The Securities and Exchange Commission has decided not
to decide yet whether to approve proposals by Nasdaq and the
New York Stock Exchange to pay market makers to make better
markets in thinly traded ETFs. The proposals would require an
exemption from a current prohibition against such payments.
Rather than approving or rejecting the idea, the SEC decided
last Wednesday, July 11, to seek another round of comments on
pilot projects put forth by Nasdaq and NYSE Arca (the
electronic exchange formerly known as Archipelago). In its
83-page order instituting proceedings to determine whether
to approve or disapprove the proposed pilots
posted on the
SECs web site last Thursday the SEC
listed 27 questions asking for more input on specific points.
Theyre keying up the issues, said a source
who asked not to be named.
Under the law, the SEC has 45 days to respond to these kinds
of regulatory filings by the exchanges, with an automatic right
to extend the initial deadline by another 45 days.
July 11 was the 90-day mark for the Nasdaqs proposal,
and while the SEC had until August 14 to respond to NYSE Arca,
it decided to consider both proposals with a joint
order a suggestion made by Vanguard, the
mutual fund and ETF sponsor headquartered in Valley Forge,
Pennsylvania, which filed separate comment letters on both
Because both proposals raise similar regulatory issues
about the appropriate scope for permitting issuer payments to
market makers, we believe the Commission should consider the
two proposals together and not in isolation, said
Vanguard managing director and chief investment officer, Gus
Sauter, in a comment letter. But the two exchanges have
structured their proposed pilots very differently, and the SEC
said that it would also assess each separately.
The SECs order was published in the Federal Register
yesterday, July 17, and that starts the clock ticking on the
new comment period of 30 days. While that can be extended a
bit, the statutory deadline for final, definitive action by the
SEC now falls somewhere between early October and early
The reason this is controversial is that in 1997, during the
dot-com era, the National Association of Securities Dealers
(NASD), which morphed into the Financial Industry Regulatory
Authority (Finra), adopted what is now known as Finra Rule
5250, prohibiting issuers from making payments to market
makers. Vanguard, in one of its comment letters, cited the
SECs statement when it approved the rule, on the
rules intent to prevent fraudulent and manipulative
acts, to promote just and equitable principles of trade and to
protect investors and the public.