On November 19, 2014, the Securities and Exchange Commission (“SEC”) enacted new rules sparked by a series of major blunders over the past several years from Nasdaq OMX’s (NDAQ.O) botched handling of Facebook’s initial public offering to the shutdown of the stock market during Hurricane Sandy.1
The new rules, collectively known as Regulation Systems Compliance and Integrity or “Reg SCI” apply to certain self-regulatory organizations (“SROs”) such as registered clearing agencies, alternative trading systems (“ATS” or “dark pools”), plan processors, and exempt clearing agencies.2 These “SCI entities” are now required to establish and enforce policies and procedures to ensure that their systems are resilient and secure. Reg SCI also impacts other SEC regulations such as Regulation of Exchanges and Alternative Trading Systems (“Reg ATS”) and Regulation National Market System (“Reg NMS”).3 It is anticipated that Reg SCI will affect about a dozen large equities trading platforms.
The enactment of Reg SCI, first proposed for comment in early 2013, is the latest in a series of efforts to educate firms and investors on alternative trading platforms / dark pools and the significant investor and regulatory risk these platforms represent. The release of Michael Lewis’s book Flash Boys: A Wall Street Revolt ignited a national conversation about both high frequency trading and the dark pools in which this trading is common. Recent enforcement actions and investigations related to dark pool non-compliance have served to further instruct Risk and Compliance Departments on how to assess and mitigate risk.
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1. U.S. SEC enacts rules to protect exchanges, dark pools from glitches, Sarah N. Lynch, Reuters (Nov. 19, 2014) http://www.reuters.com/article/2014/11/19/sec-rulemaking-exchanges-idUSL2N0T91A120141119
2. See SEC’s Reg SCI at 17 CFR Parts 240, 242, and 249, Release No. 34-73639: http://www.sec.gov/rules/final/2014/34-73639.pdf
3. See SEC’s Reg NMS at 17 CFR Parts 200, 201, 230, 240, 249, and 270, Release No. 34-51808: http://www.sec.gov/rules/final/34-51808.pdf