SEC Proposes Rules to Improve Systems Compliance and Integrity (with Lofchie and Barrentine Comment)

The SEC unanimously proposed new rules to require certain key market participants to have in place comprehensive policies and procedures surrounding their technology. The SEC's proposal, which is called "Regulation SCI," would replace the current voluntary compliance program with rules whose violation may be the subject of enforcement actions.

SROs, certain alternative trading systems, plan processors, and certain exempt clearing agencies would be required to design, develop, test, maintain, and survey their key systems. The proposed rules would require them to ensure that their core technology met certain standards, to conduct business continuity testing, and to provide certain notifications in the event of systems disruptions and other events.

Lofchie and Barrentine Comment: The new rule requirement will present challenges for compliance professionals and particularly for a firm's Chief Compliance Officer, who is responsible for the creation and enforcement of reasonable supervisory procedures related to the implementation and maintenance of applicable technology and the software that operates it. While these responsibilities are far from a routine compliance skill set, Regulation SCI is a continuation of a recent trend by the SEC of placing increased responsibility on compliance with respect to policies and procedures for implementing and maintaining various types of technology. Probably the clearest expression of the SEC's views in this regard can be found in its 2011 enforcement case against several of AXA Rosenberg's registered investment advisers. (See link to Cadwalader's Client Friend's Memo below). This trend also finds expression in Exchange Act Rule 15c3-5, which requires broker-dealers that provide market access to establish and enforce risk management controls and supervisory procedures designed to ensure that both proprietary and customer transaction (i) are within credit and capital thresholds, (ii) are not erroneous, and (iii) do not violate any applicable regulatory requirements. (See link to Cadwalader's Client Friend Memo below). (See movie clip from YouTube.)

See: SEC Fact Sheet.See also: Quantitative Investment Models and Compliance Policies and Procedures: the Securities and Exchange Commission Order Involving the AXA Rosenberg Entities (Feb. 17, 2011) and The SEC Publishes Final Rule Regulating Access to Securities Markets (Nov. 15, 2010).