Time to Call False Start Penalty Against SEC Reg ATS Rulemaking

On April 14, 2023, the Securities and Exchange Commission published "SEC Reopens Comment Period for Proposed Amendments to Exchange Act Rule 3b-16 and Provides Supplemental Information." Upon reading the SEC's press release, one is immediately struck by the ponderous nature of the headline, which is about the reopening of a comment period in order to supplement previously proposed amendments. Oh my, what an exaltation of doublespeak and bureaucratese!

April 14, 2023 SEC Press Release -- in its own words

Rather than be accused of spinning the SEC's word jumble, let me allow the press release to speak for itself:

SEC Reopens Comment Period for Proposed Amendments to Exchange Act Rule 3b-16 and Provides Supplemental Information

FOR IMMEDIATE RELEASE
2023-77

Washington D.C., April 14, 2023 —
The Securities and Exchange Commission today reopened the comment period and provided supplemental information on proposed amendments to the definition of “exchange” under Exchange Act Rule 3b-16. The Commission initially proposed the amendments in January 2022 and reopened the comment period in May 2022. The reopened comment period closed on June 13, 2022.

The reopening release reiterated the applicability of existing rules to platforms that trade crypto asset securities, including so-called “DeFi” systems, and provides supplemental information and economic analysis for systems that would be included in the new, proposed exchange definition. The reopening release also requested information and public comment on crypto asset securities trading on such systems and certain aspects of the proposed amendments applicable to all securities.

“I believe this supplemental release will help address comments on the proposal from various market participants, particularly those in the crypto markets,” said SEC Chair Gary Gensler. “Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets. I welcome additional public comment on all aspects of the proposal in light of the information in this supplemental release.”

The public comment period will remain open for 30 days after publication of the reopening release in the Federal Register.

January 2022 Proposed Amendments

The April 14, 2023, SEC Press Release
https://www.sec.gov/news/press-release/2023-77 references January 2022 proposed amendments: "SEC Proposes Amendments to Include Significant Treasury Markets Platforms Within Regulation ATS / Proposal Would Enhance Investor Protections and Cybersecurity for Alternative Trading Systems That Trade Treasuries and Other Government" (SEC Press Release 2022-19 / January 26, 2022) (the "January 26, 2022, SEC Press Release"),
https://www.sec.gov/news/press-release/2022-10.

The January 26, 2022, SEC Press Release references "Related Materials," among which is a "Proposed Rule."
https://www.sec.gov/rules/proposed/2022/34-94062.pdf. That "Proposed Rule" is 591 pages long!

May 19, 2022 Extended Comment Period

The April 2023 SEC Press Release also references : "SEC Extends Comment Period for Proposed Rules on Climate-Related Disclosures, Reopens Comment Periods for Proposed Rules Regarding Private Fund Advisers and Regulation ATS" (SEC Press Release 2022-82 / May 9, 2022) (the "May 9, 2022 Press Release")
https://www.sec.gov/news/press-release/2022-82 

The April 14, 2023, Reopening

Just putting things in perspective, in January and May 2022, the SEC published just under 600 pages of information about its proposed amendments to Regulation ATS. Then, in April 2023 -- let's say about a year later (give or take a few months) -- the SEC says fuggedaboutit. If only the SEC could be so terse! In fact, the April 14, 2023 SEC Press Release references under "Related Materials" the "Reopening of Comment Period."
https://www.sec.gov/rules/proposed/2023/34-97309.pdf/ That "Reopening of Comment Period" is 161 pages long!

Since January 2022, about 16 or so months, the SEC has printed around 755 pages of . . . of what? Of proposed amendments to Reg ATS -- or perhaps it's now all being refined to "the definition of "exchange"" -- and then the extending of the comment period on the amendments, and then the reopening of the comment period. Who knew? When it comes to federal regulators, there's a difference between reopening a comment period and extending a comment period, which, if you have a dirty mind, sort of sounds like a low budget porn film rather than any serious attempt at regulation. 

Everybody's Talkin' At Me

To go from the sublime to the ridiculous (as in doesn't anyone at the SEC have anything important or truly serious to do?), on April 14, 2023, the SEC published Statements by four SEC Commissioners and the Chair on the proposed, extended, and reopened ATS proposal.

Commissioner Crenshaw Statement

Statement on Supplemental Information and Reopening of Comment Period for Amendments to Exchange Act Rule 3b-16 Regarding the Definition of “Exchange” by SEC Commissioner Caroline A. Crenshaw
https://www.sec.gov/news/statement/crenshaw-statement-ats-041423, which states in part:

Under the Proposal, entities that bring together buyers and sellers of securities and meet the other criteria of the revised definition would be required to register as exchanges or comply with the conditions to an exemption to registration, such as Regulation ATS.[3] This would be true regardless of whether securities in question are crypto asset securities or traditional securities. The existing definition of “exchange” does not have an exception or carve-out for entities that trade crypto asset securities, and the updated definition would not include one, either. This is consistent with the principle I emphasized when we proposed the amendments: that there should be a level playing field for entities performing similar functions.

