At its next open meeting on December 14, 2022, the US Securities and Exchange Commission is expected to propose a series of rules and rule amendments that have the potential to fundamentally reshape the structure of the US securities markets.
- Rule 605 Disclosures: The SEC is expected to propose rule amendments to update the disclosures required by Rule 605 under Regulation NMS of the Securities Exchange Act of 1934 (Exchange Act) for order executions in national market system (NMS) stocks. The proposed amendments would expand the scope of entities subject to Rule 605, modify the information required to be reported under the rule, and change how orders are categorized for purposes of the rule. Current Rule 605 generally requires a market center that trades NMS stocks to make available to the public monthly electronic execution reports that include uniform statistical measures of execution quality.
- Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders: Proposed amendments to certain rules under Regulation NMS would adopt variable minimum pricing increments for the quoting and trading of NMS stocks, reduce access fee caps, and enhance the transparency of better priced orders.
- Order Competition Rule: The SEC is expected to propose a new rule under Regulation NMS titled the “Order Competition Rule,” which would require certain equity orders of retail investors to be exposed to competition in fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition.
- Regulation Best Execution: Proposed new rules, titled “Regulation Best Execution,” would establish a best execution standard and require detailed policies and procedures for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers as well as more robust policies and procedures for entities engaging in certain conflicted transactions with retail customers, plus related review and documentation requirements.
Although all of the market structure proposals would be significant, the Order Competition Rule and Regulation Best Execution could be the most consequential—not only from an implementation perspective, but also from a cost-benefit and economic analysis perspective.
Given the potentially expansive nature of these proposals, we would hope that the SEC provides more than the 30-day comment period it has been providing. Market participants may want to consider immediately submitting comments after the December 14 open meeting to request additional time to provide comments on any proposals. To that end, it may be worth noting to the SEC that Regulation NMS—the last major overhaul of the US securities markets—underwent a proposal, supplementation, and pre-proposal process that lasted almost a year, as reflected in the first footnote to that final rule. In addition, commenters with the operational knowledge to opine on the proposals would likely need more time in light of the upcoming holiday season.