Statement at Open Meeting on Rule 15b9-1 and Reg A+
Chair Mary Jo White
March 25, 2015
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on March 25, 2015 under the Government in Sunshine Act. The Commission today will consider two recommendations, one from the Division of Trading and Markets and the other from the Division of Corporation Finance – a proposed amendment to Rule 15b9-1 of the Exchange Act and the adoption of Regulation A+ under the JOBS Act.
The first recommendation, from the Division of Trading and Markets, reflects a simple but powerful principle of the federal securities laws – the protection of investors and the stability of our markets require that trading be overseen by both the Commission and strong self-regulatory organizations. Section 15(b)(8) of the Exchange Act recognizes the important role of SROs by requiring broker-dealers to be members of national securities associations unless they limit their business to an exchange of which they are a member.
This model of regulation enables the Commission to better leverage its resources, draw on extensive market expertise, and build an oversight program that is deeper and broader. Each exchange is an SRO with primary responsibility to regulate its members’ activity on that exchange. A national securities association is also an SRO that has primary responsibility for regulating off-exchange trading – today, that is FINRA. But Rule 15b9‑1 of the Exchange Act currently permits certain broker-dealers to engage in significant off-exchange proprietary trading without becoming members of FINRA. The proposal before us today is designed to close this regulatory gap.
Rule 15b9-1 was implemented at a time when our equity market structure was dominated by floor-based exchanges that could readily regulate all of their members’ trading activity. It was designed to accommodate exchange specialists and floor brokers that focused their trading on the floor of an individual exchange who might need to conduct limited hedging or other off-exchange activities ancillary to their floor-based business.
That is not our market today. Trading is now dominated by computer algorithms and active cross-market proprietary trading firms have emerged as significant market participants. These firms represent a significant portion of off-exchange trading, accounting for nearly half of all orders sent to alternative trading systems. The business of these firms is not focused on an exchange floor, and their off-exchange activity is far from ancillary. Yet, they may and do rely on the very same exemption under Rule 15b9-1 for floor brokers.
The proposed amendment would change that and require membership in an association, helping to ensure that all broker-dealers active in the off-exchange market – not just some, as it is today – are subject to the same comprehensive set of SRO regulations and compete on a level playing field. This measure would significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they use.
While importantly closing this gap, the proposal would preserve, as originally envisioned, the exemption for floor-based dealers who continue to transact predominantly on the floor. Among other things, the proposal would provide a limited exemption for these floor-based dealers to engage in hedging transactions off-exchange without triggering the association membership requirement and unnecessary costs. This exception is narrowly tailored for these purposes and imposes strict – but I believe quite workable – conditions that would enable floor-based dealers to hedge efficiently while ensuring that the exception does not swallow the rule. As always, we look forward to the feedback from market participants and the public.
Before I ask Steve Luparello, Director of the Division of Trading and Markets, to discuss the recommendations in greater detail, I would like to thank Steve, as well as Gary Goldsholle, David Shillman, Kathy England, David Michehl, Nick Shwayri, Charlie Sommers, Malou Huth, and Christian Sabella from the Division of Trading and Markets for their hard work on this rulemaking.
I would also like to thank Meridith Mitchell, Lori Price, Robert Teply, Debby Flynn and Kevin Christy from the Office of the General Counsel; and Amy Edwards, Laura Tuttle and Christopher Meeks from the Division of Economic and Risk Analysis.
Finally, I would like to thank my fellow Commissioners and all of our counsels for their work and comments on the proposed amendments.
The second item on our agenda is a recommendation from the Division of Corporation Finance to adopt final rules implementing Title IV of the JOBS Act. The JOBS Act requires the Commission to adopt rules to create a new exemption from registration under the Securities Act for offerings of up to $50 million dollars in a twelve month period.
This mandate, often referred to as Regulation A+, is designed to help enhance the ability of small companies to access capital. Small companies are essential to the livelihood of millions of Americans, fueling economic growth and creating jobs. As I have said in the past, it is critically important for the Commission to consider ways that our rules can facilitate capital-raising by smaller companies. Congress recognized the importance of providing new avenues for capital-raising when it adopted the JOBS Act, which provides for crowdfunding as well Regulation A+.
