Securities Regulation Daily SEC adopts disclosure requirements for certain dark pools, relaxes stock compensation issuance rule
Wednesday, July 18, 2018

SEC adopts disclosure requirements for certain dark pools, relaxes stock compensation issuance rule

By John Filar Atwood

By unanimous vote, the SEC today approved amendments to Regulation ATS that will require ATSs that trade stocks listed on a national securities exchange to file detailed public disclosures on new Form ATS-N. The Commission also adopted an increase from $5 million to $10 million in the Securities Act Rule 701 disclosure threshold for companies issuing stock for compensation purposes. Finally, the agency agreed to issue a concept release that will explore additional ways to modernize the rules that apply to stock compensatory arrangements.

Commissioner Kara Stein supported the adoption of the new disclosure requirements for ATSs that trade national market system (NMS) stocks, saying that it will shine a light on dark pools that heretofore have operated in secrecy. However, she believes that the disclosure requirements should not be limited to NMS stock ATSs, and decried a missed opportunity to require public disclosure for ATSs trading over-the-counter equity securities, government securities, municipal securities, and corporate debt securities.

Commissioner Robert Jackson agreed with Stein’s remarks, saying that the new rule is an important first step but that more work needs to be done, especially with regard to fixed income market disclosure. Chairman Jay Clayton praised the rule adoption, but also underscored the agency’s need to consider further rules for segments of the market where disclosure is not adequate.

Commissioner Hester Peirce emphasized that the new rule for NMS stock ATSs is not a tool to engage in merit regulation, but simply a disclosure rule. The SEC will not be regulating the operations of ATSs as a result of the rule, she noted.

Regulation ATS amendments. The SEC adopted new Form ATS-N and amendments to Regulation ATS and Exchange Act Rule 3a1-1 that will require NMS stock ATSs to publicly disclose detailed information about their operations. This includes identifying and ownership information about their broker-dealer operators, as well as information on the ATS-related activities of their broker-dealer operators.

Specifically, NMS stock ATSs must disclose the trading activities of the broker-dealer operator and its affiliates on the ATS, whether subscribers to the ATS can opt out from interacting with orders and trading interest of the broker dealer operator and its affiliates, and arrangements between the broker-dealer operator or its affiliates and trading centers to access the ATS services. They also must disclose products and services offered to ATS subscribers by the broker-dealer operator and its affiliates, the activities of service providers to the broker-dealer operator and its affiliates, and safeguards and procedures established to protect the confidential trading information of subscribers.

Other required disclosure will include the types of subscribers, the criteria for eligibility for ATS services, and conditions for excluding subscribers from ATS services. The means of entry for orders and trading interest, connectivity and co-location procedures, arrangements with any subscriber or the broker-dealer operator to provide liquidity, and segmentation of orders and trading interest and the provision of notice regarding segmentation, among other things, also must be disclosed.

The new rule requires the disclosure of fees; procedures for stopping or suspending trading; procedures regarding trade reporting, clearance, and settlement; and sources and uses of market data. NMS stock ATSs also must disclose information about an NMS Stock ATS’s obligations related to order display and execution access pursuant to Rule 301(b)(3) of Regulation ATS and fair access pursuant to Rule 301(b)(5) of Regulation ATS, and aggregate platform-wide order flow and execution statistics provided by the NMS stock ATS to one or more subscribers.

Rule 701 amendments. The amendment to Rule 701(e) increases from $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required to deliver additional disclosures to investors. The adjustment, which will be effective immediately, was required by the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act.

Stein noted that the original $5 million threshold was implemented due the Commission’s concern that the larger the offering, even in the context of employee compensation, the greater the possibility of investor harm if there are no accompanying protections like financial disclosure. Although she said she was unsure of the costs and benefits of raising the threshold, she supported the rule change because Congress gave the SEC no choice.

Concept release. The concept release approved by the Commission seeks public input on ways to modernize compensatory securities offerings and sales. The SEC acknowledged that equity compensation can be an important component of the employment relationship, and Rule 701 gives companies some flexibility in the issuance of stock compensation. Peirce noted, however, that the rule has not been updated in 30 years and may not reflect the realities of a new, internet-driven economy.

The release solicits comments on "gig economy" relationships, in which issuers use internet platforms to provide workers the opportunity to sell goods and services. The Commission wants to better understand how the relationships work and determine which attributes of the relationships might provide a basis for extending eligibility for the Rule 701 exemption.

The concept release also will explore whether the SEC should further revise the disclosure content and timing requirements of Rule 701(e), and whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined.

Stein said that main question on which the release seeks feedback is whether companies should be allowed to issue stock compensation to even more people without having to register the offering with the Commission. Specifically, would allowing companies to issue stock to workers with whom they have short-term contractual arrangements be consistent with the rule’s underlying goals and what parameters should be set around the relationship between a company and its workers. Peirce believes that expansion of Rule 701 could enhance a company’s ability to hire and retain workers.

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