Tags: SEC | regulation | integrity | trading

SEC Adopts Regulation Systems Compliance and Integrity

By    |   Thursday, 20 Nov 2014 10:55 AM

No one had the ill grace to say, "The mountain labored and brought forth a mouse" when on Wednesday the Securities and Exchange Commission (SEC) voted unanimously to issue Regulation SCI, which has been in the works at this stage of consideration for more than a year and a half.

The initials stand for "Systems Compliance and Integrity." The word "Integrity" seems redundant, since presumably if a regulated entity is compliant, either there will be some integrity built into that or society will gladly settle for compliance.

The regulation is the agency's tepid but welcome response to a pattern of glitches and scandals that has given rise to concern that the agency, whose members in staff never cease to repeat that its mission is to "protect investors, maintain fair, orderly and efficient markets and facilitate capital formation," has failed in at least two of these charges.

Perhaps the regulation is also a response to the publication of Michael Lewis' latest book, Flash Boys, which spawned a spate of congressional hearings at which legislators pointedly asked witnesses, "Are the financial markets rigged?" Critics derided the book and a coincident "60 Minutes" segment as a shallow PR stunt, but if so, it was a successful one.

A cynic might say that the new rules are designed to bring market regulation of key trading venues into the computer age by establishing a framework to require designated "SCI entities" and "SCI personnel" to establish policies and procedures to ensure that their systems and controls meet minimum standards that will eventually be established under the rule. Importantly the rule provides for massive exemptions, but the SEC fended off criticism of these by issuing a pledge the Chairman Mary Jo White will work to extend the coverage of the regulations over time.

Another criticism of the regulations is that they fall into an all-too-familiar pattern of regulators of issuing, with great fanfare, "a framework," "a plan to have a plan," along the lines of the Consolidated Audit Trail (CAT) that then-Chairman Mary Schapiro admitted had been in the works since 1980. This CAT still hasn't gotten out of the bag.

The regulations follow the pattern of the Sarbanes-Oxley Act of 2002 in requiring lots of reports, verification by qualified independent consultants and certification by senior executives that their firms are in compliance, so that they can't deny that they know what is going on, and firms are required to take "prompt corrective action" when failures occur.

During the meeting White lauded the broad sweep of the regulations when they are ultimately implemented while fellow Commissioners Luis Aguilar and Kara Stein lamented that it exempts the proprietary trading by broker-dealers, the algorithmic trading that caused the Flash Crash and all swap trading. Commissioners Daniel Gallagher and Michael Piwowar expressed relief that the final version is less burdensome and entails less litigation risk than the prior version did.

The most positive thing to say about these rules is that they will raise the visibility of the issues raised by the SEC's struggles to regulate securities markets as the Commission proceeds with a broad study of Market Structure that promises to take years. The rules provide an opportunity for forward-looking segments of the industry to establish standards ahead of this sluggish agency.

(Archived video can be found here and the press release can be found here.)

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Robert-Feinberg
No one had the ill grace to say, "The mountain labored and brought forth a mouse" when on Wednesday the Securities and Exchange Commission (SEC) voted unanimously to issue Regulation SCI, which has been in the works at this stage of consideration for more than a year and a half.
SEC, regulation, integrity, trading
558
2014-55-20
Thursday, 20 Nov 2014 10:55 AM
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