Better Markets filed a supplemental comment letter with the Securities and Exchange Commission in response to the SEC’s proposal to amend its rule defining certain terms in the definition of an “exchange” in the Securities Exchange Act of 1934. The proposal appropriately updates the definition of “exchange” to encompass the rapidly evolving nature of electronic trading venues in the form of Communication Protocol Systems. The changes in the proposal will help the SEC’s regulatory framework keep pace with the increased use of electronic trading venues and innovations in facilitating the purchasing and selling of securities. As a result, the proposal enables the SEC to respond to the technological advances occurring in our markets. We filed a supplemental comment letter to make it clear that the Commission has the authority to adopt the proposal.
Why It Matters. Under the current regulatory framework, Communication Protocol Systems do not fall within the regulatory definition of an exchange. Nor are they subject to regulation under Regulation ATS, which exempts certain alternative trading systems (ATSs) from having to register as a national securities exchange so long as they satisfy certain conditions. Yet Communication Protocol Systems are clearly performing the same core market functions that exchanges and ATSs perform—they bring together buyers and sellers of securities on their platforms. This regulatory disparity between market participants threatens investors by allowing Communication Protocol Systems to fulfill the functions of an exchange without having to register as an exchange or comply with the requirements of Regulation ATS. The SEC’s proposal would help address this inconsistent regulatory approach by ensuring that enhanced oversight and regulation applies to Communication Protocol Systems.
What We Said. We support the SEC’s proposal to adopt a rule to ensure that entities operating as exchanges by connecting buyers and sellers of securities are subject to the requirements of the Exchange Act. Our supplemental comment letter explained that the SEC maintains the authority to adopt the proposal despite a recent Supreme Court decision. That decision held that when there is an ambiguity in a statute that an agency administers courts must independently interpret the statute and need not defer to the agency as to how the statute should be interpreted. Here, however, there is no relevant ambiguity in the statute. The Exchange Act gives the SEC the explicit authority to define, by rules and regulations, the terms in the Exchange Act’s definition of “exchange.” So the SEC has the authority to adopt a rule that defines those terms consistent with market realities.
Bottom Line. Better Markets supports the SEC’s rule proposal to amend the definition of exchange, and the SEC has the authority to adopt the rule proposal.
