We here at SECond Opinions pride ourselves on staying current on all things SEC. But how about when in a single day, the SEC finalizes one rule and proposes four others (totaling 1,656 pages!) that could drastically change our financial markets? Well, we're only human. Given the potential sweeping impacts of these rules, we'll take a deep dive into them after the holidays. In the interim, we offer this brief snapshot of the SEC's most recent rule flurry.

New Final Rule

After prior extensions of the public comment period, yesterday the Commission finalized its new rule requirement relating to insiders' securities transactions.

• Amendments to Modernize Exchange Act Rule 10b5-1 (Insider Trading Plans and Related Disclosures): Approximately a year ago, the Commission proposed revisions to Exchange Act Rule 10b5-1, governing company insider trading plans, along with some additional disclosure requirements for issuers. The SEC finalized rules earlier this week, with four main highlights:
  • The amendments add new conditions to Exchange Act Rule 10b5-1(c)(1), including cooling-off periods for directors and officers (generally the later of 90 days or two business days following disclosure of issuer financial results), and persons other than issuers (30 days).
  • Directors and officers must now represent, at the time of implementation, that they are not aware of material nonpublic information about the issuer or its securities and that they are entering into the plan in good faith and not in violation of Rule 10b-5.
  • Registrants must abide by additional quarterly disclosure requirements, including those covering issuers' insider trading policies and procedures, disclosures around trading arrangements by issuers' directors and officers (such as modifying an existing 10b5-1 plan), and for equity compensation awards made to directors and officers in close proximity to the issuer's disclosure of material nonpublic information.
  • The new rule provides for updates to Forms 4 and 5 to require filers to identify transactions made pursuant to a 10b5-1 plan in order to satisfy the affirmative defense conditions of Rule 10b5-1(c).

The rule will become final 60 days after adoption, with certain reporting and filing obligations to become effective April 1, 2023.

Four Proposed New Rules

For many, the last few years were the first time they first heard the term "payment for order flow." For his part, SEC Chair Gary Gensler has made no secret of his misgivings about this practice and other areas where, in his view, the markets "are not as fair and competitive" as they could be. The SEC's four new proposed rules supported by Chair Gensler and some — but not all — of the other SEC Commissioners are purportedly designed to improve fairness, competition, and overall outcomes for investors. Given the practical, logistical, and monetary impact of these proposed rules, however, we expect heavy comments on the proposals.

• Proposed Rule to Enhance Order Competition: In an effort to address Chair Gensler's much-discussed concerns about unfair markets, the SEC's proposed rule would require certain "marketable orders" — those that seek to trade immediately at the best available prices in the market — for individual investors to go through competition in fair and open auctions before they could be executed internally by any trading center that restricts order-by-order competition. The rule applies to orders placed by natural persons who average fewer than 40 trades a day, with certain exceptions for, among other things, larger orders (such as those over $200,000 in market value). Currently, many marketable orders are routed to off-exchange wholesalers who execute the transactions internally without competition from other market participants. The SEC claims that these "restricted competition trading centers" create a "competitive shortfall." To address this purported shortfall, the SEC proposes auctions that last between 100 milliseconds and 300 milliseconds. Under the proposal, absent an exception—such as the ability to beat certain price metric data — entities qualifying as "restricted competition centers" would be prohibited from executing these "segmented orders" unless those orders first went through a "qualified auction" in an "open competition trading center." Chair Gensler praises the proposed rule as a mechanism to achieve better prices for investors. Conversely, Commissioner Mark Uyeda views the rule as an attempt to "upend" markets that already provide tight spreads for all investors and accuses the Commission of "circular reasoning" to justify the proposal.
• Proposed Regulation Best Execution: The duty of best execution requires a broker-dealer to seek and execute customers' trades in a manner to obtain the most advantageous terms for the customer. Although FINRA rules exist governing best execution obligations, this is the SEC's first foray into best execution rulemaking. Under Proposed Regulation Best Execution, subject to certain exceptions, a broker-dealer (including its associated persons) would be required to use reasonable diligence to ascertain the best market for the security and buy or sell in such a market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. As has been pattern and practice for the SEC during its recent run of rulemaking, the proposed rule includes requirements that broker-dealers establish, maintain and enforce written policies and procedures reasonably designed to comply with the proposed best execution standard. Further, the SEC proposes that broker-dealers engage in a quarterly review of trade execution quality and document the results accordingly, along with mandatory annual reviews that need to be documented (akin to the SEC's proposal around Advisers Act Rule 206(4)-7(b)). SEC Commissioner Caroline Crenshaw praises the proposal, claiming it will bring much-needed "consistency and clarity" to best execution duties and responsibilities and a "long overdue" rulemaking effort by the Commission. Not surprisingly, SEC Commissioner Hester Peirce is critical of the proposed rule, calling it "unduly prescriptive" and arguing that it "provides a handy checklist for SEC examiners and enforcement attorneys, but it does not foster brokers' exercise of judgment to achieve what is best for customers."
• Proposed Rule on Disclosure of Order Execution Information: Regulation NMS includes various requirements concerning National Market System stocks. The Commission adopted Regulation NMS in 2000 to, among other things, help the public compare and evaluate execution quality among different market centers. The current version of the rule requires wholesalers and exchanges to publish monthly data about the stock price quality for investors. The most notable aspect of the proposed rule is the expansion of the types of entities subject to the rule (including broker dealers with more than 100,000 customer accounts and entities that operate certain qualified auctions). Additionally, the proposal would also expand the definition of "covered order" to include orders submitted outside of normal trading hours, certain orders submitted with stop prices and non-exempt short sale orders and would require time-based metrics to be recorded at a more granular level. Furthermore, under the proposed rule, all subject entities would be required to publish a summary report with the pertinent information on the Commission's website. Interestingly, in her statement on the proposed rule, Commissioner Peirce criticized the overall suite of proposed reforms but noted that Regulation NMS doesn't currently provide sufficient information on order execution and the proposal "appears to be a reasonable attempt to address deficiencies" under the current framework.
• Proposed Rule on Tick Sizes, Access Fees, and Transparency of Better Priced Orders: The most noteworthy aspect of this proposal involves proposed changes to the minimum price increments for quotes and orders called "tick sizes." Rule 612 of Regulation NMS sets forth a tick size of 1 cent for quotes and orders in NMS stocks priced at or greater than $1.00. Much decried by exchanges, the current version of the rule prevents bid-ask spreads for these stocks from being less than a penny. Under the SEC's proposed rule, the Commission offers a more variable approach that would allow exchanges to quote prices in tighter increments—ranging from one-tenth of a penny to a penny depending on the "Time Weighted Average Quoted Spread" for the stock during the evaluation period. Under the proposal, more actively traded stock would generally produce the most narrow tick sizes. Commissioners from both sides of the aisle supported aspects of the proposal, all noting that the current tick size requirement warrants improvement.

The SECond Opinions Blog will continue to monitor and report on this and other proposed rules and related developments. And we promise to say more on the new and proposed rules when we've packed away our holiday decorations and shuttled our darling children back to school.