United States: SEC Issues Proposed Regulation SCI To Enhance Its Regulatory

I. Overview of SEC Proposal

The SEC has issued a release (the "Release")1 proposing Regulation Systems Compliance and Integrity ("Regulation SCI"). The Release would impose a variety of requirements upon key market participants, e.g., exchanges and certain alternate trading systems ("ATSs"), clearing agencies, FINRA, the MSRB, and "plan participants," with respect to automated systems that directly support trading, clearance and settlement, order routing, market data, regulation or surveillance.

Requirements under Regulation SCI applicable to "SCI Entities" (as defined below) include:

  • establishing, maintaining and enforcing written policies and procedures designed to ensure that SCI Entities
    • have levels of capacity, integrity, resiliency, availability, and security adequate to maintain operational capability and promote fair and orderly markets, and
    • operate in compliance with the federal securities laws and rules and with the entity's own rules and governing documents;
  • taking corrective action upon becoming aware of a system disruption, compliance issue or intrusion (an "SCI Event");
  • notifying the SEC of certain material system disruptions or any system compliance issue or system intrusion;
  • disseminating to SRO members or participants in an ATS notice of system any compliance issue or material system disruption;
  • providing thirty days advance notice to the SEC of material system changes;
  • reviewing, at least annually, compliance with Regulation SCI and submitting a report on compliance to senior management and both the report and the response of management to the SEC; and
  • testing, at least annually, business continuity and disaster recovery plans, including:
    • requiring participation in the test of SRO members and ATS participants; and
    • coordinating testing on an industry or sector-wide basis.

The remainder of this memorandum includes a brief background section (Section II), an overview of the entities covered by Regulation SCI (Section III) and concludes with a short discussion of some of the policy issues raised by Regulation SCI (Section IV), including considerations relating to enforcement risk and whether Regulation SCI may color the SEC's view of Exchange Act Rule 15c3-5 (Risk Management Controls for Brokers or Dealers with Market Access).

II. Background

Regulation SCI is meant to replace, and expand, two Automation Review Policy statements issued by the SEC in 1989 and 1991, respectively, as well as the SEC's "voluntary" ARP inspection program (collectively, "ARP"). Regulation SCI would cover the same types of entities as are currently covered by ARP, but it would significantly lower the applicable thresholds that govern whether an ATS would be subject to Regulation SCI. Indeed, the Release states that no ATS currently exceeds the ARP applicable volume threshold. By contrast, the SEC estimates that fifteen ATSs would exceed the thresholds for becoming subject to Regulation SCI.2

III. Covered Entities

Entities covered by Regulation SCI ( "SCI Entities") would include the national securities exchanges,3 FINRA, the Municipal Securities Rulemaking Board, and the registered clearing agencies (collectively, "SCI Self-Regulatory Organizations" or "SCI SROs"). Also subject to regulation SCI would be plan processors that process and disseminate quotations and transactions data under the various national market system plans.4 As discussed further below, SCI Entities would also include ATSs that meet certain volume thresholds in (i) NMS stocks,5 (ii) equity securities that are not NMS stocks but for which transactions are reported to FINRA,6 (iii) municipal securities or corporate debt securities (such covered ATSs, "SCI ATSs"). In addition, Global Joint Venture Matching Services – US, LLC ("Omgeo"), an exempt clearing agency that is nonetheless subject to ARP, would be an SCI Entity.

Broker-Dealers and Regulation SCI. While Regulation SCI, as proposed, would not cover brokerdealers that are not ATSs, the Release discusses whether some broker-dealers should be subject to the Regulation. The Release also includes a discussion of the scope of Rule 15c3-5, which the Release characterizes as designed to address in a more limited manner some of the same concerns as Regulation SCI. The Release requests comment on 17 separate questions relevant to brokerdealers and Regulation SCI while also stating that should the SEC decide to regulate brokerdealers under Regulation SCI, it would issue a separate release discussing such proposal.

SCI ATSs. Currently, Rule 301(b)(6) of Regulation ATS generally provides that ATSs that exceed 20% of the U.S. average daily trading volume in covered securities must comply with ARP-like provision.

Regulation SCI would apply to ATSs that, during four of the preceding six calendar months, satisfied any of the following volume thresholds:

  • With respect to NMS stocks:
    • Five percent or more of the average daily dollar volume of any single NMS stock and one-quarter of one percent or more of the average daily dollar volume in all NMS stocks; or
    • One percent or more of the average daily dollar volume in all NMS stocks.
  • With respect to non-NMS stocks for which transactions are reported to an SRO:
    • Five percent or more of the average daily dollar volume.
  • With respect to municipal securities and corporate debt securities, five percent or more, respectively, of either:
    • the average daily dollar volume traded in the U.S. or
    • the average daily transaction volume traded in the US.

IV. Policy Considerations

Market Solutions. While the Release discusses the potential for market driven solutions to the technology compliance problems to be addressed by Regulation SCI, it does so largely for the purpose of asserting their short comings. The Release fails to acknowledge however the negative impact that the structure of the national market system, as created by Regulation NMS, has on market driven solutions. Specifically, the order protection rule, which makes it impossible for market participants to avoid any one exchange, also serves to undermine the market discipline that true competition between the exchanges might bring.7 It could be productive to at least begin a discussion of ways the national market system itself contributes to the very problems the SEC is trying to solve.

