Industry participants say this week’s decision by the Securities and Exchange Commission (SEC) to reopen the comment period on three regulatory proposals was a response to pressure from lawmakers and financial industry participants, who are concerned about what they say are overly aggressive regulatory timelines under the chairmanship of Gary Gensler. The three proposals include a document that contemplates wide-ranging amendments to Regulation Alternative Trading System (Reg ATS) to include significant Treasury markets platforms.

“We are not surprised that the SEC has heard from a wide breadth of investors, issuers, market players, and participants, given the far-reaching implications of the proposed rule,” says a source from a vendor that would fall under the scope of the proposals.

The SEC announced on Monday that it was to reopen the comment period for the three proposals. In the case of the Reg ATS amendments, that means stakeholders have another 30 days to consider and submit comments. The substance of the proposal itself does not change; the SEC says the scope and comment process for the proposal will remain as stated in the original notice.

The commission’s announcement quoted chairman Gensler, who said the three proposals—the other two deal with the standardization of climate-related disclosures for investors and enhancing private fund investor protection—drew significant interest from a swath of stakeholders, so the regulator was providing more time for comment.

“Commenters with diverse views have noted they would benefit from additional time to review these three proposals, and I’m pleased that the public will have additional time to provide thoughtful feedback,” Gensler said.

The SEC under Gensler, who took office in April 2021, has wasted no time in implementing his ambitious agenda, releasing a slew of proposals. Anxiety around the volume of proposals is compounded by the fact that under Gensler, the SEC has stuck to providing 30- or 45-day comment periods, rather than the 60 days commonly offered by his predecessors.

The short deadlines have drawn criticism from Senators, a range of lobby firms including the Securities Industry and Financial Markets Association (Sifma) and the FIA Principal Traders Group, and investors. The notice and comment period is an important mechanism to hold the agency accountable and help it develop carefully considered regulation, these critics say, and the consistently short and overlapping comment periods don’t provide enough time for affected parties to fully analyze and comment on proposals.

This week’s extension of the climate disclosure proposal deadline drew the most media and popular attention. But the Reg ATS amendments, which were proposed in January, are arguably a more complex and transformational document, as most of the proposal’s key provisions touch on trading venues in all asset classes.

The proposal is over 600 pages long, contains some 220 questions for the public to answer, and came with a 30-day comment deadline. In substance, it widens the definition of “exchange”, sweeping into the scope of Reg ATS systems that support trading in government securities, which were formerly exempt, and so-called “communication protocol systems”: vendors that use non-firm trading interest to bring together buyers and sellers of securities—potentially drawing in smaller fintechs such as providers of execution management systems (EMSs) and request-for-quote (RFQ) protocols.

Should the proposal become regulation, these vendors, many of them smaller companies, would be subject not only to Reg ATS but also to the SEC’s operational resilience regulation, Regulation Systems Compliance and Integrity (Reg SCI).

The SEC’s lone Republican commissioner, Hester Peirce, dissented against the Reg ATS proposal, saying at the time that short comment periods are the SEC insisting on blindfolding itself, and that 30 days was too short given the wide-ranging impact of the proposal, affecting virtually the entire financial marketplace.

Companies that are potentially affected by the proposal say that not only is its scope vast, but it also overlaps with other regulation that is itself still in the proposal stage. Understanding this tangled web of regulation is difficult enough for large organizations like market operators or large buy-side firms, which can afford teams of lawyers, and have government affairs staff who are often former SEC officials. The CEO of a small ATS, on the other hand, might have to wend their way through hundreds of pages of regulation largely unaided, trying to understand the impacts on their business.

The executive at the vendor says many companies did not even realize the Reg ATS proposal had implications for their businesses until they read the submissions of others, and the extended comment period will benefit them.

“Firms are now realizing from the comments already submitted that they are impacted and may not have recognized it. The SEC extension will provide firms the time necessary to assess that impact and provide comment to that effect,” they say.

Transformational regulation often goes through a sort of workshopping process with the industry, and proposals are preceded by years of dialog at roundtables and conferences, lobbying, and regulatory tools like concept releases and requests for information that thoroughly sound out market opinions. The idea of competing consolidators that forms the basis for 2021’s Market Data Infrastructure Rule, for example, while by no means universally popular, had been kicked around various forums for at least a decade prior to the rule’s proposal. This means that by the time a proposal comes out, both affected parties and the regulator have formed to some degree an understanding of the proposed changes.

The fundamental intentions behind the Reg ATS amendments were not entirely a surprise to the industry. That proposal was to some extent presaged by an earlier proposal and concept release that the SEC published together in 2020. These 2020 releases contemplated enhancing oversight of ATS that traded government securities and asked for comment on the regulatory framework for electronic platforms that trade corporate debt and municipal securities.

And many had expected the SEC to be looking to regulate central limit order books more closely, especially after an outage at BrokerTec in 2019 that shut down trading of US Treasuries for 90 minutes.

However, the “final product”—the proposal that came out in January 2022—goes way beyond what these events signaled, says the executive, and has caught the industry by surprise. Thus, the 30-day comment deadline to understand completely new complex regulation is particularly egregious.

