(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC May Revise Regulation NMS Proposal

The SEC announced that it will consider a recommendation from the staff regarding proposed Regulation NMS (2003-04 CCH Dec. ¶87,146) on December 15, 2004. As originally proposed, Regulation NMS would contain four interrelated proposals designed to modernize the regulatory structure of U.S. equity markets. The substantive topics were 1) trade-throughs, 2) intermarket access, 3) sub-penny pricing and 4) market data. In addition, the rules as proposed would update existing Exchange Act rules governing the national market system and consolidate them into a single regulation.

The SEC noted that the staff had reviewed more than 700 comment letters on the Regulation NMS proposal. Because the staff recommendations to the Commission differ in some respects from the rule text originally proposed, the staff will urge the SEC to publish Regulation NMS in its revised form to provide the public an opportunity to review the details before the Commission takes final action. The additional comment period would likely be followed by SEC action early next year.

The Commission voted to release the proposal for public comment in March 2004, with a 75-day comment period. The comment period was extended by Commission order for an additional month until June 30, 2004. SEC Chairman William Donaldson had previously commented that the views in the comment letters reflected differing priorities and perspectives, but were generally focused on the public welfare and promoting the efficiency and fairness of the U.S. equity markets. These views would be reflected in any final rulemaking, stated the chairman. He noted that the SEC was aware that some of the proposals are far-reaching and would require significant modifications to industry systems. Chairman Donaldson stated that the agency would work closely with the industry to will ensure that it has adequate time to implement any new rules efficiently.

In testimony before the Senate banking committee, Chairman Donaldson explained that the national market system does not require modernization because it has failed investors. Rather, he asserted that as the system has been so successful in promoting growth, efficiency and innovation that many of the existing rules are now outdated. The ultimate goal of Regulation NMS is to identify and improve those outdated rules, he explained.

Commissioner Paul Atkins has, however, criticized the proposal. He had raised concerns at the time proposed Regulation NMS was approved for comment, as he pointed out that the proposal inserts the government's hand into the operation of the markets. While he has not come to a firm conclusion on the proposal, Mr. Atkins said the central question is when it is appropriate for the government to intrude into the marketplace, and particularly into the pricing of securities.

Mr. Atkins said the SEC has not studied the overall impact of an enforced trade-through rule on liquidity and the pricing of securities. He has not heard a convincing explanation of how the rule will be implemented in a non-standardized automated market and said it raises a number of technical issues. Mr. Atkins suggested that the trade-through rule may actually remove investor choice and may interfere with a broker's fiduciary obligation to provide best execution for all customers. Without an opt-out provision, Mr. Atkins questioned whether the rule will replace investor choice with government choice.