SEC Poses Capital Rules for Trading Specialists

The Securities and Exchange Commission, in a long-discussed post-crash reform, on Monday proposed a rule that would require all of the stock market trading functionaries called specialists to meet its regulations for maintaining minimum amounts of capital.

Specialists are used at the New York, American and regional stock exchanges to supervise trading of individual issues. They stabilize the market by buying stocks when there are no other buyers and selling when there are no other sellers.

Minimum capital rules are designed to ensure that specialists are able to buy and sell stocks even in moments of great financial stress, such as the October, 1987, crash.

Many specialists are already covered by the SEC’s minimum capital rules, and most of the others will probably meet the commission’s rules without having to increase their capital reserves, SEC officials said. Investment firms that do business with the public as broker-dealers are now required to meet the SEC’s capital rules. But other specialists are not. For example, a private partnership that works exclusively as a specialist firm is currently exempt.

SEC officials said that extending the agency’s capital rules would enable it to keep a closer eye on the specialists and in the future would ensure that specialists will keep pace with the growing demands in the market for capital.

“This rule won’t have much of an immediate impact,” said Mark D. Fitterman, an associate director of the SEC. “But over the long run, we think it will encourage them to be more conservative in keeping the necessary amounts of capital on hand.”

He said the rule will encourage specialists to maintain larger permanent capital reserves and rely less on short-term bank borrowings. During the week of the crash, some banks hesitated to continue to lend capital to specialists.

Spokesman for the New York and American stock exchanges said they were not sure how many specialists would be required to raise additional capital under the SEC rules, which are extremely long and complex.

The SEC’s 5-0 vote Monday to propose the new rule begins a 30-day period for public comments, after which the commission may revise the proposed regulations before they are reconsidered for final approval.