Freedom of Associations

Good morning and good to be with you all. Joe [Mecane], thank you for the introduction. It's an honor to join you for STANY's 90^th annual conference. For ninety years, your association has contributed precious time and expertise to improve our capital markets and benefit the investing public that each of your members serve. Ninety years of market bulls and bears, interest rates high and low, profound technological advances, and shifting geopolitical considerations. Congratulations on your persistence and resilience. And thank you for your constructive engagement with the Commission throughout your rich history-continuing to the present, when your perspective is as relevant as ever.

Before I proceed, I should say that I speak today in my official capacity as the Commission's Director of the Division of Trading and Markets. My remarks do not necessarily reflect the views of the Commission, the Commissioners, or members of the Division's staff.

Nearly twenty years ago, Chairman Atkins, then a Commissioner, addressed your group. Our gracious host today was active then, as he noted:

"Significant business and regulatory changes are also afoot. The NASD and NYSE Regulation are scheduled to complete their merger in June. The NYSE and Euronext have completed their merger and will presumably now seek to capitalize on the efficiencies that the combination provides." [1]

Many in STANY's 2007 audience would likely have been surprised that the first combination, which we now know as FINRA, would prove more durable than the second. But as industry associations go, the NASD's formative years are instructive-and worth reflection.

Robert Healy was one of the five original Commissioners seated on July 2, 1934. Commissioner Healy served for more than twelve years-the longest tenure of any Commissioner in the agency's history. William O. Douglas, third SEC Chairman, Supreme Court Justice, and friend of Senator Frank Maloney of Connecticut, described Commissioner Healy as "impeccably honest" and marked by "a quiet sense of humor and a bulldog tenacity." [2]

In April 1939, Healy spoke at the annual dinner of the New York Securities Dealers Association. Possibly, the NYSDA shared members with the newly-formed STANY; that's a question for any industry historians in the crowd. The Maloney Act, which amended the '34 Act to add Section 15A, establishing registered national securities associations as "self-regulatory organizations," had become law in 1938. Commissioner Healy encouraged the industry audience to take the self-regulatory plunge. His elevator pitch:

"You have by voluntary organization of your group made its members most articulate and effective. You have given your group a feeling of solidarity consistent with strong, healthy competition. You have stood for raising the standards of your business in an attempt to protect against the temptations of the market place. You have taken steps in the direction of supervising the financial condition of your members so as better to protect the trade and the public from the risks of insolvency and unsound financial practices. In these and in other respects, you have demonstrated a capacity for constructive leadership." [3]

Commissioner Healy made the sale. Roughly four months later, the NASD became effective, and self-regulation outside the exchange context was born. Then, the Commission recognized the value of partnership with industry, both formally and informally, to solve problems and advance the interests of the investing public. Today, it is in this spirit that I ask for input from your association on two areas of current focus for the Division: tokenized securities and Reg NMS reform.

Two months ago, Chairman Atkins spoke of the promise of tokenized securities - and his associated direction to the Division:

"Tokenization could transform the financial system as we know it by, for example, shortening settlement cycles, facilitating the movement of collateral and dividends, facilitating proxy voting, or making it easier for people to construct and manage bespoke, diversified portfolios of investments. We stand ready to work with entrepreneurs who are building for a better future." [4]

For nearly a year, the Division has engaged in detailed discussions with interested parties on functions throughout the marketplace ecology-including issuance, execution, clearance and settlement, and custody. "Innovation without arbitrage" has been our guiding principle. In practice, this principle means that as we propose policies to the Commission, we aim to advantage neither new entrants nor legacy providers over the other. Our proper role is not to pick winners, but to create a level playing field that drives competition. Market forces must determine value, not arbitrary public sector policy choices.

To this end, the Division has issued a "no action" letter to DTC related to a three-year pilot program to tokenize securities, issued a staff statement setting out a taxonomy for tokenized securities, and, earlier today, issued a staff statement regarding wallets and other user interfaces that investors may use to engage with these tokenized securities. The Division is currently working on an "innovation exemption" recommendation to the Commission to allow certain trading venues to trade tokenized securities. Your feedback - and your ideas for additional areas that warrant our attention - are more than welcome. These are necessary for the Commission to make sound, lasting policy.

Turning to more traditional markets, the Commission continues to review Reg NMS, which was adopted over twenty years ago-and sorely needs modernization in the view of many. Speaking to this audience in 2007, Commissioner Atkins said the following:

"Reg NMS represents a massive regulatory intrusion into our secondary trading markets that was completely unwarranted, given the lack of evidence of market failure and the availability of substantially less intrusive means to advance the enumerated goals. Reg NMS has the potential to do significant harm to our markets by unduly interfering with the operation of the competitive forces. Over the years, these forces have benefited investors immensely by reducing trading costs and increasing market efficiency. Whatever its justification, Reg NMS is a carte blanche for unsupervised meddling by the SEC staff in the marketplace for years to come." [5]

The Division began its review with two roundtables last year on Rule 611, the "trade-through rule." We have received input on possible paths forward, which will assist us in making a recommendation to the Commission. In addition, we recently published a request for exemptive relief from Rules 610 and 612 from MEMX. We are keenly interested in comment on the questions MEMX raises, particularly the appropriate level for an access fee cap and the proper scope for quoting in half-cent increments, as well as implementation timing given potential changes to Rule 611. Lastly, we may soon recommend asking for comment on potential changes to market data revenue allocation and for ways to modernize best execution obligations.

So as you can see, the Division has much on its plate, and we seek wise counsel from members of your association-on issues and assets both novel and traditional.

Our Nation's founding was driven by rugged individualists, but voluntary association built our great institutions. Throughout our 250 years, these institutions have emanated a warmth of prosperity, progress, and protection. In financial markets, associations such as yours have set and upheld high standards. These associations are not command-and-control collectives, but rather groups of colleagues and competitors that join together voluntarily to solve shared problems and protect the interests of individuals served. Here in New York City, at the Exchange, on capitalism's hallowed ground, forgetting our past foundation could lead to a fatal fall in the future.

Thank you for your time and attention. I look forward to your questions and your engagement going forward.