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U.S. Securities and Exchange Commission

SEC Adopts Regulation NMS and Provisions Regarding Investment Advisers Act of 1940


Washington, D.C., April 7, 2005 - On April 6, the Commission voted to adopt provisions regarding the application of the Investment Advisers Act of 1940 to certain broker-dealers. (See Advisers Act Release No. 1845, Advisers Act Release No. 2278, Advisers Act Release No. 2339, and Advisers Act Release No. 2340).

The Commission also voted to adopt Regulation NMS, which contains four interrelated proposals designed to modernize the regulatory structure of the U.S. equity markets. Regulation NMS was originally proposed for public comment in February 2004 (www.sec.gov/rules/proposed/34-49325.htm). The Commission extended the comment period and issued a supplemental release in May 2004 (www.sec.gov/rules/proposed/34-49749.htm), and reproposed a revised Regulation NMS in December 2004 (www.sec.gov/rules/proposed/34-50870.htm).

The substantive topics addressed by Regulation NMS are (1) order protection, (2) intermarket access, (3) sub-penny pricing, and (4) market data. In addition, Regulation NMS updates the existing Exchange Act rules governing the national market system, and consolidates them into a single regulation. Finally, two amendments were made to the joint industry plans for disseminating market information (Plans).

Order Protection Rule

  • Rule 611 would require trading centers to obtain the best price for investors when such price is represented by automated quotations that are immediately accessible.
  • Specifically, the rule would require trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs, and, if relying on one of the rule's exceptions, which are reasonably designed to assure compliance with the exception.
  • The rule would protect the best bids and offers of each exchange, Nasdaq, and the NASD's ADF.
  • The rule does not contain a general "opt-out" exception that would have allowed market participants to disregard displayed quotations. The elimination of any protection for manual quotations is the principal reason that this broad exception is not included in the rule being considered for adoption.
  • The rule would include a number of exceptions to help ensure that the rule is workable with high-volume stocks and relate to, among others, intermarket sweep orders, quotations displayed by markets that fail to meet the response requirements for automated quotations, and flickering quotations with multiple prices displayed in a single second.
  • The rule would not change a broker-dealer's existing duty to obtain best execution for customer orders.

Intermarket Access

  • Rule 610 would establish a uniform market access rule that would promote non-discriminatory access to quotations displayed by SRO trading centers through a private linkage approach.
  • Rule 610 also would harmonize the pricing of quotations across different trading centers by limiting the fees that any trading center could charge for accessing protected quotations or manual quotations that are at the best bid or offer, to no more than $0.003 per share (or, if the price of a protected quotation is less than $1.00, to no more than 0.3% of the quotation price per share).
  • Finally, the rule would require each SRO to establish and enforce rules that, among other things, prohibit its members from engaging in a pattern or practice of displaying quotations that lock or cross the protected quotations of other trading centers.

3. Sub-Penny Pricing

  • Rule 612 would prohibit market participants from displaying, ranking, or accepting quotations in NMS stocks that are priced in an increment of less than $0.01, unless the price of the quotation is less than $1.00. If the price of the quotation is less than $1.00, the minimum increment would be $0.0001.
  • This rule is intended to prevent sub-penny pricing from being used to "step-ahead" of customer limit orders for an economically insignificant amount which could, over time, discourage investors from placing limit orders, an important source of market liquidity.

4. Market Data

  • Regulation NMS would update the formulas for allocating revenues generated by market data fees to the various SROs to correct the flaws of the current formulas, which incent distortive behavior such as wash sales and trade shredding, and to allocate revenues to SROs that contribute to public price discovery by dividing market data revenues equally between trading and quoting activity.
  • The amendments also would require the SRO committees governing the market data consolidation systems to create advisory committees composed of non-SRO representatives to the joint industry plans. The advisory committees are intended to improve the transparency and effective operation of the plans by broadening participation in plan governance.
  • Finally, the rule would promote the wide availability of market data by authorizing markets to distribute their own data independently (while still providing their best quotations and trades for consolidated dissemination through the plans) and streamlining requirements for the display of market data to investors.

5. Implementation

  • Given the significant systems and other changes necessary to implement Rules 610 and 611, as well as the amendment to the formula that allocates revenues among the SROs, the rule would provide for extended compliance dates for these new regulatory requirements.
  • Compliance with Rules 610 and 611 would begin with a small group of representative NMS stocks, in order to allow market participants to verify the functionality of their systems and procedures necessary to effectively comply with the rules. This first phase would begin on April 10, 2006 and end on June 9, 2006. On June 12, 2006, trading centers would be required to begin trading all NMS stocks pursuant to the requirements of Rules 610 and 611.
  • The compliance date for Rule 612 would be July 1, 2005, and the compliance date for the amendment to the formula that allocates revenues among the SROs would be July 3, 2006.

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The full text of detailed releases concerning each of these items will be posted to the SEC Web site as soon as possible.


Modified: 04/07/2005