Commissioner Lizarraga Statement

Promoting Fair and Competitive Markets by SEC Commissioner Jaime Lizárraga
https://www.sec.gov/news/statement/lizarraga-statement-ats-041423, which states in part:

I look forward to receiving public feedback on these proposals that will help the Commission close the regulatory gap between registered and unregistered trading platforms. I am pleased to support this proposal. As always, my gratitude to all of the Commission staff for their hard work in crafting this important rule, and for their commitment to public service and to the fulfillment of the SEC’s mission on behalf of the investing public.

Commissioner Peirce Statement

Rendering Innovation Kaput: Statement on Amending the Definition of Exchange by SEC Commissioner Hester M. Peirce
https://www.sec.gov/news/statement/peirce-rendering-inovation-2023-04-12, which states in part:

Thank you, Mr. Chair. Stagnation, centralization, expatriation, and extinction are the watchwords of this release. Rather than embracing the promise of new technology as we have done in the past, here we propose to embrace stagnation, force centralization, urge expatriation, and welcome extinction of new technology. Accordingly, I dissent.

Commissioner Uyeda Statement

Statement on Supplemental Information and Reopening of Comment Period for Amendments to Exchange Act Rule 3b-16 regarding the Definition of “Exchange” by SEC Commissioner Mark Uyeda
https://www.sec.gov/news/statement/uyeda-statement-ats-041423, which states in part:

The potential unintended consequences of the expansionary and ambiguous language of the proposed amendments to Rule 3b-16 are concerning. Yet the Economic Analysis in the Supplemental Information does not address these concerns. The Supplemental Information represents a missed opportunity to reflect further on the economic impact reflected in the commentary received to date. Instead, one might wonder whether this is simply a paper exercise under the Administrative Procedure Act so the Commission can finalize a decision that has already been made – namely that nearly all crypto assets are securities and are subject to the Commission’s jurisdiction. For that reason, I cannot support the Supplemental Information and Reopening of Comment Period. I do thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of the General Counsel, the Strategic Hub for Innovation and Financial Technology and many others within the Commission for their efforts. I have no questions.

Chair Gensler Statement

Statement on Alternative Trading Systems and the Definition of an Exchange by SEC Chair Gary Gensler
https://www.sec.gov/news/statement/gensler-statement-ats-041423, which states in full that:

Today, the Commission is considering whether to issue a supplemental release to our January 2022 proposal requiring significant trading platforms—including in the Treasury markets—to come under important rules for the markets. I believe this supplemental release would help address comments on the proposal from various market participants, particularly those in the crypto markets.

I continue to believe that the proposal would benefit investors and our markets.

First, the proposal would require certain entities in the government securities markets known as interdealer brokers (IDBs) to comply with Regulation ATS and Regulation Systems Compliance and Integrity. These IDBs function like exchanges but currently are not regulated like exchanges. In closing this regulatory gap, this proposal would promote resiliency and greater access in our $24 trillion Treasury markets as well as in other marketplaces for government securities.

Second, the proposal would modernize our rules regarding the definition of an exchange. This would account for the evolving nature and electronification of trading platforms. In particular, the proposal would require communication protocols—venues that bring together buyers and sellers of securities through structured methods to negotiate a trade—to comply with rules for exchanges. As one example, request-for-quote platforms perform several exchange-like functions in the Treasury markets, among others. Ensuring that exchange-like platforms follow our exchange-specific rules benefits investors and markets alike.

The Commission received a significant number of comments on the proposal, particularly from crypto market participants.

Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.

As I’ve said numerous times, the vast majority of crypto tokens are securities. As Justice Thurgood Marshall put it so well, “Congress’s purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.”

Thus, given how crypto trading platforms operate, many of them currently are exchanges, regardless of the reopening release we’re considering today. These platforms match orders of multiple buyers and sellers of crypto securities using established, non-discretionary methods. That’s the definition of an exchange—and today, most crypto trading platforms meet it. That’s the case regardless of whether they call themselves centralized or decentralized.

Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.

Calling yourself a crypto platform is not an excuse to ignore the securities laws.

Calling yourself a DeFi platform is not an excuse to defy the securities laws.

The supplemental release also provides additional information and requests for comment on the modernized exchange definition. For example, the supplemental release requests comment on communication protocol systems, such as how they’re defined, the role of chat features, and the role of order execution management systems.

The proposal’s modernized exchange definition would include communication protocols in the crypto markets as well. These trading venues provide structured methods to negotiate a trade and function like exchanges. Requiring these exchange-like platforms to comply with our exchange-related rules would help protect investors. The supplemental release further elaborates on this proposed requirement and provides additional economic analysis.

