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June 3, 2013

Overwhelmed

Industry Struggles to Respond to Reg SCI

By Tom Steinert-Threlkeld

The Securities and Exchange Commission’s attempt to mandate standards and testing procedures to stem the technical disruptions that have afflicted the nation’s equities exchanges since May 6, 2010, is barely out of the box—and it may be going back in.

The SEC’s effort to turn its voluntary Automation Review Policy into a mandatory set of rules, known as Regulation Systems Compliance and Integrity, is facing industry opposition to the speed at which the agency is moving.

The beef: Not enough time to digest the 377-page document published in February and to respond to the 200-plus requests for comments placed to market participants.

As of May 9, only eight comments had come in to the SEC—and only one, from technology consultancy Tellefsen & Co., offered substantive analysis. Two of the comments, from the Securities Industry and Financial Markets Association and the Financial Industry Forum, were actually requests of their own: to extend the public comment period by 90 days, from May 24 to Aug. 22.

Howard Meyerson, Liquidnet

“We believe it is critical that industry members and interested individuals have sufficient time to review and evaluate the proposal so that the Commission can have the benefit of the most thoughtful and detailed feedback possible,” SIFMA managing director and associate general counsel Theodore R. Lazo said.

Among the criticisms most widely voiced in the first weeks after the regulation was proposed by then-SEC chairman Elisse B. Walter was a lack of clear definition of what constituted materiality in the “material changes” in computer systems being made that must be reported to the agency.

There is a difficulty with “the concept of having to inform the SEC of a material change without a definition of what materiality is,” said Brad Vopni, a senior vice president of Nasdaq OMX Group at the Security Traders Association of New York conference in April.

Also at issue was how widely the regulation should be applied. As proposed, Reg SCI would apply only to “self-regulatory organizations” such as the Financial Industry Regulatory Authority, the New York Stock Exchange and other national exchanges, alternative trading systems of a certain size, the Municipal Securities Rulemaking Board and two “plan processors” that provide market data to investors. These are NYSE Euronext’s Securities Industry Automation Corporation and a unit of Nasdaq OMX Group.

“We think it will be more equitable if this rule also applied to market makers and broker-dealers that are active in the market,” said Howard Meyerson, general counsel at Liquidnet, an alternative trading system that handles anonymous trading in large blocks of shares for institutions and would be affected by the regulation.