April 6, 2001

Proposed Rule Changes of Self-Regulatory Organizations

  • Jay Cochran

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RSP 2001-04


Proposed Rule Changes of Self-Regulatory Organizations

Stated Purpose:

The Commission seeks comments on its proposed changes to it Regulation 19(b) governing Self-Regulatory Organizations’ abilities to receive expedited treatment of certain internal rule changes from the SEC.

Summary of RSP Comment:

The Securities and Exchange Commission (SEC) has proposed to modify its Rule 19(b) implemented under the Securities Exchange Act of 1934, requiring self-regulatory organizations (or, SROs, such as the New York Stock Exchange) to file proposed rule changes with the Commission before implementing them. Under the proposed revisions, the categories of proposed rule changes that may qualify for immediate effectiveness will include trading rules (other than a trading rule that would make fundamental structural changes to the market, and that would significantly affect the protection of investors or the public interest or impose a significant burden on competition). The proposed changes may also permit the SROs to file proposed rule changes electronically.

To its credit, the SEC recognizes that the structure of securities markets is changing rapidly and that therefore it must expedite the SROs' ability to adapt their internal rules without extensive SEC oversight. Since the proposed rule only affects a few possible SRO rule changes, however, the costs and benefits of the proposed changes are likely to be minimal. In fact, less than one-fifth of all SRO rule changes (according to data supplied by the SEC) will be eligible for expedited treatment. Of this fraction, moreover, the changes will not be fundamental structural changes inasmuch as 19(b)(6) prohibits the expediting of fundamental changes.

Essentially, the rule changes the SEC is proposing will maintain the regulatory status quo, with only slight modifications. Since the SROs must still file documentation justifying any proposed changes under the new rule, and must certify that the proposed changes meet the requirements of Section 19(b)(6), the SRO preparation phase of a proposed rule change will be unchanged (and in fact may increase slightly). The SEC suggests that expediting these rule changes will generate trading efficiencies, lower transactions costs, and therefore, lead to more efficient US securities markets. It is unlikely, however, that significant innovations will result from this proposed rule change since fundamental structural changes are directly excluded from expedited consideration under the new rule.