February 8, 1994
TO: BOARD OF GOVERNORS NO. 14-94
INVESTMENT ADVISERS COMMITTEE NO. 12-94
SEC RULES COMMITTEE NO. 13-94
MARKET 2000 TASK FORCE
RE: SEC RELEASES MARKET 2000 REPORT
__________________________________________________________
The Securities and Exchange Commission recently released the report of the
Division of Market Regulation entitled "Market 2000: An Examination of Current
Equity Market Developments." In its statement upon releasing the report, the SEC
indicated that "the study is an attempt by the Division to assess the state of
our equity markets and to provide guidance for the development of a national
market system." A copy of the Executive Summary of the report is attached, and
the proposals discussed therein are summarized below. In the course of the SEC's
preparation of the report and recommendations, the Institute had urged it
generally to consider that investors be able to effect transactions in the manner
most efficient for them, that efficient markets require transparency, and that
regulations applied to new trading systems should be tailored to the nature of
the market being regulated.
The report states that over 20 years ago, the Commission conducted a study
of the equity markets that resulted in the introduction of legislation in 1975
to provide a framework for a national market system. It notes that dramatic
changes in those markets since 1975 (due to, for example, technological advances,
new product development and globalization) have raised concerns about market
fragmentation, inadequate disclosure of market information and regulatory
inconsistencies among competitors. The report explains that the Division
undertook the Market 2000 study to respond to those concerns.
According to the report, equity markets are operating efficiently within
the existing regulatory structure and radical change is not necessary. The
report identifies four areas, however, in which the Division believes
improvements are possible: (1) fair treatment of investors; (2) timely and
comprehensive disclosure of market information; (3) fair competition among
markets and market participants; and (4) open market access. The report makes
specific recommendations in each of these areas.
For example, with respect to fair treatment of investors, the report
suggests that, among other things, the SEC require greater disclosure of payment
for order flow and broker-dealer order handling procedures, and improved
disclosure by investment advisers to their clients concerning soft dollar
practices. In the area of market transparency, the report makes recommendations
concerning display of limit orders, reduction in the minimum pricing variation
permissible for bids and offers from one-eighth to one-sixteenth of a dollar,
enhanced public dissemination of SelectNet orders, development of a reporting
system for after-hours trades and trades in U.S. equity securities that are
nominally executed abroad and reconsideration of the imposition of an order
exposure rule. At the Institute's urging, the NASD's Board of Governors recently
voted to expand public access to SelectNet.
To enhance fair market competition, the report recommends NASD oversight
of third market activity and the application of specific trading principles to
third market dealers designed to protect the integrity of the price discovery
process; recordkeeping and reporting requirements for automated trading systems;
the extension of transaction fees currently only applicable to listed securities
to NASDAQ securities as well; and expedited Commission review of certain SRO rule
change proposals. With respect to open market access, the report suggests the
removal of off-board trading restrictions on after-hours trading; changes to NYSE
and Amex rules regarding delisting of securities from those exchanges; and
extension of the link between the Intermarket Trading System and the NASD's
Computer Assisted Execution System toall listed stocks.
Paul Schott Stevens
General Counsel
Attachment