applications filed by securities exchanges. The APA explicitly covers unreasonable delay by administrative agencies, offering judicial review to persons who suffer legal wrong or who are adversely affected or aggrieved by an unreasonable delay in agency action.4/ Proposed Section 6(c), as drafted, would require the Commission to grant an application of a national securities exchange if all of the criteria set forth in the Act were met and to deny an application if any of the criteria have not been met. We assume the Commission could deny registration in the face of technical compliance with proposed Section 6 of the Act, if the public interest so requires, but this fact should be made explicit in the draft legislation. Similarly, while authority for the Commission to grant a conditional registration may be implicit in the language of the Section as drafted, we recommend that the Commission be given explicit authority to grant a conditional registration when not inconsistent with the public interest. Except as noted above, the Commission generally endorses the changes proposed by Section 5 of the bill. Section 6. Section 6 of the bill would amend Section 11(b) As discussed in the Commission's March 29, 1973 Policy Statement on the Structure of a Central Market System, price priority for public orders is considered of prime importance by the Commission in the development of a central market system for listed securities. To assure price priority for public orders, it is necessary that all members of the system have access to all such orders represented within the system at any given time. The Commission's Policy Statement suggested one method by which this could be achieved: an electronic central repository for all active limit orders. Nevertheless, some commentators have questioned the feasibility of such a system, and it is evident that should the repository prove impracticable, an alternative will be needed. It has been suggested that an "open book," which would make public each limit order entered into the system, could provide such an alternative. Proposed Section 11(b), in conjunction with proposed Section 15(c) (6) 5/ of the Act (concerning regulation of nonspecialist market makers), would provide for an open book by 4/ Section 10 (e) (1) of the APA, as codified, 5 U.S.C. 706 (1). 5/ See our comments on Section 11 of the bill. authorizing the Commission to require all market makers, whether operating on or off an exchange, to disclose to such persons as the Commission may designate the limited price orders which they hold. Presumably, the Commission also would be empowered to determine the manner in which such disclosure is to be made, but in order to make this more clear, we suggest that line 20 on page 9 of the bill be amended to add the phrase "in such manner and under such conditions" after the word "persons." This provision would give the Commission more discretion with respect to disclosure of limit orders than Section 11(b) presently provides. Because of the additional flexibility the proposed amendment to Section 11(b) would provide the Commission in its efforts to achieve the widely-shared goal of according price priority to public orders, the Commission supports this section of the bill. Section 7. Section 7 would add a new Section 11A to the Act The Commission concurs in the Subcommittee's view that automated communications systems for the dissemination of transaction and quotation information will provide the foundations for a national market system and that the Commission's authority and responsibility must be expanded to encompass the regulation of persons operating and administering such systems. Specifically, proposed Section 11A of the Act would empower the Commission to assure that all brokers and dealers have access on reasonable terms to all services available through any securities information system, to review any exclusionary action taken by a securities information processor and to promulgate rules to facilitate the prompt, accurate and reliable collection, processing and distribution of quotation and transaction information. Proposed Section 11A also would authorize the Commission to promulgate rules to prevent the publication of fraudulent or manipulative information with respect to quotations and transactions; to specify the form and content of and the method and manner by which quotations and transaction reports are published; to allocate among self-regulatory organizations and registered securities information processors the costs, functions and responsibilities associated with the collection, processing and distribution of quotation and transaction data; and to require disclosure of all securities transactions which utilize the jurisdictional means, including those which take place in the so-called fourth market. The Commission believes this broad grant of authority over the operations of securities information processors is important if a national market system is to be developed. Several caveats appear in order. Proposed paragraph (1) of Subsection 11A (a) makes it unlawful for any securities information processor to use the mails or interstate commerce unless registered with the Commission. The Commisson, by rule, may exempt under certain conditions any securities information processor or class of securities information processors from any provision of this section or rule or regulation prescribed thereunder. In the interests of administrative flexibility, we believe the Commission should be empowered to exempt securities information processors by order as well as by rule. For example, an order would be a more appropriate means by which the Commission could act to exempt a particular processor rather than a class of processors. In addition, we believe that the standard the Commission would be required to apply in determining whether an exemption from the requirements of this section should be granted may prove cumbersome. Rather than having to find that regulation of a particular securities information processor is "neither necessary nor appropriate in the public interest or for the protection of investors," the