SEC Innovation Exemption for Tokenized NMS Stocks and Distributed Ledger Trading Venues

Summary

SIFMA provided comments to the SEC on its Innovation Exemption for tokenized NMS stocks, raising questions and offering recommendations on issuer consent, investor protection, regulatory oversight, trading volume limits, beneficial ownership and corporate actions. SIFMA urges the Commission to promptly address these operational and regulatory considerations to support market integrity and investor protection as the exemption is implemented.

Excerpt

The Securities Industry and Financial Markets Association ("SIFMA") ¹ is responding to the Securities and Exchange Commission's request for comment accompanying its publication of the Innovation Exemption. SIFMA's membership consists of broker-dealers and asset managers operating in U.S. and global markets. In addition, many SIFMA members are, or are ultimately owned by, public companies. The comments and questions that follow come from a broad cross section of that community.

Because the Order became effective upon publication, issuers and market participants had no opportunity to comment before it took effect. Several Tokenized Securities Venues ("TSVs") have already published notices and may begin operating within 30 days, and issuers have begun receiving Issuer Notices. SIFMA and its members have therefore compiled an initial set of questions and recommendations on the Order's operation, substance, and scope that warrant the Commission's prompt consideration. The five-year term of the relief heightens the importance of resolving these questions at the outset, since early design choices will shape market practice well before any permanent framework is adopted. SIFMA welcomes the statements by Chairman Atkins and Commissioner Uyeda that they expect notice-and-comment rulemaking to follow and intends to comment on specific features of the Innovation Exemption in more detail in the future. ²

SIFMA and its members believe certain operational questions warrant immediate attention. We set them out below in four areas: (A) issuer notice and consent; (B) investor protection, illicit finance, oversight, and enforcement; (C) the application of trading volume limits across venues and in aggregate across the market; and (D) beneficial ownership, corporate actions, and the transferability of tokenized shares. The questions are numbered for ease of reference, and where members have identified a practical solution, SIFMA's recommendations follow the questions they address. Additional questions are also set out in the Appendix. Many of the questions in this letter seek clarification of how the Order's existing conditions will operate, which the Commission or its staff could address through frequently asked questions ("FAQs") or guidance. However, certain recommendations below, including affirmative issuer consent, a longer objection period, and a universal issuer opt-out, would require the Commission to amend the Order.