FR 2024-31351

The document from the Federal Register discusses the Securities and Exchange Commission (SEC)'s request to extend the use of Regulation Systems Compliance and Integrity, known as Regulation SCI. This regulation mandates that key market players such as national securities exchanges maintain strong technological systems and submit reports to the SEC about technological events and updates. The purpose of Regulation SCI is to enhance the reliability and security of the U.S. securities market by ensuring that essential systems comply with federal laws. Currently, the requirement affects 48 entities, but this number is expected to grow, increasing the workload and compliance costs for these entities.

Significant Concerns and Issues

The document presents an overwhelming amount of technical detail, which poses readability challenges for anyone who isn't familiar with regulatory or legal jargon. This complexity could hinder affected market participants, especially smaller firms, from fully understanding their obligations under Regulation SCI. Moreover, it provides extensive estimates of the costs and burdens associated with compliance, yet fails to explain why these costs are necessary, reasonable, or beneficial in relation to the regulation's goals. There is also a lack of transparency concerning whether the entities were consulted regarding these financial implications.

Another issue is the substantial financial burden especially highlighted for new respondents. These businesses will face high initial compliance costs, and ongoing expenses may be difficult for smaller entities to manage. Furthermore, the document mentions additional costs for external legal and consulting services without adequate justification for such expenses. This could imply a potentially unnecessary reliance on external services rather than developing internal capabilities.

Impact on the Public and Stakeholders

Broadly, the public might not see immediate effects from these regulations, but in theory, Regulation SCI aims to ensure market stability and security, possibly yielding benefits in terms of investor protection and overall financial system integrity. However, these benefits are not clearly articulated in the document, leaving skepticism about the direct advantages to the public when weighed against the costs imposed on market players.

Specific stakeholders, such as securities exchanges and alternative trading systems, will be directly impacted. They face the dual challenge of meeting compliance demands while managing the significant financial commitments outlined. For larger, well-resourced entities, these requirements might be manageable, but smaller participants might struggle, potentially affecting competition and innovation within the market. The increased burden on new market entrants could discourage their participation, inadvertently leading to market concentration.

Overall, while the SEC’s intention to strengthen market infrastructure is clear, the lack of clarity on cost justification and benefits, combined with the intricacy of compliance, raises concerns about the regulation's broader effectiveness and fairness. A more transparent explanation of the regulation's expected positive economic impacts and a consideration of less burdensome compliance processes could benefit all involved parties.

The document from the Securities and Exchange Commission discusses the costs associated with compliance to Regulation Systems Compliance and Integrity (Regulation SCI). It outlines both initial and ongoing costs for respondents, which include national securities exchanges, associations, registered clearing agencies, exempt clearing agencies, plan processors, and alternative trading systems.

Initial Costs

For seven new respondents, who are expected to join as SCI entities, the initial internal cost of compliance is estimated to average $1,696,578. Additionally, these new respondents are expected to spend $305,500 on outside legal or consulting costs. Similarly, different estimates for internal compliance costs are provided for new respondents, ranging from approximately $628,160 for certain activities, alongside consulting costs of $175,500, to $309,868 for others. The initial burden for recordkeeping is noted, with new respondents incurring a cost ranging from $72,930 to $903 for various procedures.

Ongoing Costs

The ongoing annual internal cost of compliance is projected to average $4,801,060 for all respondents. For some specific tasks, such as compliance under rule 1001(b), the document reports ongoing costs of $2,881,660. Furthermore, activities related to certain reporting requirements foresee costs averaging $3,795,800, while the management of systems disruptions or intrusions would cost around $3,329,040. These include a variety of tasks that require a financial outlay to maintain compliance with established standards and protocols under Regulation SCI.

Additional Legal and Compliance Expenses

The document highlights that respondents will incur costs for outside legal advice, totaling around $319,000, along with further sums like $182,600 annually for additional legal preparations. Notably, substantial outside legal or consulting services are being highlighted, raising questions about potential inefficiencies if such advice could be integrated internally rather than frequently outsourced.

Issues and Observations

One apparent issue is the lack of a detailed breakdown or justification for these financial figures, which can often seem arbitrary without thorough explanation, potentially raising queries about the accuracy or necessity of such expenses. The document does present a thorough overview of the numerous costs but does not provide a narrative about anticipated benefits that could balance these expenses, leaving an impression of an overwhelming financial burden, particularly for new respondents.

Moreover, while these expenses reflect adherence to technical and regulatory requirements, there is no direct mention of specific benefits for respondents who bear these costs, leaving questions about whether these financial burdens are offset by enhanced business security or operational effectiveness. Consequently, the reliance on external services and the assumptions of these costs might suggest an area of improvement for the Commission and respondents to reduce waste by potentially developing more robust internal capabilities.

The financial aspects, especially the heavy utility of external advisory services, seem to underline a systemic challenge within the infrastructure, hinting at the potential for favoritism or inefficiencies in consulting expenditures, which may need further scrutiny. Overall, the specific estimated costs prompt discussion, especially regarding whether these financial investments are directly aligned with tangible securities market benefits or are just a mechanism for regulatory compliance without significant procedural improvements.