SEC Adopts Rules to Improve Systems Compliance and Integrity

The Securities and Exchange Commission today voted to adopt new rules designed to strengthen the technology infrastructure of the U.S. securities markets.  The rules – together comprising Regulation Systems Compliance and Integrity (Regulation SCI) – impose requirements on certain key market participants intended to reduce the occurrence of systems issues and improve resiliency when systems problems do occur.

“The rules adopted today mark an historic shift in the Commission’s regulation of the U.S. securities markets that will better protect investors by requiring comprehensive new controls for the technological systems that form the core of our current markets,” said SEC Chair Mary Jo White.  “The rules provide greater accountability for those responsible for our critical market systems, helping ensure that such systems operate effectively and that any issues are promptly corrected and communicated to market participants and the Commission.” 

Given the heavy reliance on technology and automated systems in the securities markets today, the impact of technology failures can be significant.  Recent technology issues in the markets have illustrated the risks of systems issues, including the impact on investors and losses that can occur.

Under Regulation SCI, self-regulatory organizations, certain alternative trading systems (ATSs), plan processors, and certain exempt clearing agencies will be required to have comprehensive policies and procedures in place for their technological systems.  The rules also provide a framework for these entities to, among other things, take appropriate corrective action when systems issues occur; provide notifications and reports to the SEC regarding systems problems and systems changes; inform members and participants about systems issues; conduct business continuity testing; and conduct annual reviews of their automated systems.

The new rules become effective 60 days after publication in the Federal Register.  Entities subject to Regulation SCI generally must comply with the requirements nine months after the effective date.  ATSs newly meeting the volume thresholds in the rules for the first time, will be provided an additional six months from the time that the ATS first meets the applicable thresholds to comply.  Further, entities will have 21 months from the effective date to comply with the industry- or sector-wide coordinated testing requirement.