“Smart Regulation: Keeping the Door Open for Effective Ideas”

In my remarks at the Commission’s May 26, 2010 meeting considering the CAT proposal, I quoted from a 1980 Commission report that spoke about the need for a comprehensive market oversight surveillance system.¹ Flash forward over three decades from that report, and not much has changed. We have seen enormous growth in the capital markets, and the SEC still does not have access to comprehensive market data. As a result, I have been a consistent and vocal supporter of a consolidated audit trail.²

It has taken over 30 years for the Commission to be poised to act on this issue. Accordingly, it is important that the Commission get it right. If the first steps in establishing this national market oversight framework are flawed, the system will not be comprehensive, and it will not serve the needs of the American public.

Unfortunately, as currently structured, today’s rule falls short of establishing the process that investors deserve. It is with great disappointment that I am not able to support today’s rule. I am concerned that the proposal fails to set appropriately specific requirements to ensure the creation of a comprehensive market surveillance system, one that will capture the whole of the capital markets – including both regulated and currently unregulated markets. Moreover, I am concerned that the rule as currently drafted will limit innovation, and will fail to achieve cost savings.

Reduced Clarity

I am particularly concerned that the rule to be voted on today has moved too far away from the more prescriptive requirements contained in the 2010 proposal. The lack of sufficient prescriptive requirements could adversely impact the Commission’s ability to receive the comprehensive data it needs to be an effective regulator. Additionally, given the absence of such requirements, I believe that the rule should not require that all the SROs jointly submit a single plan. Rather, the rule should provide the Commission with the ability to consider a fulsome discussion of competing solutions submitted by different sets of SROs.³ This would best serve the public interest and the protection of investors, by enabling the Commission to select the plan best designed to achieve the full range of benefits of a consolidated audit trail. As President Ronald Reagan once said, “excellence demands competition.”⁴

The release states that the decision to require all SROs to jointly file one NMS plan with the Commission “is appropriate because such a requirement is expected to result in an NMS plan that is the product of negotiation and compromise among all of the SROs….”⁵ However, this assumes that all SROs will have equal weight and negotiation power, which is just not realistic. The process contemplated by Rule 613 could result in a battle of size, not necessarily one of ideas. And, I might add, not all compromises represent improvement.

Allowing for competing NMS plans would facilitate the development and consideration of more innovative ways to establish a consolidated audit trail that collects timely and accurate data in a cost-effective manner.⁶

Cost Savings

In addition, there are some that have expressed concerns regarding the costs of a consolidated audit trail.⁷ I strongly believe that market confidence and the other benefits to be derived from a comprehensive and reliable audit trail will more than justify the costs of such a mechanism. However, I agree that it is important to develop a process that works toward maximizing these benefits while minimizing the costs.

In my view, as I’ve considered this rule since its proposal, the best way to address cost concerns is through competition by encouraging the submission of multiple NMS plans.⁸ As Henry Ford once said, “[c]ompetition is the keen cutting edge of business, always shaving away at costs.”⁹ Through the competition of ideas, the Commission would be in the best position to choose an NMS plan that will foster the creation of the most cost-effective, comprehensive consolidated audit trail.

No one can argue that effective oversight requires an informed regulator. For too long, the Commission has lacked ready access to the market information necessary to facilitate effective surveillance. The events of May 6, 2010 showed the significant costs to investor protection and market integrity when regulators do not have prompt access to critical information.

Accordingly, I am deeply concerned that Rule 613 will limit a comprehensive discussion of the options the Commission can consider. Therefore, I am unable to support Rule 613 as currently drafted.

Notwithstanding my disappointment with the final rule, I want to thank the staff for their work on this rulemaking. I particularly want to thank those members of the staff that initially brought and strongly advocated this idea to the Commission. I thank you for your efforts.

Thank you.

¹ See, Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, “The Need for Effective Surveillance,” remarks at open meeting of the Securities and Exchange Commission, Washington, DC (April 14, 2010), http://www.sec.gov/news/speech/2010/spch041410laa-trader.htm#P16_810.

² See, e.g., Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, “Exemplifying Fundamentals—Back to Basics,” remarks at the NASAA Section 19(d) Conference, Washington, DC (March 28, 2011), http://www.sec.gov/news/speech/2011/spch032811laa.htm#P58_10887; Aguilar, “Effective Capital Markets Regulation Depends on Access to Real-Time Data,” remarks at open meeting of the Securities and Exchange Commission, Washington, DC (May 26, 2010), http://sec.gov/news/speech/2010/spch052610laa-audit.htm; Aguilar, “The Need for Effective Surveillance,” remarks at open meeting of the Securities and Exchange Commission, Washington, DC (April 14, 2010), http://www.sec.gov/news/speech/2010/spch041410laa-trader.htm#P16_810; Aguilar, “Sustainable Reform Prioritizing Long-Term Investors Requires the Right Orientation,” remarks at SEC Speaks, Washington, DC (February 5, 2010), http://sec.gov/news/speech/2010/spch020510laa.htm.

³ I note that Rule 613(a)(1) requires a NMS plan to address the process by which the plan sponsors solicited views of their members regarding the creation, implementation, and maintenance of the consolidated audit trail, provide a summary of the views of such members, and describe how the plan sponsors took such views into account in preparing the NMS plan. However, Rule 613(a)(1) does not sufficiently provide the Commission and the public full transparency into all of the proposals that were considered by the plan sponsors, nor does Rule 613(a)(1) promote a framework by which all SROs are encouraged to submit their own competing plan due to the lack of a formalize process within Rule 613 as to the consideration of every proposal submitted by an SRO.

⁴ Ronald Reagan, Remarks to National Catholic Education Association, April 15, 1982.

⁵ Consolidated Audit Trail Release File No. S7-11-10 at p. 77.

⁶ See, The NASDAQ OMX Group, Inc. Letter (November 18, 2011); Correlix Letter (February 4, 2011); Letter By Jarg Corporation, NextStage Evolution, and Enterprise Infrastructure Services (April 6, 2011); Integration Systems LLC Letter (November 24, 2010); and Fix Protocol Ltd. Letter (August 5, 2010).

⁷ See, Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; SIFMA Drop Copy Letter, p. 1.

⁸ See, NMS Rule 608(a)(1).

⁹ See, “Rivalries—Webster’s Quotations, Facts and Phrases” Icon Group International (November 26, 2008).