SEC Proposes Increase in Disclosure Requirements Regarding Dark Pools
Commentary by Steven Lofchie
The SEC voted to propose rules requiring alternative trading systems ("ATSs") that trade stocks listed on a national securities exchange ("NMS stocks") to publish detailed information about their operations. ATSs that fall under the requirements would include so-called "dark pools." Disclosures would be made on a new Form ATS-N, on which an ATS that trades NMS stocks would be required to disclose (i) the activities of the broker-dealer that operates the ATS and the broker-dealer's affiliates, and (ii) the manner in which the ATS operates, particularly its trading rules. The SEC's press release provides a useful list of the requirements of the new form.
The SEC highlighted the following aspects of the proposal:
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Public Availability of Form ATS-N. The SEC specified that Form ATS-N would be kept current and made available for public view on the SEC Web site, and that an ATS which is subject to the disclosure requirement would be required to publish a direct URL hyperlink to the relevant SEC page on its public Web site.
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SEC Review of Form ATS-N Filings. The SEC reported that the proposal would provide a process for the SEC to (i) review Form ATS-N filings for compliance with the form requirements and consistency with federal securities laws; (ii) review and declare, by order, initial filings on Form ATS-N effective or ineffective; and (iii) review and declare, by order, Form ATS-N amendments ineffective. It would also provide a process for an ATS to file amendments to Form ATS-N.
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Safeguards and Procedures Protecting Subscriber's Confidential Trading Information. The SEC stated that the proposal would amend Regulation ATS to require written safeguards and procedures to protect the confidential trading information of ATS subscribers.
In his supporting statement, Commissioner Michael S. Piwowar stressed that this proposal is not intended to be "a regime of merit review of ATS operations," but rather "is about disclosure, and disclosure alone."
Commentary
Significant rulemaking in this area was inevitable, since meaningful disciplinary actions had been brought against a number of ATSs for failing to operate their systems fairly or protect the confidentiality of their subscribers. That's why it was good to see the SEC produce a rule that reflects a consensus view and that is based, as Commissioner Piwowar pointed out, on concepts of disclosure rather than narrowly defined requirements or broad prohibitions.
Those who are interested in the operation of all financial markets and not only the equity markets will find Commissioner Aguilar's remarks to be well worth reading. The tone of his comments about ATSs is more negative than seems fair, since fully regulated exchanges have had their share of issues, too, and some of them are also struggling for survival. Still, the questions that he raises are important. Many are also relevant to fully regulated exchanges.
The somewhat heavy regulation imposed on ATSs raises another question: whether fully regulated national securities exchanges should be reined in with a somewhat lighter hand. Perhaps the SEC should expand the scope of the rules that national securities exchanges can make without SEC approval, or with post-facto review.
New regulation of ATSs reopens a broader question: whether the SEC should revisit Regulation NMS, which has disincentivized many traders from using fully regulated exchanges. That is clearly an unintended consequence, albeit one that dissenters against the adoption of the regulation anticipated.