Commission should be authorized to grant exemptions where it finds that such exemption "is not inconsistent with the public interest or the protection of investors." We believe this standard should be substituted in other provisions of the bill which grant exemptive powers to the Commission. Proposed Section 11A (c) provides procedures relating to the grant or denial of an application for registration of a securities information processor. Since the procedures are the same as those set forth in proposed Section 6(c), the Commission's comments on that section are equally applicable here. Subsection (g), which deals with Commission rulemaking authority with respect to reports of transactions in securities, appears so broad as to comprehend the full details of all trades, including information of the kind required by S. 2234 (the Institutional Investor Full Disclosure Act). We question whether the Committee intended this result. Subsection (h) would appear to require the Commission to adopt rules to assure that quotation and transaction reports in all non-exempted securities are available to all registered brokers and dealers (and, on a potentially more limited basis, to all investors). Although we doubt the Subcommittee so intended, this language could be construed to preclude the Commission from distinguishing between listed and unlisted securities in acting to require quotation and transaction reporting. The flexibility to observe the results of such reporting in listed securities prior to mandating it for all securities would seem highly desirable. We suggest that the bill be modified to clarify that such flexibility indeed was intended to be available. Item (3) of subsection (h) of proposed Section 11A (lines 17 through 24 of page 15 of the bill) grants rulemaking authority for the Commission to provide "for the fair and reasonable allocation among national securities exchanges, registered securities associations, and registered securities information processors of the costs, functions, and responsibilities . . . and the development, operation, and regulation of a national market system." We recommend that the substance of this subsection be included in proposed Section 17 (c) inasmuch as both sections refer essentially to similar if not identical allocations. Proposed subsection (i) provides for Commission review of any prohibition or limitation of access to services offered by a securities information processor. We assume that paragraph was intended to cover not only refusals to commence new services but also any restriction of an existing service. If this is the case, it may be desirable to provide for some form of hearing prior to any restriction of an existing service. In addition, to avoid the possibility of unnecessary irreparable harm, provision should be made for a stay of such a restriction pending Commission review. If a hearing is to be required, we would suggest that the institution of review by the Commission not operate as a stay unless the Commission otherwise orders, after notice and opportunity for the presentation of views on tle question of a stay; if no hearing is to be required, we believe the commencement of any such proceeding should operate as a stay of the restriction unless otherwise ordered by the Commission. Pursuant to proposed Section 11A (i), the Commission would be required to dismiss a review proceeding under this section if it finds that the prohibition or limitation is consistent with the provisions of the Act and, among other things, that no burden has been placed on competition not reasonably necessary for achievement of the purposes of the Act. As hereinbefore noted with respect to proposed Sections 6(b)(4) and 11A (a)(1), we believe these standards to be unnecessarily stringent. We therefore would recommend that the Commission be authorized to dismiss a review proceeding pursuant to this section if it finds, among other things, that a limitation or prohibition is not inconsistent with the public interest or the protection of investors and that it is necessary or appropriate within the scope and purposes of the Securities Exchange Act. A suggested modification in proposed paragraph (j) is contained in the discussion of Section 2 of the bill. Finally, although the Commission has no objection to providing in its annual report to Congress information concerning exemptions from Section 11A (as would be required under proposed Section 11A (a)(2) of the Act), which will be a matter of public record in any event, good order would appear to dictate that such legislative mandates requiring the transmission of specific information to Congress be aggregated in the Act. Perhaps Section 23(b) could be revised to achieve this result. Accordingly, the Commission recommends that proposed Section 11A (a) (2) be deleted from the bill and its subject matter covered elsewhere, if deemed essential. Section 8. Section 8 of the bill would amend Section 12(f) of the Act to permit an exchange to extend unlisted trading privileges to any security registered under Section 12 of the Act, or any security exempted from the registration requirements by virtue of Section 12(g) (2) (B) or 12(g) (2) (G) (applying respectively to investment company securities registered under Section 8 of the Investment Company Act and certain issues of insurance companies), upon application to and approval by the Commission, even if such security is not listed on any stock exchange. It also would establish various criteria to be considered by the Commission in determining whether an exchange's application for unlisted trading privileges in a particular security should be approved. Our views on this subject are expressed in some detail in a letter dated September 28, 1973 from Lee A. Pickard, Director of the Commission's Division of Market Regulation, to Harvey A. Rowen, Special Counsel to the Subcommittee on Commerce and Finance of the House Committee on Interstate and Foreign Commerce. A copy of that letter is enclosed for your information. It appears that the language of the bill would satisfy the Section 9. Section 9 of the bill would amend Section 12 (j) |