The Securities and Exchange Commission, bowing to pressure from exchanges that say they face greater competition than ever, is proposing to give exchanges more leeway to make quick changes in their markets. The SEC said Wednesday it would allow exchanges to institute a broader range of rule changes without getting prior SEC approval.
SEC Chairman Christopher Cox observed that “competitive decision making in the marketplace [by exchanges] is now urgent and immediate.” Nasdaq OMX and NYSE Euronext have been outspoken critics of delays associated with the SEC’s rule filing process as the fight for market share has intensified over the last year and liquidity has become somewhat easier to move around.
Robert Greifeld, CEO of Nasdaq OMX Group, issued a statement noting that “this SEC initiative allows exchanges to focus on innovation and improving the quality of U.S. capital markets, which will enhance their global competitiveness.” He also said that by “streamlining the process around certain rule changes, the SEC can focus their efforts and resources on key regulatory priorities.”
To give exchanges more headroom to compete swiftly and innovate, Cox said the SEC would soon issue interpretative guidance expanding the types of rule changes that could be submitted for immediate effectiveness.
Changes to rules governing trading systems, “copycat” rule filings based on rules approved for another self-regulatory organization, and changes relating to minor rule violations would no longer be subject to the commission’s review process. The SEC, Cox said, would also require that proposed rule changes submitted for review under the 1934 Exchange Act’s Section 19(b)(2) be published for notice in the Federal Register within 15 business days of their filing.
Erik Sirri, director of the SEC’s Division of Trading and Markets, acknowledged at the SEC’s open meeting Wednesday that increased competition among market centers made these changes necessary. “Competition is not just amongst the SROs,” he said. “It’s between the SROs and broker-dealers, and the SROs and foreign exchanges as well as with other trading venues.”
The SEC’s Office of Inspector General took the SEC to task in a March report that criticized the Commission’s delays in taking prompt action on proposed rules. That report, which examined a “judgmental sample” of filings submitted for approval, said the SEC took an average of 57 days to issue a notice of a rule filing in the fourth quarter of last year, with 53 percent of the filings (which excluded accelerated filings) taking longer than the 35-day statutory timeframe. In 2007, the SEC processed 1,143 rule changes, with more than half of them immediately effective upon filing.
The current changes are expected to increase the proportion of filings submitted for immediate effectiveness. However, Cox said, with that increase could come more abrogations of rule filings if SROs push the boundaries of what’s allowable for immediate effectiveness. The SEC currently abrogates less than one filing per year on average, with the last one voided in April.
Sirri said of the exchanges: “My expectation, my hope, is they’ll adhere to the high standards that we expect of them.”
Exceptions to the 15-day notice requirement will be allowed on a case-by-case basis. Sirri pointed out that rule filings sometimes “raise very, very deep and fundamental policy questions and we realize the decision to be made on [a] particular filing will affect many subsequent filings and the shape of competition in the field.”
The SEC’s guidance on rule changes that will be subject to immediate effectiveness is expected to impact primarily exchange filings. The Commission does not appear to be contemplating quick approval of rules that impact broker-dealers.
At a market structure conference in May, sponsored by the Securities Industry and Financial Markets Association, Robert Colby, deputy director of the SEC’s Division of Trading and Markets, observed that broker-dealers by and large do not want rule changes that affect their operations to become effective without SEC review.
At that meeting, Colby also noted that the SEC’s effort to streamline the rule-filing process could require the Commission to find new ways to issue policy statements. In the past, he said, the SEC has made significant policy decisions through the rule-filing process. Some of those decisions could be moved into Commission rules, he said.
As part of the current suite of SRO rule-filing changes, the SEC also ended the delegation of authority given to the Division of Trading and Markets to abrogate rule filings. That authority will now return to the Commission. Commissioner Paul Atkins said on Wednesday that the decision was “warranted in part because of a recent event in which an SRO rule was abrogated without the Commission’s advance knowledge.” He said Commission staff found out about the decision through press reports.
The only SRO rule abrogated by the SEC in recent months was a February NYSE Arca rule change expanding its existing “primary only” order type to allow routing and execution at any time of the day rather than during only the primary market’s opening. The SEC, when it pulled the plug on that rule in April, said the rule change raised the potential for “unfair competitive advantage that the affiliated member could have by virtue of informational or operational advantages.” Archipelago Securities, Arca’s routing broker, is an affiliate of the NYSE.
An SEC spokesperson declined to comment about this matter. An Arca spokesperson also declined to comment.