Business Continuity. The Release identifies a business continuity standard that is focused on rapid recovery and timely resumption of critical operations, i.e., no later than the next business day. While this sounds all for the good, in the case of exchanges, however, it might be more economically efficient to develop processes and systems to take advantage of the redundancies offered by the fact that there are thirteen separate exchanges that trade NMS stocks. Assuming an exchange is able to process all open transactions along a normal settlement cycle and transition or cancel all existing orders, how important is it that the exchange be prepared to open no later than the next business day notwithstanding earthquake, hurricane or other natural disaster? While listing exchanges have unique responsibilities, e.g., opening auctions, how difficult would it be to transition those responsibilities to a backup exchange? Indeed, it appears that the NYSE is prepared to adopt such an approach by announcing a new disaster recovery plan that, effectively, shifts trading to its electronic Arca system.8

Focus on Risk and on Structures to Reduce Risk. The Release also does not appear to recognize that not all system disruptions are equally significant or even significant at all. For the reasons set forth above under "Business Continuity," so long as system issues do not affect the ability to process open transactions and transition or cancel existing orders, it seems likely that the system "problem" will be of little or no harm – except perhaps to the reputation of the applicable exchange. Accordingly, rather than forcing exchanges to focus broadly and indiscriminately across all "SCI systems," exchanges might be better directed to begin their efforts by developing a risk matrix based upon possible harm to market participants and then focusing their efforts on steps to mitigate any significant sources of harm. Similarly, the SEC might find it productive to focus on the development of structures that serve to reduce or eliminate risk.

Narrow Conduits. Regulation SCI fails to focus significantly or even identify "narrow conduits" in the national market system. By "narrow conduits", we mean single source providers that are crucial to the functioning of the national market system. While the national market system might function just fine with one less exchange, that same is not true if there is one less clearing agency or one less plan processor since they function as monopolies within their areas of coverage. Might it be useful to consider means of encouraging redundancies and competition in these areas?

Enforcement. Given the comprehensive nature of Regulation SCI and the numerous obligations it imposes on SCI entities, it seems likely that one result of Regulation SCI will be to create an easier path for enforcement actions by the SEC wherever a firm has had technology problems. Moreover, and regardless of whether the SEC ultimately decides to impose Regulation SCI on broker-dealers, it seems likely that Regulation SCI, and the standards that it seeks to impose, will color their view of appropriate policies and procedures for purposes of Rule 15c3-5.


1.SEC Release No. 34-69077 (March 8, 2013).

2. See the Release at 226.

3. The term SCI Entities does not include securities futures exchanges that are noticed registered under Section 6(g) of the Exchange Act. 4 The term "plan processors" is defined at (a)(55) of Rule 600 of Regulation NMS as "any self-regulatory organization or securities information processor acting as an "exclusive processor" in connection with the development, implementation and/or operation of any facility contemplated by an effective national market system plan." Section 3(a)(22)(B) of the Exchange Act, defines "exclusive processor" to mean "any securities information processor or self-regulatory organization which, directly or indirectly, engages on an exclusive basis on behalf of any national securities exchange or registered securities association, or any national securities exchange or registered securities association which engages on an exclusive basis on its own behalf, in collecting, processing, or preparing for distribution or publication any information with respect to (i) transactions or quotations on or effected or made by means of any facility of such exchange or (ii) quotations distributed or published by means of any electronic system operated or controlled by such association."

4. The term "plan processors" is defined at (a)(55) of Rule 600 of Regulation NMS as "any self-regulatory organization or securities information processor acting as an "exclusive processor" in connection with the development, implementation and/or operation of any facility contemplated by an effective national market system plan." Section 3(a)(22)(B) of the Exchange Act, defines "exclusive processor" to mean "any securities information processor or self-regulatory organization which, directly or indirectly, engages on an exclusive basis on behalf of any national securities exchange or registered securities association, or any national securities exchange or registered securities association which engages on an exclusive basis on its own behalf, in collecting, processing, or preparing for distribution or publication any information with respect to (i) transactions or quotations on or effected or made by means of any facility of such exchange or (ii) quotations distributed or published by means of any electronic system operated or controlled by such association."

5 An "NMS stock" is a security, other than an option, for which transaction reports are made available pursuant to an effective "transaction reporting plan" that meets the requirements of Rule 601 of Regulation NMS. See Regulation NMS Rule 600(b)(46), (47) and (82). Practically speaking, the term "NMS stock" is synonymous with the term "listed equity."

6 As a general matter, this means "OTC Equity Securities" and "Restricted Equity Securities" as defined at FINRA Rule 6420.

7 Rule 611 of Regulation NMS.

8 See Wall Street Journal "NYSE Disaster Recovery Plan Focuses on Electronic Trading," March 8, 2013, available at http://mobile.blogs.wsj.com/cio/2013/03/08/nyse-disaster-recovery-plan-focuses-on-electronic-trading/.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.