Section 916 – The Lunatics Are Running The Asylum

Those crafty arms merchants did it again. Of course, when the term arms merchant appears in a Themis Trading note, you know we are referring to the for-profit stock exchanges. This time the arms merchants were able to get an SEC rule changed that would allow them to more easily sell their financial weapons.

Forgive us for our tardiness, but the rule change that we are referring to became effective in January 2011. Somehow, the rule change, which was part of the Dodd-Frank Act, managed to slip by us. The rule is referred to as Section 916 and SEC stated in a filing  that:

“In addition, the Dodd-Frank Act removed the concept of “abrogation” of a filing that an SRO designated to be effective immediately upon filing with the Commission. Prior to the Dodd-Frank Act, the Commission had the authority, within 60 days of the date of filing, to summarily abrogate a proposed rule change filed for immediate effectiveness under former Section 19(b)(3)(A) of the Exchange Act if the Commission determined that such action was necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. Abrogation suspended the effectiveness of an immediately effective proposal and obligated the SRO, if it desired to proceed with its proposed rule change, to refile the proposal for notice, comment, and Commission consideration under Section 19(b)(2) of the Exchange Act. Section 916(c) of the Dodd-Frank Act amended Section 19(b)(3)(C) of the Exchange Act and replaced abrogation with a process in which the Commission may “temporarily suspend” a proposed rule change (if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act) and then must institute proceedings under Section 19(b)(2)(B) to determine whether to approve or disapprove the SRO rule change.”

Basically, this means that if an Exchange decides to submit a rule change that is deemed “immediately effective”, then the SEC is going to have a much tougher time getting it disapproved. Prior to Section 916, the SEC could have stepped in within 60 days of the filing and forced the exchange to justify its changes. Now, the burden falls on the SEC. They can suspend the rule change but then must institute proceedings to approve or disapprove the rule. The SEC would have to make the case why the rule change does not meet code.  Essentially, the for-profit exchanges are approving their own rule changes.  The lunatics are now running the asylum.

Let’s think about this. If an exchange submits an immediately effective rule change and no one complains, what do you think the chances are that an understaffed, maxed out to capacity SEC will decide to step in and suspend that rule? It just got easier for the for-profit exchanges that are solely focused on the bottom line to add rule changes that may only benefit their largest clients. No wonder why NASDAQ just gave Bob Greifeld a five year, multi-million dollar extension.