## Facts

- INET ATS, Inc. (INET) was a registered broker-dealer operating an alternative trading system (ATS) under Regulation ATS of the Securities Exchange Act of 1934.
- INET was formed in late 2003 to early 2004 by combining (i) an ATS operated by Instinet Corporation (Instinet-ATS) and (ii) The Island ECN, Inc. (Island), another ATS acquired by Instinet Group.
- The conduct addressed by the SEC occurred on Instinet-ATS before it was combined with Island and renamed INET, but the SEC brought the administrative matter against INET as the successor.
- Regulation ATS Rule 301(b)(5) (the fair-access rule) applies when an ATS reaches specified volume levels in a covered security, including a threshold of 20% or more of the average daily volume in that security during four of the preceding six months.
- Between approximately February 2002 and July 2003, Instinet-ATS met the fair-access threshold with respect to multiple securities in multiple months.
- Instinet-ATS offered a service called BookStream that provided subscribers with real-time depth-of-book information by displaying all bids and offers on the ATS, not only the best-priced quotations.
- Instinet-ATS’s written access standards incorporated subscriber agreements that barred subscribers from making Instinet-ATS services or data available to third parties without Instinet-ATS’s approval.
- The written standards did not state the circumstances or criteria under which Instinet-ATS would approve a subscriber’s request to redistribute BookStream to the subscriber’s customers.
- Instinet-ATS approved redistribution of BookStream for some subscribers but denied permission to other similarly situated subscribers, without written criteria governing those decisions.
- Rule 301(b)(5) also required an ATS subject to the fair-access rule to report on its quarterly Form ATS-R all grants, denials, and limitations of access and the reasons for them.
- Instinet-ATS’s quarterly Forms ATS-R did not disclose all grants, denials, and limitations of access to BookStream.
- The SEC instituted public administrative and cease-and-desist proceedings, and INET submitted an offer of settlement that the SEC accepted; INET consented to the order without admitting or denying the findings (except as to jurisdiction).

## Issues

1. Whether an ATS that meets the Rule 301(b)(5) volume threshold must maintain written standards that specify criteria for granting or denying permission to redistribute an ATS service such as BookStream.
2. Whether allowing some subscribers to redistribute BookStream while denying other similarly situated subscribers, without stated written criteria, constitutes an unreasonable limitation of access through unfair or discriminatory application of access standards under Rule 301(b)(5).
3. Whether failing to disclose all BookStream-related grants, denials, and limitations of access (and the reasons) in quarterly Form ATS-R filings violates Regulation ATS reporting requirements.

## Decision

- The SEC accepted INET’s settlement offer and issued an order instituting and resolving administrative and cease-and-desist proceedings under Exchange Act Sections 15(b) and 21C.
- The SEC found that Instinet-ATS, during the relevant period when it met the fair-access threshold, did not have written standards that specified when redistribution of BookStream would be approved, as required by Rule 301(b)(5).
- The SEC found that Instinet-ATS limited access to its services by granting redistribution permission to some subscribers while denying other similarly situated subscribers, which the SEC treated as unfair or discriminatory application of access standards under Rule 301(b)(5).
- The SEC found that Instinet-ATS’s Forms ATS-R were incomplete because they failed to report all grants, denials, and limitations of access to BookStream (and related reasons), contrary to Regulation ATS reporting duties.
- The SEC ordered INET to cease and desist from committing or causing violations and imposed remedial sanctions in the settled administrative order.

## Legal Principles

- When an ATS reaches the Rule 301(b)(5) volume threshold for a covered security, it must have written access standards for granting access to trade that security on the system and must not unreasonably prohibit or limit access to its services through unfair or discriminatory application of those standards.
- Written access standards must be specific enough to constrain decision-making; leaving key approval criteria unstated can violate the fair-access rule when the ATS is subject to Rule 301(b)(5).
- Access to “services offered by” an ATS can include permission to receive and redistribute an ATS data product; selective authorization of redistribution can function as a limitation on access.
- Regulation ATS requires quarterly Form ATS-R disclosures of all grants, denials, and limitations of access, along with the reasons; incomplete reporting can constitute a separate compliance failure.
- In an SEC administrative resolution, a successor entity operating the combined ATS can be named as respondent and ordered to cease and desist, even when the charged conduct occurred in a predecessor system.

## Conclusion

In *In the Matter of INET ATS, Inc.*, the SEC found that once Instinet-ATS reached the Regulation ATS fair-access threshold, it was required to use written, defined standards governing BookStream redistribution decisions, apply access decisions without unfair discrimination among similarly situated subscribers, and fully report access actions on Form ATS-R; failures on both access controls and reporting supported a cease-and-desist order and remedial sanctions against INET as successor.


In the Matter of INET ATS, Inc., Admin. Proc. 3-12259 (2006)