Quick Answer
A subscriber is anyone contracted to access the venue to trade or handle orders, never an exchange or association. Control is presumed for a director, general partner or executive officer, and at twenty-five percent of voting securities by vote or sale power, or of partnership capital contributed or receivable on dissolution. Debt and convertible debt are not NMS stocks.
The requirements in the lesson on requirements for alternative trading systems fire on percentages of volume in named instrument categories, and they exclude an alternative trading system (ATS) by reference to what the venue itself is and what it trades. Those triggers work only because Regulation ATS defines each term first.
Who Is a Subscriber, and Who Is Not?
A subscriber is any person that has entered into a contractual agreement with an ATS to access it for the purpose of effecting transactions in securities, or submitting, disseminating, or displaying orders on it. The term includes a customer, member, user, or participant in an ATS.
A subscriber, however, shall not include a national securities exchange or a national securities association.
An affiliate of a subscriber is any person that, directly or indirectly, controls, is under common control with, or is controlled by, the subscriber, including any employee.
Exam Tip: Gotchas
- The exchange and association carve-out is express. Neither is a subscriber, however it connects to the venue.
- An employee is named in the affiliate definition. The rule does not leave that to inference from the control test.
- Access alone is not enough. The person must have entered into a contractual agreement with the venue.
What Counts as Control of the Broker-Dealer of an ATS?
Control is the power, directly or indirectly, to direct the management or policies of the broker-dealer of an alternative trading system, whether through ownership of securities, by contract, or otherwise.
A person is presumed to control that broker-dealer in three situations.
- The person is a director, general partner, or officer exercising executive responsibility, or has similar status or performs similar functions.
- The person directly or indirectly has the right to vote twenty-five percent or more of a class of voting security, or has the power to sell or direct the sale of twenty-five percent or more of a class of voting securities, of that broker-dealer.
- In the case of a partnership, the person has contributed, or has the right to receive upon dissolution, twenty-five percent or more of the capital of that broker-dealer.
Exam Tip: Gotchas
- Control runs to the broker-dealer of the venue, not to the venue as a trading platform. The definition names the broker-dealer throughout.
- The three situations are presumptions, and the general definition stands on its own. A person with no listed stake can still control through contract or otherwise.
- The voting test has two routes at the same threshold. The right to vote the shares and the power to sell or direct the sale of them each reach twenty-five percent.
Which Securities Definitions Does Regulation ATS Use?
| Term | Definition |
|---|---|
| Order | Any firm indication of a willingness to buy or sell a security, as either principal or agent, including any bid or offer quotation, market order, limit order, or other priced order |
| Debt security | Any security other than an equity security, as the SEC's equity security definition provides, as well as non-participatory preferred stock |
| Corporate debt security | A security that evidences a liability of its issuer, has a fixed maturity date at least one year following the date of issuance, and is not an exempted security |
| Effective transaction reporting plan | A transaction reporting plan the SEC has approved, as the national market system (NMS) rules provide |
A corporate debt security must satisfy all three of its elements. A security evidencing a liability of the issuer that matures in six months is not a corporate debt security here, whatever it is called.
Exam Tip: Gotchas
- Non-participatory preferred stock is a debt security under this regulation. That is an addition to the general equity security definition, not a restatement of it.
- One year is a floor for a corporate debt security, measured from issuance. A shorter fixed maturity fails the second element outright.
What Is an NMS Stock ATS?
An NMS stock carries its meaning under the national market system rules, with one carve-out: a debt or convertible debt security is not deemed an NMS stock for purposes of Regulation ATS.
An NMS Stock ATS is an alternative trading system that trades NMS stocks as defined that way.
A venue trading only debt is still an alternative trading system under the two-prong definition, but it is never an NMS Stock ATS, so the separate filing route for NMS Stock ATSs never reaches it.
Exam Tip: Gotchas
- The debt carve-out is scoped to Regulation ATS alone. Elsewhere the term keeps its national market system meaning: an NMS stock is an NMS security other than an option, and a security is an NMS security when transaction reports for it are collected, processed and made available under an effective transaction reporting plan, or under an effective national market system plan for reporting listed options transactions.
- A convertible debt security is excluded even though it can become equity. The carve-out names debt and convertible debt together.
What Should You Check on Exam Day?
- Confirm the party in the scenario contracted with the venue, since a national securities exchange or association is never a subscriber.
- Apply the twenty-five percent presumption to the broker-dealer of the venue, and remember control can also arise by contract with no stake at all.
- Test a corporate debt security against all three elements, especially the one-year fixed maturity from issuance.
- Check whether the instrument is debt or convertible debt before calling the venue an NMS Stock ATS.