Opening Statement at the SEC Open Meeting

Chairman Jay Clayton

July 18, 2018

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act. Today, the Commission will consider two recommendations from the Division of Corporation Finance and one recommendation from the Division of Trading and Markets. The fourth item that appeared on the Sunshine Act notice has been removed. The staff continues to refine and work with the Commission on the recommendation, and I expect that recommendation to be voted on shortly.

Securities Act Rule 701

The first two items on the agenda are recommendations from the Division of Corporation Finance that relate to Rule 701 under the Securities Act. Rule 701 allows non-reporting companies to sell securities for compensatory purposes without the requirement to register the offer and sale of such securities with the Commission. Currently, issuers that sell more than $5 million worth of securities in a 12-month period in reliance on Rule 701 are required to provide investors with additional disclosure.

First, the staff recommends that the Commission adopt an amendment mandated by the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, which would raise the threshold for the enhanced disclosure requirement under Rule 701. Specifically, the recommendation would increase the threshold, which has not been revised since 1999, from $5 million to $10 million.

In addition, the staff recommends that we issue a concept release, requesting comment on other ways in which our rules for compensatory securities offerings could potentially be revised, consistent with investor protection, to adapt to developments and innovations in labor markets and compensation practices. Modernizing Rule 701 is a topic on which we have received recommendations from the Commission's Advisory Committee on Small and Emerging Companies,[1] and we would benefit from comments from a broad range of constituencies.

Before I turn the proceedings over to Bill Hinman, the Director of the Division of Corporation Finance, to discuss the recommendations, I would like to thank the staff for their hard work on these releases.

Specifically, I would like to thank Bill Hinman, David Fredrickson, Tamara Brightwell, Anne Krauskopf, Adam Turk, Michael Coco, and Eloise Quarles in the Division of Corporation Finance; Bryant Morris, Dorothy McCuaig, Omid Harraf, and David Friedman in the Office of General Counsel; and Vanessa Countryman, Hari Phatak, Jennifer Juergens and Mattias Nilsson in the Division of Economic and Risk Analysis.

NMS Stock Alternative Trading Systems

The final item on the agenda is a recommendation to adopt amendments to the regulatory requirements governing alternative trading systems, which are commonly known as ATSs. These amendments to Regulation ATS would impose new public disclosure requirements on, and enhance the Commission's oversight of, ATSs that facilitate transactions in National Market System stocks ("NMS Stock ATSs").

The U.S. equity markets have evolved substantially since Regulation ATS was adopted almost 20 years ago. Today, many NMS Stock ATSs actively compete with national securities exchanges for order flow, and operate with comparable speed and sophistication.

That said, there is a significant difference between the information national securities exchanges, on the one hand, and NMS Stock ATSs, on the other hand, are required to disclose to the public. For instance, national securities exchanges are required to maintain a publicly posted rulebook and publicly file all of their proposed rule changes with the Commission. In contrast, NMS Stock ATSs generally file information about their operations with the Commission on a confidential basis, and that information is not required to be publicly released or even shared with their subscribers. This absence – or in the best cases, asymmetric level – of information about the operations of NMS Stock ATSs relative to national securities exchanges can inhibit market participants' and intermediaries' understanding of how orders interact, are matched, and are executed on NMS Stock ATSs.

As the staff will describe in more detail in a few minutes, the recommendation before us will help fill these information gaps. More specifically, it will require NMS Stock ATSs to disclose information about, among other things, the activities of the operator of the ATS and its affiliates, its safeguards to protect confidential trading information, available order types, outbound routing practices, and fees. Promoting greater transparency through public disclosure of information about NMS Stock ATSs should help empower investors and their intermediaries to find those trading venues that best meet their trading and investing objectives.

More generally, one of my guiding principles is that because markets are constantly changing, we must continually evaluate our approach to regulation. Today's recommendation is the result of such attention to market developments and needs.

In this same vein, I note that earlier this week, the Commission's Fixed Income Market Structure Advisory Committee, or the FIMSAC, recommended that the Commission review the regulatory framework for oversight of electronic trading platforms used in the municipal securities and corporate bond markets – in other words, markets not directly impacted by today's staff recommendation. I have asked the staff to conduct a review of this type, as informed by FIMSAC's views, and provide a recommendation to the Commission concerning whether there are opportunities to enhance the framework for oversight of electronic trading platforms in these fixed income markets.

Turning back to the recommendation at hand today – before I ask Brett Redfearn, Director of the Division of Trading and Markets, to discuss the staff's recommendation, I would like to thank Brett, as well as David Shillman, John Roeser, Tyler Raimo, Matthew Cursio, Marsha Dixon, Jennifer Dodd, David Garcia, Megan Mitchell, and Andrea Orr from the Division of Trading and Markets, for their hard work on this rulemaking.

I would also like to thank Meridith Mitchell, Lori Price, Robert Teply, Donna Chambers, and Janice Mitnick from the Office of the General Counsel; and Chyhe Becker, Hari Phatak, Amy Edwards, John Ritter, Salil Pachare, Mike Willis, Hermine Wong, Walter Hamscher, Alexei Orlov, Lauren Moore, Claire O'Sullivan, and Tony Garvey from the Division of Economic and Risk Analysis.

Finally, I would like to thank my fellow Commissioners and their counsels for their engagement on, and thoughtful feedback about, this rulemaking and all of the others considered today.