Agency may streamline process for NASD, NYSE, etc.

The Securities and Exchange Commission is seriously considering a proposal to allow self-regulatory organizations to issue rules without prior industry input or SEC review.

And the industry doesn’t like it one bit.

Under the proposal, organizations such as the National Association of Securities Dealers and the New York Stock Exchange would be able to streamline most rule changes.

Such changes would take effect within 10 business days without allowing for public comment. Affected parties would have to file petitions to change rules after they were issued. Currently, self-regulatory organizations must allow for comment periods and get SEC approval.

The SEC staff has been calling industry officials in recent weeks to clarify positions on the proposal, made in January. That signals that the issue is being actively considered, although there are no deadlines.

The insurance industry in particular is concerned that NASD Regulation Inc. could use the streamlined procedures to assert jurisdiction over unregistered group variable-annuities sales – retirement plan contracts sold to employers for their employees.

The SEC is reviewing a request by the NASD’s enforcement arm that it be allowed to exert jurisdiction over the group plans. The SEC review was undertaken after the American Council of Life Insurers in Washington protested NASDR’s bid for expedited approval.

complexity noted

As far as SRO rulemakings are concerned, says Carl Wilkerson, the life insurers group’s chief counsel of securities and banking, “this is too complicated an area to not provide SEC scrutiny. Automatic rules lead to regrettable consequences in the marketplace.”

Self-regulatory organizations face increasing pressure from automated trading systems, as well as foreign exchanges, and they want the SEC to allow them to streamline their regulatory procedures so they can react to market changes more swiftly.

But the industry wants a chance to slow down self-regulatory organizations when it comes to significant rule changes.

Referring to the group variable-annuity proposal, Mr. Wilkerson says, “Under [the SEC proposal allowing streamlined SRO rule changes], we wouldn’t have had an opportunity to slow it down and raise all the issues before the SEC. When it involves significant marketplace competition, the SEC should be actively involved.”

Amal Aly, staff adviser to the self-regulation and supervisory practices committee at the Securities Industry Association in New York, echoes those concerns.

“Any rule, even the most benign rule on its face, may have implementation difficulties,” she says.

NASDR rules “are the ones that present significant concern,” she adds.

“Even when rules are vetted internally within the NASD, there’s no assurance that the committees that take a look at these rules provide an adequate cross-reference of the industry,” says Ms. Aly. “We need to make sure that the people who are most impacted have a voice.”

And comments the Investment Company Institute filed with the SEC in April assert, “There have been numerous instances where proposed rule changes … have had a major impact on market participants, albeit often unintended.”

The ICI letter, signed by general counsel Craig Tyle, cites rules extending the close of trading and governing how orders are handled: “Many of the filings that would become immediately effective under the proposed rule could result in adverse consequences for investors, without any opportunity for input from the public or review by the commission.”

In comments it filed with the SEC in May, however, NASDR argues that the proposed changes should enhance its ability to regulate the industry “without compromising the ability of the SEC staff to meaningfully review and act upon proposed rule changes.”

James Angel, associate professor of finance at Georgetown University, agrees, but says the SEC proposal doesn’t go far enough. Mr. Angel was a visiting academic fellow at NASDR for the past year.

“The process has gone haywire,” he says. “As global barriers to competition have faded and as the technology has shifted, we see broker-dealers like Instinet acting like exchanges, and we’re seeing exchanges starting to behave like broker-dealers – the Australia Stock Exchange and the Singapore Stock Exchange channel order flows to each other.”

The current regulatory environment, he adds, “gives all the SROs’ competitors a chance to see what the SRO is doing in advance, and then lobby the government to halt it.” He cites as an example the fact that the Boston Exchange had to go through a lengthy process to extend its trading hours by 15 minutes, while Instinet was able to operate 24 hours a day immediately.

“Is there any other business in this country that has its hours of operation governed by the federal government?” Mr. Angel asks.

“That is the level of madness. Even the most trivial and routine business decisions have to be approved in advance by the federal government.”

The SEC would still have approval power over major SRO changes, he adds.