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From Securities Regulation Daily, March 6, 2018

NYSE to pay $14 million to settle first-ever Reg. SCI charges, parent firm’s WKSI status secure

By Mark S. Nelson, J.D.

The SEC announced that the New York Stock Exchange LLC and affiliated exchanges have agreed to settle the first-ever charged violations of Regulation SCI, the agency’s cybersecurity and business resiliency rules for market-facing entities. The exchanges agreed to pay a $14 million fine without admitting or denying the SEC’s findings that they lacked policies and procedures to handle multiple failures governed by Regulation SCI and other laws. Intercontinental Exchange, Inc. (ICE), of which NYSE is an indirect subsidiary, also won a waiver that preserves its status as an eligible issuer (In the Matter of New York Stock Exchange LLCRelease No. 33-10463, March 6, 2018).

Moreover, the SEC’s co-directors of enforcement emphasized different aspects of the NYSE matter. "For retail investors to have confidence in our markets, exchanges must provide accurate information and comply with legal requirements, including being equipped for unexpected market disruptions," said Stephanie Avakian. By contrast, Steven Peikin noted that this was not the first time NYSE exchanges had had systems issues: "NYSE’s violation of the prior SEC order was a significant factor in assessing the civil penalties in this matter."

47 minutes. The SEC’s order focused on a total of five shortfalls. In one instance, NYSE and NSYE American LLC issued quotations labeled as "automated" when in fact they were not automated due to connectivity issues between trading units and customer gateways during a 47-minute period before a trading shutdown that occurred on July 8, 2015. The SEC alleged that the mislabeled quotes amounted to negligent misrepresentations or omissions of material facts. NYSE’s inability to provide automated quotes meant that NYSE was, briefly, not an "automated trading center" as defined by Regulation NMS. According to the order, NYSE has since adopted standards to deal with similar, future situations.

Moreover, the SEC claimed that NYSE lacked business continuity and disaster recovery plans because, for a one-year period after Regulation SCI became effective, NYSE would have had to rely on NYSE Arca, Inc.’s backup systems. NYSE also violated Exchange Act Section 19 by allowing a situation where floor brokers could detect non-displayed depth liquidity.

In other instances, NYSE Arca was alleged to have exacerbated limit-up/limit-down pauses that occurred during trading of exchange traded products on August 24, 2015 by applying price collars that slowed the resolution of imbalances during reopening auctions. Specifically, the use of "1-2-5" percent collars resulted in fewer shares being available for execution; more shares could have been available if, instead, either no collars or wider collars had been used. The SEC’s order said the use of price collars was a material operation that should have been included in the exchange’s rules. NYSE Arca has since adopted the needed exchange rules.

In yet another instance, NYSE Arca mistakenly halted trading in 134 securities on all exchanges for 20 minutes but, despite resuming its own trading within two hours, still was unable to publish information on closing auction imbalances. The halt resulted from NYSE Arca’s inability to clear a queue of 212 million superfluous messages directed to its market data publishing application.

Penalty and undertakings. NSYE and the other named exchanges were censured and ordered to cease and desist from further federal securities law violations. In addition to the $14 million civil money penalty, the exchanges, for a total of three years, must have their principal executive officers certify in writing that, based on a reasonable review, the exchanges have taken reasonable steps to comply with portions of Exchange Act Section 19. Moreover, the exchanges’ senior managements must meet in person with Commission staff on an annual basis for three years to further discuss their compliance with federal securities laws.

WKSI waiver. ICE, NYSE’s parent, asked the SEC to issue a waiver from the otherwise applicable ineligible issuer provisions contained in Securities Act Rule 405. ICE posited that the 47-minute outage was unrelated to its status as an issuer of securities and that its subsidiaries had taken reasonable steps to reduce the likelihood of another similar event, such as implementing a "failure scenario grid" to guide decisions by managers to delay, suspend, or resume trading. ICE also said the SEC’s order penalizing NYSE involved negligence and not more serious violations involving scienter or criminal conduct. The Rule 405 request was ICE’s first-ever WKSI waiver request.

The Commission granted the requested waiver because it was unnecessary, under the circumstances presented, to deny ICE its WKSI status. However, the Commission noted that the failure of the exchanges to comply with their agreed undertakings could result in reconsideration of the waiver.

The release is No. 33-10463.

Companies: New York Stock Exchange LLC; Intercontinental Exchange, Inc.

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