Legislators and Market Participants Challenge SEC's Proposed Expansion of the Term "Exchange"
Commentary by Steven Lofchie
In separate comment letters, the Investment Company Institute, SIFMA, SIFMA Asset Management Group and legislators from the House Financial Services Committee called for increased clarity on an SEC proposal to expand the definition of "exchange."
As previously covered, the SEC reopened the comment period for a proposal that would amend the statutory definition of "exchange" to include trading systems that facilitate the trading of crypto asset securities. In reopening the comment period, the SEC provided supplemental information and economic analysis as to impacts on such trading systems.
Members of the House Financial Services Committee and several trade associations provided the following feedback:
- House Financial Services Committee members: Legislators called the proposal an attempt by the SEC to "front-run Congress . . . when the House Financial Services Committee and House Agriculture Committee are actively working on legislation to establish a market structure for digital assets" (see previous coverage). The legislators stated that expanding the definition of "exchange" would "stifle innovation and harm digital asset market participants."
- ICI. ICI underscored the regulatory ambiguity in the proposal on order execution management systems ("OEMSs") and ETF portals used for the creation and redemption process. The ICI stated that it does not believe the SEC "intended OEMSs and ETF portals to generally meet the definition of ‘exchange.’" The ICI recommended the SEC provide clarity to (i) make clear that ETF portals are not "exchanges" and (ii) provide a list of non-exclusive examples of functions that would not cause an OEMS to be deemed an "exchange."
- SIFMA AMG. SIFMA AMG urged the SEC to make clear that being "non-discretionary" is "key to the definition of an ‘exchange’" and that therefore the "exchange" definition should not be applicable in instances where the user has the discretion to select (i) potential counterparties and (ii) the preferred order or response.
- SIFMA. SIFMA described the proposed amendment as one that "lacks conceptual coherence and [has] become untethered to how actual exchanges operate." SIFMA stated that the SEC failed to provide a "clear rationale" as to why a major expansion of SEA Rule 3b-16 ("Definitions") is necessary.
Commentary
The Hippocratic oath, "first do no harm," might have some relevance here. In the absence of an identified material problem, and in the face of opposition from both buy-side and sell-side, it is not easy to see the reason for the amendment. That, of course, leaves aside a fundamental question as to whether the amendment is consistent with the statute, a question that does not provide an easy "yes."
Related Articles
-
The SEC set a new comment deadline of June 13, 2023 for a proposal that would amend the statutory definition of "exchange" to include trading systems that facilitate the trading of crypto asset securities.
-
The SEC reopened the comment period for a proposal that would amend the statutory definition of "exchange" to include trading systems that facilitate the trading of crypto asset securities.
-
The SEC reopened the comment periods for proposals to (i) expand the scope of Regulation ATS and (ii) expand regulation of private fund advisers. As outlined in a notice in the Federal Register, comments for both proposals are now due by June 13, 2022.
-
The SEC proposed to (i) expand the definition of "exchange" under SEA Rule 3b-16 to include systems that only display "trading interest" (as opposed to "orders") including by use of "communication protocols"; and (ii) remove the exemption that Regulation ATS currently provides to systems that trade only government securities.