Thursday, February 17, 2022
The U.S. Securities and Exchange Commission (SEC) recently issued proposed amendments to the Securities Exchange Act [1] (the “Exchange Act”) that would significantly broaden the definition of “exchange” for purposes of regulation under the Exchange Act (“Proposed Rule”).[2] Designed to address a “regulatory gap,”[3] the Proposed Rule would cover “platforms for all kinds of asset classes that bring together buyers and sellers.”[4] Under the Proposed Rule, communication protocol systems—trading systems that offer the use of non-firm trading interest and provide protocols to bring together buyers and sellers of securities—would have to register with the SEC as an exchange unless otherwise exempt.[5] As we previously reported, this amendment, if passed, likely would have a significant impact on the decentralized finance (“defi”) industry.
Current Definition of “Exchange”
Section 3(a)(1) of the Exchange Act defines an “exchange” as “any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.”[6]
The Exchange Act provides a two-step test to assess whether a trading system meets the definition of an exchange:
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does the system bring together the orders for securities of multiple buyers and sellers; and
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does the system use established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders…
