On November 19, 2014, the SEC adopted Regulation SCI – Regulation Systems Compliance and Integrity, to require:

  • national securities exchanges
  • alternative trading systems that exceed defined volume thresholds (but excluding ATSs limited to municipal securities and corporate debt)
  • registered clearing agencies
  • quotation and last sale reporting processors, and
  • certain exempt clearing agencies whose exemptions were conditioned on compliance with the SEC’s Automation Review Policy, which was superseded by this Regulation

The purpose of Regulation SCI is to provide a formal regulatory structure governing the automated systems of key US market participants and utilities in light of the concern that a single breakdown can and has spread risks throughout large segments of the US national market system.

Regulation SCI establishes a mandatory framework requiring SCI Entities to maintain comprehensive policies and procedures for their technological system, including requirements to:

  • take corrective actions when systems issues occur
  • provide notifications and reports to the SEC concerning these issues and material systems changes
  • provide information to market participants
  • conduct business continuity testing
  • conduct annual systems reviews

SCI Entities will generally have 9 months to comply after the effective date of the Regulation. They will have 21 months to comply with industry-wide or sector-wide coordinated testing.

Notably registered broker-dealers with significant automated systems, including firms that internalize significant order flow in equities, are not included in the definition of SCI Entities. The SEC indicated that if they were to seek to include additional categories of firms, this would be done through a separate rule-making effort.

Review the adopting Release