FINRA and the NYSE for compliance with common FINRA and NYSE 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 NYSE.

Ultimately the NYSE believes that the proposed rule change will not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The proposed rule change is not designed to have a competitive impact and is simply intended to align the definition of “member organization” with that of its affiliates and similar definitions of other national securities exchanges, while ensuring the member organizations continue to be subject to comprehensive regulatory oversight.

Interested persons may submit written data, views, and arguments concerning the proposed rule change to the SEC, either electronically or in writing.