Existing Regulation A is rarely used by issuers. A 2012 GAO Report cited various factors that have contributed to its lack of use, including the overlapping requirements of federal and state law over such offerings. Our goal in this rulemaking is to make Regulation A+ an effective, workable path to raising capital that also provides strong investor protections. The staff will describe their recommendations for this final rule in more detail, but one issue that I will address first is preemption, an issue of particular interest and importance.
The final rules we are considering today seek to address the challenges presented by federal and state securities registration and qualification by striking an appropriate balance for the roles of federal and state law. In light of the significant investor protections included in the rules and the need to develop a workable exemption, the rules would preempt state registration and qualification laws for certain offerings of up to $50 million in what we call Tier 2 offerings. While the establishment of the North American Securities Administrators Association’s (NASAA) coordinated review program is a very positive development, it is a new program and at this stage concerns remain about the costs associated with state securities law registration and qualification requirements, even under a coordinated review program, which may deter issuers from using Regulation A. To create an updated exemption that will be a viable path for capital raising, a calibrated preemption of state securities laws in connection with Regulation A offerings is necessary, at least until there is a track record from which to judge whether the functioning of the coordinated review program may obviate need for preemption.
Importantly, under the rule we are considering today, there continues to be, a strong role for states to play in offerings under Regulation A. NASAA has made great progress in implementing its coordinated review program for Regulation A offerings, and issuers can avail themselves of that program for offerings of up to $20 million, in Tier 1 offerings. It will be informative to see how the program works in practice in connection with these offerings, and the Commission is committed to monitoring the operation of Regulation A to see whether efficiencies in the coordinated program merit further evaluation of whether such a program could effectively operate within the broader context of Regulation A+. It is also important to emphasize that the states retain their full anti-fraud powers and may require that issuers using Regulation A+ file their offering documents with the states. Also, in recognition of the important role of state securities regulators and our relationship with them, we are currently exploring ways to further collaborate with our state colleagues, including establishing a program for a representative of NASAA or a state securities regulator to work with the staff in the SEC’s Division of Corporation Finance as it implements these rules and considers other issues of mutual interest.
The final rules we are considering today benefitted greatly from public comment we received and the staff’s thorough and careful analysis. I look forward to continuing to work with my fellow Commissioners, the staff, state securities regulators, and market participants to help Regulation A+ become a vibrant capital-raising option that also protects investors in these offerings. As we go forward, the staff will be actively monitoring and assessing the implementation and development of the Regulation A+ regime, which will include a review of the $50 million aggregate offering limitation for Tier 2 offerings, as required by the JOBS Act. As reflected in the release, I have also directed the staff, within five years of the adoption of Regulation A+, to review the impact of both Tier 1 and 2 offerings on capital formation and investor protection and report its findings to the Commission so that we can consider possible changes to the Regulation A+ offering regime.
Before I turn the proceedings over to Keith Higgins, the Director of the Division of Corporation Finance, to discuss the recommendations, I would like to thank the staff for all of their efforts to develop these very important rules. Specifically, I would like to thank Keith Higgins, Betsy Murphy, Sebastian Gomez Abero, Zachary Fallon, Shehzad Niazi, Raquel Fox, Mark Kronforst, Craig Olinger, Lindsay McCord, Jim Budge, Heather Mackintosh, and Sylvia Pilkerton in the Division of Corporation Finance; Annie Small, Rich Levine, Bryant Morris, and Dorothy McCuaig in the Office of the General Counsel; Mark Flannery, Scott Bauguess, Vanessa Countryman, Simona Mola Yost, and Anzhela Knyazeva in the Division of Economic and Risk Analysis; and Jeff Minton, Blair Petrillo, Brian Croteau, Kevin Stout and Wes Kelly in the Office of the Chief Accountant. I also would again like to thank my fellow Commissioners and their counsels for their hard and productive work on these rules.