Statement at Open Meeting on Streamlining the Review of SRO Rulemaking
Chairman Christopher Cox
U.S. Securities and Exchange Commission
June 25, 2008
The final item on our agenda is a recommendation from the Division of Trading and Markets for streamlining the review of proposed rule changes submitted by securities exchanges and other self-regulatory organizations (SROs). The Commission's work in this area is critical to protecting investors and promoting capital formation through efficient, competitive markets.
Over the past decade, our major securities markets have transformed themselves from member-owned quasi-utilities into shareholder-owned, for-profit, multi-national businesses. At the same time, technology has revolutionized securities trading so that not only are trades now measured in milliseconds but competitive decision making in the marketplace is now urgent and immediate. These changes have been good for investors and good for our markets. Intense competition continues to push down transaction execution costs. Exchanges are competing with one another to provide more products to more investors more efficiently than ever before. But exchanges today also need to be able to change their rules quickly to respond in this competitive environment to improvements in technology and trading systems. In an era of high-tech, global, and competitive exchanges, it puts an even greater premium on reviewing SRO rules in a timely manner.
We've had a number of suggestions of ways in which competition in this area might be further strengthened. Most often, market participants have urged eliminating rule processing delays. They are not alone in pointing out that we can do better. This past spring, we received some very helpful recommendations in this area from the Commission's own Office of the Inspector General. In particular, the IG recommended that the Commission should improve its overall timeliness in processing proposed rule changes. For example, the IG examined an audit sample of proposed rules processed during the fourth quarter of 2007. The IG found that, on average, it took the Commission 57 days to issue a notice of a rule filing submitted pursuant to Section 19(b)(2) of the Exchange Act. The IG also identified two proposed rule changes where the Commission took more than five months and more than eight months to publish notices. The IG also analyzed an audit sample of rule filings that had been open for more than a year. The IG found that, on average, these rule filings had been open for well over two years, with the longest having been open for four years.
We can indeed do better. The Exchange Act sets out clear guidelines for the Commission's conduct in this area. For example, for a proposed rule change submitted for Commission review under Section 19(b)(2), the Commission is required to approve it, or institute proceedings to disapprove it, within 35 days of its publication. This 35-day deadline can be extended for up to 90 days in certain cases. For notices of proposed rule changes, the Exchange Act requires that, "The Commission shall, upon the filing of any proposed rule change, publish notice thereof." While reasonable minds might differ as to the proper meaning of "publish … upon the filing of", the IG has recommended establishing a goal, such as 30 days, for issuing notices of proposed rule changes.
I am pleased to announce that the staff has recommended that the Commission take aggressive action in this regard. The staff has recommended that the Commission amend its internal rules of procedure to require that any proposed rule change submitted for review under Section 19(b)(2) be published within 15 business days of having been filed by an SRO. In the rare instance where a rules change raises unusually complex or novel issues, the Director of the Division of Trading and Markets would be able to personally make exceptions to this 15-day requirement. This authority could not be sub-delegated, and the Commission, which would be notified of such exceptions, could direct the publication if appropriate.
To further address concerns about delay, the staff also has recommended that the Commission issue new interpretive guidance. This guidance would elaborate on the Commission's views regarding proposed rule changes that may properly be filed for immediate effectiveness, and specifically, those proposed rule changes filed pursuant to Exchange Act Rule 19b-4(f)(6), under which "non-controversial" rule changes may be filed.
First, the guidance would address the proposed changes to rules governing exchange trading systems that could be filed for immediate effectiveness. If these changes implicated any policy issues, they would have to be addressed consistently with how the Commission has dealt with them in the past. The guidance provides many helpful examples in this regard. Additional changes that also could be filed for immediate effectiveness would include, first, those relating to an SRO's minor rule violation plan and, second, so-called "copycat" rule filings relating to proposed rule changes other than trading rules.
This guidance should encourage SROs to file greater numbers of rule changes for immediate effectiveness where appropriate. Importantly, however, SROs should understand that, as the volume of such rule changes increases, so may the possibility that certain rule changes could be abrogated. Undoubtedly, many market participants affected by such rule changes might try to persuade the Commission that a rule change filed for immediate effectiveness should be abrogated and re-filed for full Commission review. In my view, this would be a healthy outcome and one fully contemplated by the framework established under the Exchange Act.
In anticipation of this change in the Commission's processes, the staff also has recommended that the Commission now consider any such abrogations directly. Accordingly, the staff has recommended removing the provision delegating this authority to the Division of Trading and Markets. This change would enhance the Commission's involvement in this area, where industry and Commission practice likely will undergo a period of rapid transition over the coming months and years. Once the Commission and industry have had a chance to adjust to the new process and it has become more routinized, the Commission could once again call on the staff to administer abrogations by delegation.
The recommendations before us today are squarely aimed at improving the Commission's performance in this area. I believe the staff's recommended changes will help address the timeliness concerns that the Inspector General and others have raised. Most importantly, the changes should help strengthen the protection of investors who would reap the benefits of healthier and more competitive markets.
I would like to thank the staff of the Division of Trading and Markets for their commendable work on this matter, specifically Director Erik Sirri, Deputy Director Bob Colby, David Shillman, Richard Holley, and Marlon Paz. I would also like to thank Meridith Mitchell, Janice Mitnick and Debby Flynn in the Office of the General Counsel for their hard work on this important initiative. Finally, I would like to thank the other Commissioners and all of our counsels for their work and comments on this proposed rule.