SEC approves rules on trading, best execution

The Securities and Exchange Commission on Wednesday approved a host of rule proposals aimed at bolstering U.S. equity markets.

The commission approved in a unanimous vote issuing a proposal that would broaden the entities subject to Rule 605 under Regulation NMS of the Securities Exchange Act of 1934. Rule 605, last modified in 2005, generally requires a market center that trades stocks to make public monthly electronic execution reports that include uniform statistical measures of execution quality. Under the proposal, the scope of Rule 605 would be expanded to include broker-dealers who introduce or carry 100,000 or more customer accounts; single-dealer platforms; and entities that would operate proposed qualified auctions.

The proposal would also modify the existing order size categories to base them on round lots — typically 100 shares of a stock or a multiple of 100 — rather than number of shares and include additional order size categories for fractional share, odd-lot, and larger-sized orders, according to an SEC fact sheet.

The Rule 605 proposal and three others approved Wednesday will be open for comment through March 31 or 60 days after publication in the Federal Register, whichever is longer, SEC Chairman Gary Gensler said.

Next, the commission in a unanimous vote approved a proposal to lower trading increments and access fees on exchanges. Of note, the proposal would amend minimum pricing increments, also known as tick sizes, to establish a variable minimum pricing increment model that would apply to both the quoting and trading of NMS stocks.

The Investment Company Institute said in a statement that a "reduced tick size could present a sensible first step towards relieving tick-constrained stocks and promoting competition. We will review the proposal to assess whether the proposed pricing increments present the most efficient way to achieve these goals."

Also, in a 3-2 vote with the two Republicans commissioners dissenting, the commission approved a proposal to require certain retail equity orders be exposed to open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition.

The commission, in an another 3-2 vote with the two Republicans commissioners dissenting, approved a proposal that would establish a best execution standard for brokers, dealers, government securities brokers, government securities dealers and municipal securities dealers. Specifically, broker-dealers would be required to use "reasonable diligence to ascertain the best market for the security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions," according to a fact sheet. Moreover, broker-dealers would be required to establish, maintain and enforce written policies and procedures reasonably designed to comply with the best execution standard.

Kenneth E. Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association, said in a statement that the SEC proposals are incredibly complex with material impact to all market participants, but particularly to investors.

"We strongly believe the SEC needs to be extremely careful in its approach," Mr. Bentsen said. "Any changes being proposed in the name of competition which may tilt the playing field at the expense of investors should be weighed carefully, be subject to a robust cost benefit analysis, and considered holistically with a view to ensuring there are no negative, unintended consequences for investors."

Separately, in a unanimous vote, the commission adopted amendments to enhance disclosure requirements and require a cooling-off period for corporate insiders buying stock under Rule 10b5-1. The adopted rule, which was initially proposed in December 2021, requires that issuers annually disclose their insider trading policies and procedures. Moreover, in quarterly reports, issuers must disclose the adoption and termination of Rule 10b5 1 trading plans and other trading arrangements by directors, officers and issuers, and the terms of such trading arrangements.

The proposal also requires that before any trading can commence, Rule 10b5-1 trading plans entered into by corporate officers or directors must include a cooling-off period of either 90 days following plan adoption or modification, or two business days after disclosure in the issuer's financial results for the fiscal quarter in which the plan was adopted or modified.

There will also be a 30-day cooling off period for less senior people in the plan before any trading can commence.

"The new rules close gaps in the SEC's enforcement regime that allow executives to use 10b5-1 plans as cover for insider trading," said Amy Borrus, executive director of the Council of Institutional Investors, in a statement. "The SEC amendments will better protect public investors from misuse of these plans and strengthen confidence in corporate management teams and the capital markets generally."

The rule will become effective 60 days after publication in the Federal Register.