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Atkins Criticizes Implementation of Regulation NMS

In recent remarks to the Security Traders Association of Boston, Commissioner Paul Atkins discussed U.S. market competitiveness and problems associated with Regulation NMS. Atkins said he is very excited about the work of the Advisory Committee on Improvements to Financial Reporting and its plan to recommend ways to simplify the financial reporting process. Chairman Christopher Cox has also announced the formation of a roundtable to review private securities litigation, according to Atkins, an issue that various reports have singled out as a major problem in the U.S. capital markets. Atkins said that the regulator's job is to examine the costs of its actions to market participants and ensure that they do not exceed the benefits. His remarks are posted on the SEC's Web site.

Atkins talked about significant developments in the markets, both structural and regulatory. The changes have occurred during a time of heightened concerns about the competitiveness of the U.S. markets, he said. Three major reports have contained recommendations to reduce excessive regulation in the U.S., which some have blamed for the loss of market share in the global capital markets.

The finding of each report is unique, Atkins said, but there are common themes in each of them with respect to SEC rules, the most prominent being the implementation of section 404 of the Sarbanes-Oxley Act. Atkins said he hopes that section 404 has now been fixed. The other recommendations are not radical, in his view, but reflect common sense measures that should be undertaken by the SEC. The Advisory Committee on Improvements to Financial Reporting and the roundtable on private securities litigation respond to two of the issues raised in the reports.

Atkins pointed to the actions of the Office of Economic Analysis in examining the short sale price test as one example of the SEC taking an economic view of rulemaking. He also touched on the regulatory missteps that resulted in rules that were overturned in the courts. Regulation NMS has escaped court review so far, he said, but that is its only success, in his view.

Atkins has been a frequent critic of Regulation NMS. He believes the SEC failed to establish a need for the rules and failed to conduct a cost/benefit analysis before their adoption. Regulation NMS is a "massive regulatory intrusion" into the secondary trading markets, he said. He believes it has the potential to do significant harm to the markets by interfering in the operation of competitive forces.

The biggest problem with Regulation NMS is the trade-through rule, Atkins advised. Market participants did not need the "protection" offered by the rule, in his view. Atkins added that, while he opposed the adoption of Regulation NMS, he is fully engaged in its implementation. He thanked market participants for their feedback, which he said was invaluable.

Atkins reviewed the numerous exemptions, exceptions and guidance on frequently asked questions that have been necessary to make the "one-size-fits-all" trade-through rule work. He said these carve-outs, along with the many implementation delays, prove the unworkable nature of the rule. There is no way to know the innovations that have been stifled by the rule, he added.

Atkins declared that the trade-through rule is mortally wounded, having been "eviscerated" by all of the carve-outs demanded by the market system. What remains is a "still-too-burdensome husk of a bad idea," he said.

Atkins pledged to continue to carefully monitor the implementation of Regulation NMS. While he hopes the consequences will be a non-event, he said his real concern is that the full consequences will not be known for years. The damage will already have been done and the trading patterns will already have shifted in unpredictable ways, and perhaps to other venues, he said.