(Adds comments from commissioners, industry member)
By Douglas Gillison and Chris Prentice
Feb 15 (Reuters) - Wall Street's top regulator on
Wednesday adopted rules tightening the time-frame for stock
trades in an effort to tamp down the kind of risk seen in 2021's
GameStop fiasco, when retail investors suffered heavy losses.
The U.S. Securities and Exchange Commission (SEC) also
proposed changing rules protecting client assets held by
investment managers, a move that could hinder cryptocurrency
platforms from serving a key marketplace role.
In a 3-2 vote, the SEC opted to shorten the time between
when a securities order is placed and when a trade concludes
-something officials say can lessen the kind of "systemic risk"
spotlighted in early 2021 when the share price of the consumer
electronics retailer GameStop Corp plummeted amid
intense market volatility.
Trade groups have broadly welcomed the commission's proposal
to cut the so-called settlement cycle to a single business day
from two, six years after an earlier SEC rule shortened the
period from three days.
But some have complained the commission isn't leaving enough
time for them to adjust before the rule takes effect in May
2024. Republican Commissioners Hester Peirce and Mark Uyeda
voted against the rule for this reason.
The longer a trade remains unsettled, the more likely a
buyer or seller may default — by refusing to pay or to hand over
shares sold.
Clearing houses can require trading platforms to offset such
risks with margin deposits, costs that can skyrocket during
volatility and market stress. High margin deposits caused
trading platforms such as Robinhood Markets to block purchases
of GameStop's shares in early 2021. The price then plummeted.
A shorter settlement cycle should see fewer defaults,
helping cut margin costs and reducing the chances of such a
scenario recurring, according to the SEC.
SEC TAKES AIM AT CRYPTO 'CUSTODIANS'
In a 4-1 vote, the commission proposed new requirements for
investment advisers, who can only maintain custody of client
funds or securities if they meet requirements to protect the
assets.
The SEC's draft proposal would expand these requirements to
any client assets, including real estate, loan participations
and digital assets not currently deemed funds or securities.
Advisers need to hold investors’ assets with a firm deemed
to be a "qualified custodian.” SEC enforcement staff have been
probing registered investment advisors over whether they are
meeting those existing rules when it comes to clients' digital
assets, Reuters has previously reported.
Among other things, Wednesday's proposal would require
crypto firms to guarantee in writing that client assets held on
behalf of hedge funds and others will be protected against loss
and bankruptcy.
"Make no mistake. Based upon how crypto platforms generally
operate, investment advisers cannot rely on them as qualified
custodians," SEC chair Gary Gensler said in a statement about
the proposal.
By explicitly saying the legally compliant custody of
digital assets was unlikely, the proposal could hinder such
investments, Republican members of the commission said.
"How could an adviser seeking to comply with this rule
possibly invest client funds in crypto assets after reading this
release?" Commissioner Mark Uyeda said in prepared remarks.
However, Gensler told reporters on Wednesday the
solution was simply for trading platforms to observe rules that
have been in effect since 2009.
"I continue to encourage the platforms to come in and
properly come into compliance," he said, noting that investors
lost improperly safeguarded assets in recent crypto bankruptcies
such as that of FTX, which collapsed in November.
However Miller Whitehouse-Levine, policy director at
DeFi Education Fund, described Gensler's position as an attempt
to cut off digital assets from the traditional financial system.
"This should end any doubt that 'come in and register'
is a fig leaf for the SEC usurping Congress to block crypto in
the U.S.," he said.
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GameStop seeks share split amid renewed meme-stock hype Ryan Cohen picks up 100,000 GameStop shares, stock jumps GRAPHIC-Retail investor risk appetite improves with AI stocks
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(Reporting by Douglas Gillison, Chris Prentice and Hannah Lang;
Editing by Megan Davies, Bradley Perrett and Nick Zieminski)
