June 28, 2024

Vanessa A. Countryman
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-1090

Re: Supplemental Information and Reopening of Comment Period for Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange” (File No. S7-02-22)

Dear Ms. Countryman:

The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG”)¹ and SIFMA² appreciate the opportunity to provide additional comments to the Securities and Exchange Commission (the “Commission” or “SEC”) on the above-referenced release (the “Reopening Release”)³ that provides supplemental information and reopens the comment period for the Commission’s January 2022 proposal to amend Rule 3b-16 and Regulation ATS (the “Proposal”).⁴

Overview

As stated in previous comment letters submitted by SIFMA AMG⁵  and SIFMA,⁶ the Proposal seeks to make a number of changes to an existing regulation that has functioned to serve its statutory purpose very well for many years, and which was carefully tailored to respond to the particularities of the activities it sought to regulate. In our view, the imprecise drafting of the Proposal, even as elaborated upon in the Reopening Release, applies a significant – and yet to be fully explained or justified – expansion of regulatory scope and obligations in a manner unrelated to an identified problem within the statutory remit of the Commission.

The Proposal would overlay a highly prescriptive regulatory framework onto a host of activities that bear little resemblance to commonly understood exchange-like activities. Without identifying a clear purpose or benefit to investors or the market, there is a significant risk of inflicting an irreparable setback to decades of advancement in improving market efficiencies and reducing operational risk through technological innovation. We therefore ask the Commission to work with market participants to craft a re-proposed rulemaking that adheres to the statutory purpose of exchange regulation set forth by Congress and tailors the regulatory regime to the specific risks posed by yet-to-be-identified systems that should be characterized as “exchanges.”

Executive Summary

The approach in our letter can be summarized as follows:

I. The Commission should move forward with a re-proposal coupled with a thorough cost-benefit analysis. The Commission should not proceed with the Proposal as currently drafted given the wide range of unrelated beneficial activities potentially captured under the Proposal and the lack of adequate cost-benefit analysis conducted with respect to such activities.

II. In any re-proposal, the Commission should explicitly clarify the scope of systems subject to Reg ATS including specific carve-outs consistent with the statutory definition of “exchange” to mitigate the risk of ambiguity for market participants. As a critical part of any future re-proposal, the Commission must fully tailor the scope to only “exchange-like” activities and provide market participants with meaningful guidance that would allow them to effectively interpret the Commission’s intended application of such re-proposal. Such re-proposal must explicitly carve out certain systems and activities from the definition of “exchange” and the application of Reg ATS. This would align with the statutory definition of “exchange” as set forth by Congress because such systems do not create a “market place” or facility that brings together purchasers and sellers of securities and do not perform the functions of an exchange as that term has been understood by market participants for nearly 100 years.7 Failure to make these conforming changes would likely result in significant harms to the efficiency and resiliency of markets and negatively impact investor outcomes.

III. Most compliance requirements applicable to Reg ATS are unworkable when applied to “communication systems.” Systems that function as “transmission pipelines” (systems lacking imposed dealers, communication parameters, aggregation of buyers or sellers, and trade-execution capabilities facing the aggregation of buyers or sellers) (“Communication Systems”) do not perform the same functions as, nor present characteristics similar to, exchanges or alternative trading systems (“ATS”). These dissimilarities make application of Reg ATS inappropriate and would likely result in impossible compliance obligations that would yield no discernable benefits to markets and investors. Application of Reg ATS to such systems would be misaligned with the policy objectives of the Proposal and leave market participants in the unreasonable position of being unable to comply with the rule in any manner.

IV. In the event the Commission moves forward with the current Proposal, even with recommended carve-outs for communication systems, it must provide at least 2 years for implementation. If the Commission finalizes the Proposal, even with explicit carve-outs for OMS, OEMS, and RFQ systems, we urge the Commission to recognize that market participants will need to make substantial changes to their current operating models and to provide a reasonable compliance date of at least two years from the effective date.

1. SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds. [↩]
2. 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). [↩]
3. Supplemental Information and Reopening of Comment Period for Amendments Regarding the Definition of “Exchange,” Exchange Act Release No. 97309 (April 14, 2023), 88 Fed. Reg. 29448 (May 5, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-05-05/pdf/2023-08544.pdf. [↩]
4. Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange” and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities, Exchange Act Release No. 94062 (Jan. 26, 2022), 87 Fed. Reg. 15496 (Mar. 18, 2022), available at https://www.govinfo.gov/content/pkg/FR-2022-03-18/pdf/2022-01975.pdf. [↩]
5. Letter from Lindsey Weber Keljo, Acting Head, and William C. Thum, Managing Director and Assistant General Counsel, SIFMA AMG, to Vanessa A. Countryman, Secretary, SEC (April 18, 2022) (“SIFMA AMG Letter I”), available at https://www.sec.gov/comments/s7-02-22/s70222-20124028-280153.pdf; letter from William C. Thum, Managing Director and Assistant General Counsel, SIFMA AMG, to Vanessa A. Countryman, Secretary, SEC (June 13, 2023) (“SIFMA AMG Letter II”), available at https://www.sec.gov/comments/s7-02-22/s70222-204000-410782.pdf. [↩]
6. Letter from Robert Toomey, Managing Director and Associate General Counsel, SIFMA, to Vanessa A. Countryman, Secretary, SEC (April 18, 2022) (“SIFMA Letter I”), available at https://www.sec.gov/comments/s7-02-22/s70222-20123991-280133.pdf; letter from Robert Toomey, Managing Director and Associate General Counsel, SIFMA, to Vanessa A. Countryman, Secretary, SEC (June 13, 2022) (“SIFMA Letter II”), available at https://www.sec.gov/comments/s7-02-22/s70222-20131150-301347.pdf; letter from Robert Toomey, Managing Director and Associate General Counsel, SIFMA, to Vanessa A. Countryman, Secretary, SEC (June 13, 2023) (“SIFMA Letter III”), available at https://www.sec.gov/comments/s7-02-22/s70222-204799-411623.pdf. [↩]