CRS Examines SEC Proposed Rules on Equity Trading Reform

The Congressional Research Service ("CRS") examined recent SEC rule proposals aimed at reforming the structure of U.S. capital markets.

The proposals relate to a best execution framework for dealers, order competition requirements, disclosure requirements for certain order executions and changes to pricing increments and transparency obligations. (See previous coverage.) In the report, the CRS described the SEC's assertions that the proposals would be (1) "leveling the playing field for different segments of equity markets, such as national securities exchanges, wholesalers, and dark pools, where trading activities take place; (2) increasing transparency on execution quality and facilitating investors' ability to compare trading venues and increase market competition; and (3) promoting competition through fair and open auctions."

The CRS noted that certain industry participants have criticized the scope and complexity of the rulemakings. On the best execution proposal, the CRS explained that opponents criticized the compliance burden associated with transitioning to a stringent framework, which would impose obligations beyond existing FINRA requirements. The CRS cited SEC Commissioner Hester M. Peirce, an opponent of the proposal, who favors an approach grounded in allowing broker-dealers to address conflicts through more fulsome diligence processes.

On the SEC's proposal on order competition, the CRS observed that critics questioned the SEC's assertion that retail investors are disadvantaged by the existing system. CRS highlighted criticism by opponents who argued that the compliance burdens and potential for expanded risk exposure create significant uncertainty as to what the holistic effects of the proposal would be, if adopted.

Public comments on the four proposals must be submitted to the SEC by March 31, 2023.