SEC Releases Spring Regulatory Agenda: Scorching Pace Continues; Conspicuously Absent Crypto Framework | Goodwin

On June 22, 2022, the United States Securities and Exchange Commission (“SEC” or “the Commission”) released its Spring 2022 Diary “Reg Flex”. The regulatory agenda, set out by Chairman Gary Gensler, outlines how the agency will prioritize its resources over the next six months from a policy and regulatory perspective. Moreover, the fact that the Commission will soon be complete can add new viewpoints to the mix, although this is unlikely to significantly change rule-making priorities or their outcomes (with votes likely continuing along party lines).

As expected, the agenda includes several high-level pending regulations that the Commission will vote on for adoption, including amendments to O. Reg. ATS and the definition of “exchange” in Rule 3b-16, eliminate the distinction between resellers and merchants, climate change disclosure, regulation of private fundsand cybersecurity risk governance.

The agenda also lists several new proposals, in particular with regard to digital engagement practices for broker-dealers and investment advisers, amendments to the SCI Regulation and SP Regulation to address cybersecurity disclosures by filers and modernization of the equity market structure. It also appears that the SEC will propose rules to restrict broker registration and FINRA membership exemptions (likely a relaunch of the proposed 2015 amendments to Rule 15b9-1). The agenda also includes “modernizing ATS regulations” to promote price transparency before trading.

In prepared remarks Earlier this year, Chairman Gensler gave an overview of what NMS modernization could include. He highlighted possible updates to existing rules and the creation of new rules related to: (i) minimum price increases (quotation rate); (ii) changes to what constitutes the National Best Offer (“NBBO”); (iii) updates to disclosure of order execution quality metrics (in accordance with SEC Rule 605); (iv) a stand-alone best execution rule; (v) enhance order-to-order competition for retail orders; and (vi) reconsider payment of order flow (“PFOF”), exchange discounts and associated access fees. If the Commission’s recent ambition is any guide, it would not be surprising to see proposals for regulation in all these areas. Some areas highlighted in this speech, such as a potential reduction in minimum quote size and harmonization of quote size increments across markets, accelerating the adoption of a new round lot definition in the NBBO, appropriately tailored enhancements to Rule 605 disclosures, or even better enforcement of the SEC rule could help further increase efficiency in the markets. The devil, as always, will be in the details. Other proposals, such as order-by-order competition or the reversal or outright banning of the PFOF could have significant disruptive effects on exchanges, broker-dealers and the investors who depend on them.

Notably absent from the agenda is any regulatory framework for what the SEC calls “digital asset securities.” Some might say that Rule 3b-16 and the Reseller/Merchant Proposals could be backdoor and roundabout ways to regulate aspects of digital assets and DeFi (Proposal 3b-16 contains no mention of digital asset securities, crypto, digital currency or distributed ledger technology, whereas the broker/trader proposal only mentions digital asset securities once and that is in a footnote). The absence of such a framework on the agenda (or even a concept release) is also particularly noticeable in light of recent statements by the U.S. House of Representatives Appropriations Committee, noting in regarding digital assets: “The Committee recognizes that digital assets can drive innovation in the financial services sector. New financial products require clear regulatory pathways and structures for stakeholders, developers and investors. The Committee is concerned that enforcement actions in the absence of regulatory clarity will sow confusion in the growing industry.The Committee encourages the SEC to issue public guidance that promotes US-based innovation.

In an interview with the FinancialTimes, Chairman Gensler said the SEC and the US Commodity Futures Trading Commission were discussing a formal agreement to create “a rulebook” for crypto. If the SEC agenda is any indicator, such a step would probably not happen until 2023, at the earliest (or ever). One could read the statement from the Appropriation Committee as saying, first of all Chairman Gensler: tell us what you want to do (or at least plan to do) before we allocate you many more resources.

The industry should soon expect final rules on recent proposals and a flurry of new proposals to consider over the coming months. Many industry players question the quantity and quality of recent regulations (and unusually brief public comment windows). SEC Commissioner Peirce recently pointed this out in her statement on the agenda, specifically critiquing the number, scope, extent and timing of existing and upcoming regulations. In Peirce’s view, the agenda “sets out erroneous goals and an imperfect method of achieving them” and “continues to avoid the problems at the heart of [the SEC’s] mission in favor of shiny objects outside [the agency’s] jurisdiction.”

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