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SEC Open Meeting

U.S. Securities and Exchange Commission

Open Meeting

Wednesday, May 6, 2020

Key Topics & Takeaways

  • New Consolidated Data Plan: In a unanimous vote, the Commission issued an order directing the equities exchanges and FINRA to submit a new NMS plan with a modernized governance structure for the production and dissemination of equity market data.

Opening Statements & Introduction

Chairman Jay Clayton

Clayton summarized the final order which would direct the registered equities exchanges and the Financial Industry Regulatory Authority (FINRA) to file with the U.S. Securities and Exchange Commission (SEC or Commission) a new, single National Market System (NMS) plan to govern the public dissemination of real-time, consolidated market data for NMS stocks. In outlining his support for the staff recommended final order, Clayton provided historical context regarding the evolution of the equity markets since the establishment of the three current Equity Data Plans approved by the Commission at various times from the 1970s to the 1990s. He continued that this evolution, combined with the substantial changes in the use of technology over the last decade, necessitated the need for the Commission to modernize the governance structure for NMS plans that distribute consolidated equity market data to market participants. He continued that the governance provisions outlined in this final order providing for voting representation of non-self-regulatory organizations (SROs) on the new NMS plan operating committee, in conjunction with the separate amendments to the existing NMS plans designed to address SRO conflicts of interest and the protection of confidential information approved by the Commission today, will help ensure the prompt, accurate, reliable and fair dissemination of consolidated market data. He concluded by thanking market participants for the substantive contributions throughout the comment period, noting that this final order will be published for notice and comment prior to Commission action, and called on the equities exchanges and FINRA to take up the task of developing a new NMS plan with vigor and urgency.

Staff Presentation: Notice of Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data

Staff:

  • Brett Redfearn, Director, Division of Trading and Markets
  • Michael Coe, Division of Trading and Markets

Redfearn summarized the proposed order and emphasized that the new consolidated data plan, which would replace the three existing equity data plans, will have a substantially different governance structure.

Like Chairman Clayton, he emphasized the changes in the equity markets since the establishment of the three current Equity Data Plans, specifically referencing technological advancements and that the exchanges are no longer member-owned non-profit organizations. He also addressed the consolidation of the exchanges, thereby allowing a small number of exchanges to wield significant control over plan matters, and the fact that the three equity NMS plans now effectively have one operating committee and one advisory committee and yet there are still three separate NMS plans for equity market data. Further, he noted the fact that full voting rights on the operating committee are granted solely to the exchanges and FINRA, a governance structure that is inadequate to respond to the public needs of the markets. He continued that the Division of Trading and Markets believes that there should be a single NMS plan for market data due to the fact that the de-mutualization of the exchanges, as well as the proliferation of proprietary exchange data products, has exacerbated the exchanges’ conflict of interest and their lack of incentive to improve the provision of core data and Security Information Processors (SIPs). He concluded by stating the SEC staff position that the timeframe outlined for the establishment of this new, single NMS plan is sufficient and that this final order reflects the original position of the SEC when they adopted Regulation NMS: that the Commission would diligently monitor market conditions and take further action when it is warranted.

Coe stated that the proposed order would do the following: 1.) require the operating committee of the new consolidated data plan to include, and provide votes to, individuals representing non-SROs, specifically individuals representing the following: an institutional investor, a broker-dealer with a predominately retail customer base, a broker-dealer with a predominately institutional investor customer base, a securities market data vendor, an issuer of NMS stock, and a retail investor. The proposed order would establish a fair and transparent nomination process for the selection of non-SRO representatives to the operating committee, stipulating that the non-SRO representatives would select the new non-SRO representatives to sit on the committee. Further, the non-SRO representatives to the committee would be allocated 1/3 of the voting power on the new consolidated data plan operating committee; 2.) stipulate that each unaffiliated SRO and affiliated exchange would be allocated one vote on the operating committee regardless of the number of exchanges licenses the entity may hold. Further, the second vote would only be provided if the unaffiliated SRO or exchange group has a market center or centers that trade at least 15 percent of the consolidated equity market share; 3.) establish that action by the operating committee, including amendment of the plan, would require an ‘augmented majority vote’, a 2/3 majority vote of all votes on the operating committee provided that this vote also includes a majority of the SRO votes; 4.) require that the administrator of the new consolidated data plan not be owned or controlled by a corporate entity that separately offers for sale a market data product; 5.) require that the new consolidated data plan set forth the specific duties of the operating committee as they relate to items such as the proposal of amendments to the plan, the selection and oversight of independent plan operators and professional service providers, as well as the development and maintenance of fair and reasonable fees for core data offerings; 6.) require policies that address the treatment of conflicts of interest for both SRO and non-SRO representatives on the operating committee while limiting the use of executive sessions to circumstances where it is appropriate to exclude non-SRO members. He specified that the final order has modified the language of the proposed order in two key areas: 1.) regarding the qualifications for individuals representing retail investors on the operating committee to ensure that they have adequate understanding of the issues facing retail investors, thereby promoting meaningful representation of the interests of retail investors and meaningful contribution to the operating committee’s work; and 2.) regarding the administrator of the plan not be owned or controlled by a corporate entity that separately offers for sale a market data product specifically related to NMS stocks. He noted that staff recommends that this order be issued within 90 days and that the existing equity data plans would continue to govern the processing and dissemination of equity market data until the new consolidated data plan is ready.

Statements

Commissioner Hester M. Peirce

Peirce noted her support for the final order as it would provide for a more transparent and appropriate governance structure. She stated that after reviewing the abundance of diverse comments received in response to the proposed order, she concluded that reforms were appropriate. She continued that taken together with the separate amendments to the existing NMS plans designed to address SRO conflicts of interest and the protection of confidential information approved by the Commission today, this final order represents a key incremental step in ensuring the improvement of the current system governing the dissemination of consolidated market data.

Commissioner Elad L. Roisman

Roisman outlined his support, noting his belief that the final order strikes a balance in acknowledging the regulatory responsibilities of the SROs in operating an NMS plan while also addressing market participants’ concerns with the current structure. He stated that this order will improve the operation of the SIPs by promoting efficiencies, mitigating conflicts, and ensuring a more diverse base of input into the plan decision making process. He emphasized the need for the Commission to engage in a comprehensive evaluation of the total effect of the reforms provided for in this order to ensure continued improvement in the provision of consolidated market data. He concluded that the Commission must be vigilant in monitoring and reacting to unintended consequences of regulatory actions and that he looks forward to continued engagement on additional equity market issues.

Commissioner Allison Herren Lee

In elaborating on her support for the final order, Lee stated that this action helps to address the deficiencies of a system in which for-profit exchanges both control, and directly compete with, the market infrastructure used to disseminate public market data. While she acknowledged her trepidation when this order was initially proposed in January, she stated that the final order sufficiently addresses her concerns and represents significant progress towards improving the public market data streams. Lee concluded that she hopes to see the proposal addressing market data infrastructure related to the content and latency of the SIPs as well as the proposal to require greater fee transparency by eliminating the “effective on filing” treatment of SIPs fee charges finalized in the near future.

Final Vote

The Commission voted unanimously in favor of the final order.

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