By Laura Anthony, Esq.
An SCI Alternative Trading System is defined by volume broken down by NMS (National Market Systems) and non-NMS stocks and generally includes an Alternative Trading System with 1% or more of the NMS stocks volume or 5% or more of non-NMS stocks volume. Alternative Trading Systems which trade only municipal securities or corporate debt securities are excluded from the requirements. The OTC Markets is an SCI Entity and has confirmed that it is in compliance with Regulation SCI.
Interestingly, broker-dealers are not included as SCI Entities. The SEC reasoned that all broker-dealers are subject to Rule 15c3-5 and other FINRA rules which impose requirements related to the capacity, integrity and security of the broker-dealers’ systems and technology. However, the SEC did note that some broker-dealers are large enough that they could pose a real market risk if their systems were to break down or be infiltrated. The SEC may amend the rules in the future to include these firms.
An SCI “plan processor” includes “any self-regulatory organization or securities information processor acting as an exclusive processor in connection with the development, implementation and/or operation of any facility contemplated by an effective national market system plan.” There are currently four plan processors including the CTA Plan, CQS Plan, NASDAQ UTP Plan and OPRA Plan.
An “exempt clearing agency subject to ARP” includes “an entity that has received from the Commission an exemption from registration as a clearing agency under Section 17A of the Act, and whose exemption contains conditions that relate to the Commission’s Automation Review Policies, or any Commission regulation that supersedes or replaces such policies.” There is currently only one entity that meets this definition, Omgeo Matching Services – US, LLC.
In addition, Regulation SCI breaks systems down into three categories, including “SCI systems,” “critical SCI systems” and “indirect SCI systems,” meant to encompass systems and processes that are subject to heightened requirements, processes and procedures. “SCI Systems” include trading, clearance and settlement, order routing, market data, market regulation, and market surveillance. In particular, an “SCI System” is defined as “all computer, network, electronic, technical, automated, or similar systems of, or operated by or on behalf of, an SCI entity that, with respect to securities, directly support trading, clearance and settlement, order routing, market data, market regulation, or market surveillance.”
A “critical SCI system” is an SCI system that directly supports (i) clearance and settlement systems of clearing agencies; (ii) openings, reopenings, and closings on primary trading markets; (iii) trading halts; (iv) initial public offerings; (v) the provision of consolidated market data (i.e., SIPs); or (vi) exclusively listed securities. In addition, a “critical SCI system” is an SCI system that provides critical functionality to the market. An “indirect SCI system” is “any systems of, or operated by or on behalf of, an SCI entity that, if breached, would be reasonably likely to pose a security threat to SCI systems” and such systems only have to comply with the Regulation SCI provisions related to security and intrusions.
An SCI Event is defined as “an event at an SCI entity that constitutes: (1) a systems disruption; (2) a systems compliance issue; or (3) a systems intrusion.” A “systems disruption” is “an event in an SCI entity’s SCI systems that disrupts, or significantly degrades, the normal operation of an SCI system.” A “systems compliance issue” is defined as an “an event that has caused an SCI system to operate in a manner that does not comply with the [Securities Exchange] Act” and the rules and regulations thereunder and the entity’s rules and governing documents, as applicable. A “systems intrusion” is defined as “any unauthorized entry into the SCI systems or indirect SCI systems of an SCI entity.”
An SCI Event triggers certain obligations including taking corrective action, notifying the SEC and disseminating information. While the response to an SCI Event does not include a materiality analysis, it does include a risk-based analysis. Although the SEC provided for exceptions to the reporting and information requirements for events the de minimus or no impact on the SCI Entity’s operations or market participants, all disruptions require certain recordkeeping, assessment, and corrective measures regardless of how seemingly small they might be.
Note 1: Read Part I of this Article. Click HERE
Note 2: Original appeared on Legal & Compliance, LLC on 12 April 2016. Click HERE
Securities attorney Laura Anthony is the founding partner of Legal & Compliance, LLC, a corporate, securities and business transactions law firm. The firm’s experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances.