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Industry Spotlight > Broker Dealers

SIFMA to SEC: Revamp SRO Structure

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The Securities Industry and Financial Markets Association called on the Securities and Exchange Commission on Thursday to review the regulatory structure of broker-dealers, exchanges and the self-regulatory model, as technology advances have changed the way market participants operate and because SROs now compete with the BDs they regulate.

In a July 31 letter to the SEC, Theodore Lazo, SIFMA’s managing director and associate general counsel, said that the self-regulatory model is a “crucial area for immediate action,” and that SIFMA believes “a discrete review of the regulatory structure of broker-dealers, exchanges should be carried out now because that structure is widely viewed to be outdated and in need of reconsideration and reform.”

A part of that review, Lazo continued, ”should focus on SRO structure, because the markets have changed to the point that the current structure of the self-regulatory model is widely viewed to be outdated and in need of reform.”

The largest U.S. securities exchange operators, Lazo said, “have evolved from member-owned utilities to for-profit business enterprises,” all while “technological advancements have changed the way the securities markets and market participants operate, with securities exchanges and non-exchange venues operated by broker-dealers performing essentially identical functions in certain respects.”

However, the status of exchanges as self-regulatory organizations “has not changed, even as the exchanges have become active competitors with the broker-dealer members they are charged with regulating,” Lazo added. “This inconsistency has led to tensions, anomalies, and conflicts in the structure, operation and regulation of the securities markets.”

Lazo identified some key areas that SIFMA believes the SEC should review, noting that the review should not be exclusive to those areas.

• What is an Exchange and Why Is It an SRO? In today’s reality, the interests, incentives and functions of the member-owned cooperative exchanges of 1934 bears little resemblance to those of the current for-profit exchanges. Eliminating exchange’s SRO status would streamline regulatory processes and make self-regulation more efficient by centralizing regulation.

• Exchanges Compete with the Broker-Dealers they Regulate. Combined with the transformation of exchanges into for-profit enterprises in search of ways to expand their businesses, exchanges and broker-dealers have become direct competitors in many aspects of their businesses. Most prominent is the competition for order flow between exchanges and broker-dealers. In this competitive dynamic, the policy of having exchanges regulating broker-dealers has become outmoded.

• Competitive and Regulatory Disparities. While competitive benefits flow from exchanges’ status as SROs, including limitations on liability, market data revenue, and ability to design market structure developments, exchanges are not subject to some of the significant regulatory requirements applicable to broker-dealers, such as best execution, supervisory controls, and financial responsibility. At the same time, SIFMA said it recognizes that exchanges are subject to unique regulatory requirements, including the requirement to submit rule changes for their business practices for SEC approval, fair access requirements, and ownership restrictions.

• Funding of Self-Regulation. While broker-dealers are subject to numerous regulatory fees from SROs, there is no way to assess the reasonableness of the regulatory funding model without greater transparency into SROs’ existing regulatory fees as well as their actual regulatory expenses. For many exchanges, regulatory fees are intended to offset the exchanges’ cost of outsourcing regulation to other SROs–such as FINRA–effectively duplicating costs on member firms.

SIFMA urges the commission to consider requiring SROs to make this important information publicly available on a regular basis.


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