I welcome additional public comment on all aspects of the proposal in light of the information in this supplemental release. I believe that, if adopted, the proposal would promote resiliency, access, and fairness in the markets.

I’d like to thank the members of the SEC staff who worked on this proposal, including:

• • Tyler Raimo, Matt Cursio, David Garcia, Eugene Hsia, Megan Mitchell, Amir Katz, Joanne Kim, Haoxiang Zhu, David Saltiel, Andrea Orr, Eric Juzenas, David Shillman, Geeta Dhingra, Joanne Rutkowski, Jo Anne Swindler, Roni Bergoffen, Yue Ding, Sharon Park, and Marilyn Parker in the Division of Trading and Markets;
  • Jessica Wachter, Paul Barton, Lauren Moore, Charles Woodworth, Zachery Kiefer, Seung Won Woo, Oliver Richard, Caroline Schulte, Jill Henderson, Woodrow Johnson, Michael Davis, Amy Edwards, Hans Heidle, and Kali Chowdhury in the Division of Economic and Risk Analysis;
  • Megan Barbero, Meredith Mitchell, Marie-Louise Huth, Robert Teply, Sean Bennett, Donna Chambers, and David Mendel in the Office of the General Counsel;
  • Jonathan Ingram and Andrew Schoeffler in the Division of Corporation Finance;
  • Jorge Tenreiro, David Hirsch, and Stephanie Reinhart in the Division of Enforcement;
  • Michael Hershaft and Constance Kiggins in the Division of Examinations;
  • Daniele Marchesani, Trace Rakestraw, and Lisa Reid in the Division of Investment Management; and
  • Valerie Szczepanik in the Office of the Strategic Hub for Innovation and Financial Technology (FinHub).

If you count up all the names of the bulleted SEC staff thanked by Chair Gensler for their work on the ATS proposal, the tally is 51. 

How sad.

How unfortunate.

51 SEC Staff have been tied up on a project that has generated hundreds of pages of a proposal that was extended and reopened. 

As in it likely came to the public too early and without adequate preparation or thought to begin with. 

As in it was rushed.

As in 51 Staff have been wasted and lost on drafting language and inserting citations and checking footnotes.

Extensions. Delay. Justice Denied.

It would all be comical if the impact wasn't so detrimental in terms of protecting the investing public and offering useful guidance to the industry.Why is my criticism so harsh? Because I'm fed up and tired with the mounting numbers of "Extensions" that are jamming up the SEC's ability to issue Decisions; see, for example: "Commission Opinions and Adjudicatory Orders" https://www.sec.gov/litigation/opinions.htm

Similarly, I'm angered by the SEC's ongoing inability to timely process Forms WB-APP by whistleblower Claimants seeking their just Awards -- and I'm troubled by horrific editing of many denials of Awards that seem to undermine the whistleblower program via gratuitous personal attacks on Claimants or the dubious minimization of their contributions; for example, read: "After Thanking Very Helpful Whistleblower, The SEC Then Stabs The Tipster In The Back (BrokeAndBroker.com Blog /  April 12, 2023) 
https://www.brokeandbroker.com/6986/sec-markopolos-whistleblower-thank-you/, which states, in part:

There is the effective regulation of Wall Street. Then there is what I call the mere "appearance" of regulation. Effective regulation proactively detects fraud, pursues the fraudster, stops the fraud, and protects the investing public -- all of which entails harvesting tips, analyzing data, conducting interviews, filing charges, and sending trial staff into court. In contrast, modern-day regulation has devolved into self-serving publicity by senior regulators posting endless amounts of podcasts, videos, speeches, bulletins, guidances, alerts, and press releases. The bureaucracy tells you what it would like to do rather than what it has accomplished; hence, the appearance of regulation rather than the substance. 

Considering Whether To Issue a Supplement to a Proposal

Perhaps most illustrative of all that is wrong at the SEC is the opening paragraph of Chair Gensler's April 14, 2023, Statement:

Today, the Commission is considering whether to issue a supplemental release to our January 2022 proposal requiring significant trading platforms—including in the Treasury markets—to come under important rules for the markets. I believe this supplemental release would help address comments on the proposal from various market participants, particularly those in the crypto markets.

We are over a year into a process whereby the SEC proposed amendments to Regulation ATS, then reopened the Comment Period, then extended the Comment Period, and is now "considering whether to issue a supplemental release."  Someone needs to call a "false start" penalty and walk off the five yards against the SEC. 

• SEC
• Comment Period
• Gensler
• Reg ATS
• Alternative Trading Systems
• Exchange
• DeFi
• Crypto
• Crenshaw
• Lizarraga
• Uyeda
• Peirce
• BrokeAndBroker
• Bill Singer