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SIFMA Comments on the SEC’s Equity Market Structure Proposals

Washington, D.C., March 31, 2023 – SIFMA today filed three comment letters with the Securities and Exchange Commission (SEC) on its equity market structure reform proposals.

Commenting on the proposals, SIFMA president and CEO Kenneth E. Bentsen, Jr., noted:

“SIFMA supports efforts to improve our markets through greater disclosure, increased transparency and greater competition but the SEC’s equity market structure proposals are far reaching and raise serious concerns.  As such we are filling individual letters on behalf of our broker-dealer and asset management members who serve tens of millions of retail and institutional clients in the equities markets.  And, because the SEC’s Reg Best Ex proposal would apply to all securities, our third letter focuses on the potential consequential impact of the proposed Reg Best Ex on the fixed-income markets.

“As a baseline matter, the SEC failed to identify a market failure that would justify the dramatic structural changes proposed, yet the proposals, individually and together, would result in fundamental changes with uncertain and consequential results. Importantly, the SEC failed to provide an analysis of cumulative and interactive effects of the four proposals.  SIFMA commissioned a study included with our comments demonstrating that the cumulative effects of the proposals likely overstate the purported benefits and likely understates the costs of its proposals.

“At the same time, there is substantial independent academic research that challenges the SEC’s asserted benefits, and in fact not only underscores the competitive nature of our current equity market structure but identifies substantive costs to investors that could result from these proposals.

“Further, it is troubling that the Commission proposes to undertake such a dramatic restructuring absent any explicit direction from Congress.  Indeed, the Congress held several hearings on equity market structure in 2021, and the House Financial Services Committee produced a report with numerous policy recommendations, but nowhere are these proposals found on that list.

“A more prudent course would be for the SEC to adopt the proposed changes to Reg NMS rule 605, which SIFMA and SIFMA AMG support with suggested recommendations, as that would provide better baseline data for the SEC and stakeholders to consider what, if any, structural changes may be necessary.”

In the comment letter on all four proposals, SIFMA said it “supports the Rule 605 Proposal to enhance disclosure of order execution information by updating Rule 605 subject to certain changes and clarifications that would improve the final rule.  Indeed, an expanded Rule 605 should be the foundation of any further rulemaking the Commission contemplates regarding equity market structure.  Once an amended Rule 605 is implemented, the Commission will have the data it needs to fully assess market quality and consider whether additional rulemaking is needed and how any such rulemaking should be designed.  As it stands now, however, SIFMA is deeply concerned that the other Proposals are likely to harm markets and create confusion for investors, particularly to the extent that all the Proposals are adopted or implemented at or around the same time.”

In the comment letter filed by SIFMA’s Asset Management Group, SIFMA AMG urges “caution in moving forward with these proposals notwithstanding the aspirational market enhancements which undoubtedly are the genesis of the Commission’s intentions. In our view, there is a natural starting point for the path forward and this begins with the Commission’s Order Execution Information proposal (the Rule 605 Proposal) to enhance disclosure of order execution information by updating Rule 605. Once an amended Rule 605 is implemented, the Commission will have better access to the data it needs to fully assess market quality and to consider whether additional rulemaking is needed and how any such rulemaking should be designed.”

In the SIFMA comment letter focused on the impact of the SEC’s best execution proposal on the fixed income markets, SIFMA notes the proposal “raises additional concerns when applied to the fixed income markets.  We do not believe that the Proposing Release adequately identifies a regulatory failure or gap that requires the Commission to adopt its own best execution rule for fixed income securities.   Specifically, in the fixed income area, broker-dealers are already subject to FINRA Rule 5310 concerning best execution, as well as FINRA Rule 2121 requiring fair prices and commissions (which has provisions specific to debt securities), FINRA Rule 2232 concerning disclosures of debt securities markups and markdowns, and FINRA Rule 2111 on suitability.  In addition, broker-dealers are subject to an entire parallel set of MSRB rules, including Rule G-18 on best execution, Rule G-19 on suitability, Rule G-30 on fair pricing and commissions, Rule G-15 on markup disclosures, for which FINRA conducts surveillance, examinations and enforcement.  In other words, broker-dealers are already subject to a full suite of rules concerning best execution and related issues.”

SIFMA’s specific comments on each proposal include:

  • Rule 605 Proposal: As the SEC notes, Rule 605 has not been substantively updated since its adoption in 2000, and equity markets have changed dramatically during this time. While SIFMA and SIFMA AMG support the SEC’s approach in the Rule 605 Proposal, it does recommend certain changes and clarifications, including requiring FINRA to produce Rule 605 reports on behalf of all broker-dealers.
  • Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders: Although SIFMA and SIFMA AMG commends the SEC’s intentions behind this proposal, as there is broad agreement that there are tick-constrained names, it believes that more careful consideration, analysis, and industry input should be gathered prior to proceeding. Any modification of the tick size for NMS stocks has significant implications for the trading of such securities, and it is critical that each of these are carefully considered and addressed to mitigate any potentially adverse or unintended consequences. SIFMA finds the tick sizes recommended in the proposal to be too granular and SIFMA sell-side proposes instead a $0.005 for select tick constrained stocks, and also supports lowering access fee caps. Both SIFMA and SIFMA AMG also support the acceleration of variable round lots and inclusion of odd-lot order information as part of consolidated market data, but has some concerns with the proposed inclusion of “best-odd lot orders” as part of consolidated market data.
  • Best Execution Proposal: SIFMA and SIFMA AMG believe that the robust FINRA and MSRB best execution rules in place today work well to ensure best execution for investors and will continue to adapt as markets evolve. Introducing an ill-fitting third best execution regime may interfere with broker-dealers’ ability to provide best execution. This proposal applies to all securities, not just equities, but does not adequately address differences in the way non-equity securities trade, as discussed in SIFMA’s fixed income best execution comment letter.  SIFMA and SIFMA AMG believe the SEC should withdraw the proposal.
  • Order Competition Rule Proposal (OCR): SIFMA and SIFMA AMG have significant concerns with this proposal and its potential to raise costs for retail investors, an outcome several independent academic studies have demonstrated. By effectively requiring most segmented orders to execute on an exchange, the OCR is inconsistent with the SEC’s role to facilitate, not to design, innovations in market structure. Rather than promote competition and protect investors and the public interest, the OCR would harm competition among trading centers and make markets less efficient and less innovative by commanding by regulatory fiat where certain orders must trade. SIFMA and SIFMA AMG believe the SEC should withdraw the proposal.

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Note to Editors:

SIFMA will host a virtual Equity Market Structure Roundtable on April 19, 2023 with academics, the buy-side, sell-side (with representatives from retail, institutional and market-making businesses), exchanges, and other interested parties who will holistically examine the impact of the SEC proposals on investors and U.S. equity market structure. The event is open to the media.  Please RSVP to Julianne Heberlein if you would like to register.

SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development.  SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

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