SIFMA, in a comment letter filed on June 13 with the SEC, supports the broad policy objectives of enhancing the resilience of the U.S. securities markets and strengthening the technological infrastructure underlying those markets, such as through the application of Reg SCI—a rule designed to monitor the security and capabilities of U.S. securities markets’ technological infrastructure—to the critical functions carried out by exchanges, registered clearing agencies, the Financial Industry Regulatory Authority (FINRA), and securities information processors upon which its members must rely or with whom they must work in fulfillment of key regulatory obligations.
However, SIFMA does not support the proposed expansion of Reg SCI to apply to broker-dealers, entities for which the rule was neither designed nor originally intended for. The entities currently subject to Reg SCI’s requirements play fundamentally different roles in our markets than broker-dealers and operate under different regulatory expectations regarding their availability and accessibility.
“The perceived benefits of expanding Reg SCI to apply to entities for which the rule was neither designed nor originally intended must be assessed and balanced against the enormous costs and unanticipated or unintended consequences of expansion, particularly where the proposed expansion has not addressed the critical distinctions that the Commission recognized when originally setting the scope for and adopting Reg SCI,” said Charles DeSimone, SIFMA managing director.
“Further, our members—including those who would be potential SCI broker-dealers under the proposal—have already developed robust technological resiliency as a result of the various existing regulatory obligations they are subject to, and they have done so without the imposition of additional requirements established by the SEC under Reg SCI.”
SIFMA’s comment letter makes the following points:
- The proposed thresholds used to define SCI broker-dealers are arbitrary, anticompetitive, and burdensome. The proposed asset and trading thresholds to capture proposed SCI broker-dealers are not the appropriate means by which to impose Reg SCI’s requirements in the context of the securities market. The Commission has not explained how the proposed thresholds are an appropriate proxy for operational risk. The actual experience of how the market operates undercuts any potential Commission justification for imposing Reg SCI on broker-dealers, including that broker-dealers are generally easily substitutable for one another in the market and that buyside firms routinely diversify using multiple broker-dealers and sources of liquidity. Further, the Commission has not addressed the fact that the proposed thresholds arbitrarily impose burdens on certain broker-dealers and not others, or grappled with how the proposed thresholds themselves would impose significant compliance burdens.
- The Proposal would create a new trading requirement for proposed SCI broker-dealers. By expanding Reg SCI from systems facilitating trading to include systems that do the trading itself, the Proposal creates, for the first time, a requirement that proposed SCI broker-dealers engage in trading by committing capital and taking on principal risk. The Proposal offers no rationale for this fundamental change and fails to analyze its consequences.
- Reg SCI was not meant for and cannot simply be imposed on broker-dealers as is. Reg SCI was originally designed and intended to cover vital systems of entities that represent the critical trading infrastructure, including certain trading venues, entities essential to providing real-time market data, and entities that clear and settle securities transactions. It was systems failures of these entities that prompted Reg SCI. The Proposal seeks to expand beyond systems that facilitate trading by others to also cover the activity of trading itself by other parties, such as broker-dealers. When applied to broker-dealers, many of the core concepts and obligations of the original rule are unsuitable and unworkable.
- The enormous cost of Reg SCI is not justified by any tangible benefits identified by the Commission. The Proposal fails to address the enormous compliance costs that would be borne by new SCI entities such as proposed SCI broker-dealers and how those costs are justified given that the substitutability of broker-dealers creates resiliency. The Proposal fails to justify those costs and cites no evidence that Reg SCI is needed to solve an existing regulatory gap or that Reg SCI would produce any net improvement in systems integrity for broker-dealers, particularly given the existing regulatory requirements which already apply to broker-dealers.
- The proposed requirements regarding third-party providers require a more principles- and risk-based approach. SIFMA members already maintain robust third-party management programs and require the contracted service provider to adhere to applicable legal and regulatory obligations. A principles- and risk-based approach is crucial to ensure such programs are efficient and sustainable, yet the Proposal takes a prescriptive approach that may disincentivize the use of third-party providers or limit the provision of certain valuable services. An outcome which potentially drives increased reliance on less sophisticated and resilient in-house systems rather than enhancements offered by innovative third-party service providers may ultimately work against the objective of improving systems integrity for broker-dealers. Regarding third-party relationships, we encourage the Commission to adopt a similar approach to the federal prudential regulators’ interagency guidance, which acknowledges potential limitations and challenges in negotiating certain rights or gaining access to certain information, and grounds its expectations in the adoption of a risk-based approach throughout the entire third-party relationships lifecycle.
- The Commission has not considered or incorporated the experience of Reg SCI thus far. The Commission should examine the experience and costs of SCI entities since the adoption of Reg SCI and apply that knowledge before expanding the scope of Reg SCI or adding additional requirements. For example, the Proposal lacks any concrete examples where current SCI requirements—and, in particular, the reporting or dissemination requirements—have provided the Commission or the public with beneficial information that it has received and found actionable in any real-time or near real-time way. In practice, these requirements have required Reg SCI entities to divert critical resources from addressing potential issues merely to meet the arbitrary timeframe for certain reporting requirements. Not only has this created unnecessary burdens and costs, but adhering to such standards could lead to harmful consequences in the future if firms must choose between addressing critical matters at hand and timely filing of regulatory reporting and must divert resources away from innovation and competition. Nevertheless, the Proposal seeks to prioritize reporting speed over system resiliency and recovery.
Source: SIFMA
