Senate Republicans Question SEC Proposal to Expand Reg SCI

Senate Republicans challenged the SEC to justify its proposal to expand Regulation Systems Compliance and Integrity ("Reg SCI") to include broker-dealers. (See related coverage.)

In a letter to SEC Chair Gary Gensler, the Republican Senators, including members of the Senate Finance Committee and Senate Banking Committee, argued that the SEC proposal to extend Reg SCI to an entirely different set of market participants was made "without adequately demonstrating the necessity or appropriateness of doing so, as required by the Administrative Procedure Act." The Senators argued the "rule [expansion] appears to be a regulatory solution in search of a problem and could result in significant costs and competitive distortions for a select group of market participants."

Further, the Senators argued:

• the proposal to extend Reg SCI to broker-dealers lacks justification. The Senators argued that the SEC cites no historical instances where technological issues caused market disruptions. In light of the absence of demonstrated failures, the Senators questioned the justification for imposing significant compliance costs, particularly as the competitive nature of broker-dealers and existing regulations already incentivize them to maintain system reliability without the need for SEC regulation.
• the extension of Reg SCI to broker-dealers is not tailored to their specific operations. The Senators claimed that the proposed definition of "SCI systems" was too broad and would unnecessarily "subject thousands of systems... to compliance," risking "significant costs" and the exposure of sensitive information."
• the proposal bases the extension of Reg SCI on arbitrary trading or asset thresholds, which do not accurately indicate a broker-dealer's market impact, or the risk their systems' outage poses. According to the Senators, this approach ignores the nuances of trading activities and unfairly subjects similar entities to different regulations based on quantitative metrics alone, avoiding a deeper analysis of activities or risks that might justify further regulation.

The Senators requested that the Division of Trading and Markets provide a briefing on their questions before April 30, 2024.