Thursday, September 07, 2023

Commission directs U.S. equity exchanges and FINRA to file new NMS plan

By Suzanne Cosgrove

The SEC has again directed the U.S. equity exchanges and the Financial Industry Regulatory Authority (FINRA) to file a plan for a national market system to replace the three existing national market system plans that govern the public dissemination of real-time, consolidated equity market data for national market system stocks.

Advances in technology and changes in the equity markets have heightened inherent conflicts of interest between the equity exchanges’ regulatory responsibilities for the oversight of existing NMS plans and their individual interests in maximizing the viability of the proprietary data products they sell, the SEC said.

But while the NMS plans are a critical piece of the national market system that facilitates the pricing and trading of equity investments, the path toward modernizing the plans has been a long one.

A bumpy road to change. An initial SEC governance order was handed down May 6, 2020, directing self-regulatory organizations (SROs) to submit a new national market system plan regarding consolidated equity market data and the dissemination of trade and quote data from trading venues. The directive came 10 years after an extreme stock market volatility event that was later dubbed “the flash crash.”

The SROs filed a proposed an updated NMS plan with the SEC on August 11, 2020, and the Commission approved the plan on August 6, 2021.

However, the exchanges objected to certain SEC terms within the plans, and a group of SROs associated with Nasdaq, the NYSE and Cboe petitioned the D.C. Circuit for review of the Commission’s action.

The SROs challenged three key aspects of the governance order and the plan approval order: the inclusion of non-SRO representatives as voting members of the plan’s operating committee; the grouping of SROs by corporate affiliation for voting; and the requirement that the plan’s administrator be independent of any SRO that sells its own proprietary equity market data.

As previously reported by Securities Regulation Daily, on July 5, 2022 the D.C. Circuit Court found that the SEC exceeded its statutory authority when it ordered the national securities exchanges and FINRA to come up with a consolidated plan for market data that included non-SRO representatives.

The exchanges lost their other two arguments for why the consolidated plan was invalid, but the D.C. Circuit court said it could not sever the offending part and vacated the entire order.

A change in plans. In the current order, which incorporates the 2022 appeals court’s decision, the Commission directs the SROs to file a revised consolidated data plan. In light of the D.C. Circuit’s ruling, non-SRO members will no longer be on the operating committee and the Commission is modifying the voting provisions of the governance order to require that action by the operating committee would require a two-thirds majority of the votes allocated to the SROs.

The revised consolidated data plan must provide for participation by non-SROs as members of a plan advisory committee, a requirement the Commission said was consistent with the current practice of the existing equity data plans under the SEC’s Regulation NMS.

Provisions of the NMS plan that was approved in 2021 and were not challenged, as well as those that were challenged but found by the court to be permissible, remain appropriate, the Commission said.

Current NMS plans will continue to govern the provision of consolidated equity market data until a new NMS plan takes effect, the SEC said.