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The SEC suggests significant modifications to the procedure for selling securities.

TheSecurities and Exchange Commission (SEC) on Wednesday put up a set of regulations that would alter how securities are sold on American markets and establish new disclosures for broker-dealers and other parties looking to trade securities on behalf of ordinary investors.

The SEC approved four recommendations that would amend broker-dealers' requirements about what constitutes "best execution" of trades for retail investors, require greater disclosures regarding the handling of retail orders, and make it simpler for retail investors to get the best prices for their trades. Additionally, the agency amended a separate insider trading rule.


The four proposed rules would be open for comments through March 31 or 60 days following Federal Register publication, whichever comes first.


The proposed regulation modifications are part of the SEC's response to the "meme stocks" frenzy of 2021, in which small-time investors utilized social media to inflate the value of dormant businesses like GameStop, AMC Entertainment, and Blackberry—only to witness those stocks' values fall as quickly as they climbed. The recommendations also cover the function of intermediaries, including as wholesalers and no-fee fintech trading platforms like those provided by Robinhood.

The proposed regulations address what SEC Chair Gary Gensler has described as market-based disadvantages for individual investors caused by a lack of competition and transparency.


"Today’s markets are not as fair and competitive as possible for individual investors—everyday retail investors. This is in part because there isn’t a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges," according to Gensler in a news statement. "Further, the markets have become increasingly hidden from view, especially for individual investors. These everyday individual investors don’t have the full benefit of various market participants competing to execute their marketable orders at the best price possible."


"Thus, today’s proposal is designed to bring greater competition in the marketplace for retail market orders. I think it makes sense for the market, and for everyday individual investors, to allow the broader market to compete for their orders."


Broker-dealers route 90% of retail investors' orders through off-exchange dealers, who carry out the trades at prices that disadvantage retail investors by an estimated $1.5 billion annually, according to the SEC.


The organization suggested prohibiting off-exchange dealers from carrying out trades within. The SEC stated that these trades will instead be subject to competition in a "qualified auction" run by a "open competition trading center." According to an agency fact sheet, this new mechanism would provide retail investors with "opportunities to trade directly with individual investor orders that are mostly inaccessible to them in the current market structure."


According to a press release from the SEC, the agency also proposed Regulation Best Execution, a new rule that would establish a framework of regulations requiring broker-dealers to "establish, maintain, and enforce written policies and procedures reasonably designed to comply with the proposed best execution standard. FFurther, the proposal would require these policies and procedures to address how broker-dealers will comply with the best execution standard and how they will determine the best market and make routing or execution decisions for customer orders."


Broker-dealers are required to perform "regular and rigorous" inspections of the execution quality of customer orders under the "best execution" regulation established by the Financial Industry Regulatory Authority (FINRA).


By establishing a best execution standard for broker-dealers, the SEC rule would go beyond what is required by FINRA. According to an SEC information sheet, a broker-best dealer's execution standard would be developed, maintained, and enforced by a number of rules and processes. Broker-dealers would be required to assess best execution policies and processes at least once a year and the execution quality of their customers' transactions at least every three months. Other policies and procedures would specify what information broker-dealers who are involved in a "conflicted transaction" with a retail investor must provide.


Gail Bernstein, general counsel for the Investment Adviser Association (IAA), stated: "At its open meeting today, the SEC issued a package of extremely complicated equity market structure rule proposals under the Exchange Act that, if adopted, will change the landscape for how retail orders are quoted, priced, routed, and filled" . The IAA said it would carefully consider the proposed rule amendments but refrained from taking a position.


Separately, the SEC authorized changes to a rule that permits firms and corporate executives to plan the purchase or sale of securities ahead of time, along with specific disclosures, in order to prevent accusations of insider trading.


Corporate insiders were able to construct an affirmative defense to trade stocks without breaking insider trading laws because to Rule 10b5-1, which was originally adopted in 2000. They may plan the sales of stocks based on a predetermined contract, verbal instructions to carry out a deal in the account of the instructing person at a specific time or date, or as part of a written plan that claimed the trader was not aware of any significant nonpublic information.


The rule had been criticized because it contained flaws, such as permitting corporate insiders to conduct scheduled trades on the same day. According to an SEC fact sheet, the changes to the rule introduce new requirements, such as cooling-off periods for directors, officers, and individuals other than the issuer; new disclosures related to the issuers' insider trading policies; and new disclosures regarding executive and director compensation with regard to equity compensation awards.


The revised rule will go into effect 60 days after it is published in the Federal Register.

By fLEXI tEAM


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