“There has been a long debate here in the US about whether ATSs that trade government securities should continue to be exempt from Reg ATS. The proposal of 2020 was about removing that exemption—it was not about changing the foundational definition of what an exchange is, in a way that would expand its reach to cover an extensive array of non-exchange activities,” the source says.

“One of the big losers here would certainly be small fintech companies and obviously the markets as well, as they benefit a great deal from the efficiencies and interoperability brought about by fintechs,” the source says.

Short cycles

The SEC has defended the short comment cycles by citing a quirk of US law: The countdown on comment deadlines only begins once the proposal is published in the Federal Register, the US government’s official register of rules and notices. If a proposal has a 30-day comment deadline but there is a delay of, say, a month between the proposal’s first announcement and its publication in the Federal Register, the commentariat actually has 60 days to respond, not 30.

The Reg ATS proposal, for example, was first published on January 26, but only hit the Federal Register on March 18, meaning that the real deadline for comment was April 18.

Bruce Bennett, a partner at law firm Covington & Burling, says this is a device he has only seen during Gensler’s tenure. It’s usual to expect a lag of about a week between the initial announcement of a proposed regulation on the SEC’s website and its publication in the Federal Register, Bennett says, but lately, some of the commission’s more complex releases have taken a full month. Bennett says the delay is almost certainly the SEC sitting on the regulation, rather than a procedural issue at the Federal Register, as rulemakings by other agencies showed up in the register in the normal span of a week to 10 days.

“It’s admittedly just a theory, but we don’t see it anywhere else. … I think it is optics, for the SEC to be able to claim in case of litigation that they gave a 30-day comment period. In certain cases, the comment period [on some complex proposals] has wound up being exactly 60 days,” Bennett says.

Market participants say this de facto 60-day deadline isn’t comforting, as it’s difficult to know how to apportion their resources when working on their responses under uncertain constraints. They say they would rather be given a concrete 60-day deadline under which to operate, as was usually the case pre-Gensler.

Virtu Financial CEO Douglas Cifu writes in the comment letter his firm submitted on the Reg ATS proposal that the delay between publications “comes as little solace for market participants and investors as they must be prepared for publication in the Federal Register at any point, at which time the clock begins ticking.”

It’s also worth noting, Cifu continues, that since proposing the changes to Reg ATS in January 2022, the SEC has released at least 13 more proposals with overlapping comment periods. “Many market participants and investors, including Virtu, will be significantly impacted by some or all of these proposals,” he said.

Bloomberg’s comment letter agrees that these overlaps are contributing to the piecemeal rollout of regulation, hindering the industry’s ability to give meaningful comment. The company’s letter points to a March proposal regarding definitions of certain kinds of dealers.

“The proposed definitions rely in part on the framework being developed in this proposal. The two proposals and issues dealt with therein are clearly interrelated, and the costs and benefits in this proposal cannot be evaluated in isolation. But it is not clear how these two proposals are intended to work together,” the letter says.

The SEC is also considering changes to Reg SCI and recommending central clearing in government securities markets, it adds.

Effective execution

Other market sources defended Gensler, saying he is trying to get as much done as possible during his term and the commission has released well-researched and informed proposals.

They pointed to Gensler’s Obama-era chairmanship at the Commodity Futures Trading Commission (CFTC). The administration had passed the bipartisan Dodd–Frank Act in response to the 2008 financial crisis, and the CFTC, a relatively sleepy and underfunded agency, suddenly had a wider and higher-profile mandate—implementing the raft of regulation over the swaps industry—thrust upon it.

And Gensler was the man for the job. He approached his role aggressively, implementing in short order all the rules Congress had made. There were those, Peirce among them, who criticized his approach of using no-action letters (a CFTC tool of regulatory relief) to mitigate the effects of rules that were pushed through quickly. But Gensler generally had bipartisan support.

“Gensler got an immense amount done. He was aggressive, but I think the consensus was that rulemaking got done reasonably well,” Covington’s Bennett says.

Gensler is implementing regulation in a different context now, however, Bennett adds.

“He had an enormous amount of work to do, and bipartisan support in Congress, which was monitoring progress on those rulemakings. So there was a lot of support to get things done quickly. My view is that he’s come to the SEC with the same mindset. There’s still a lot to get done, but he doesn’t have that life-altering event (the financial crisis) that he had at the time of Dodd–Frank, nor this piece of legislation granting him this new space,” he says.

“And I think some of the friction he’s encountering is that it’s a different situation but he’s bringing the same approach as before. But now it’s harder for the commission to defend, and it’s more difficult for the industry to see why speed—that in some cases compromises the quality of the comments is—warranted,” Bennett says.

Covington senior counsel David Martin says that while the volume of proposals coming out of the SEC lately is “toward the top end” of what the markets have the bandwidth for, there is less need to panic about deadlines than many firms may realize.

“We don’t want to do too much handwringing, because there’s nothing that says you can’t get a comment letter in after the comment period expires—the staff will still read it,” he says.

A spokesperson for the SEC declined to comment on this article.