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115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-549
======================================================================
PROTECTION OF SOURCE CODE ACT
_______
February 8, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 3948]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 3948) to prohibit the Securities and Exchange
Commission from compelling a person to produce or furnish
algorithmic trading source code or similar intellectual
property to the Commission unless the Commission first issues a
subpoena, and for other purposes, having considered the same,
reports favorably thereon with amendments and recommends that
the bill as amended do pass.
The amendments (stated in terms of the page and line
numbers of the introduced bill) are as follows:
Page 2, line 11, strike ``or provides insight to''.
Page 2, line 22, strike ``or provides insight to''.
Page 3, line 6, strike ``or provides insight to''.
Page 3, line 18, strike ``or provides insight to''.
Purpose and Summary
On October 4, 2017, Representatives Sean Duffy and David
Scott introduced the ``Protection of Source Code Act'', which
amends the Securities Act of 1933, the Securities Exchange Act
of 1934, the Investment Company Act of 1940, and the Investment
Advisers Act of 1940 to require the Securities and Exchange
Commission (SEC) to first issue a subpoena before it compels a
person to produce or furnish to the SEC algorithmic trading
source code or similar intellectual property.
Background and Need for Legislation
The goal of H.R. 3948 is to ensure appropriate due process
over highly sensitive proprietary algorithmic information and
prevent the SEC from accessing certain intellectual property
from a registered entity without a subpoena.
In December 2015, the Commodity Futures Trading Commission
(CFTC) issued a proposed rulemaking known as Regulation
Automated Trading (Reg AT). The proposed rulemaking stated that
companies would be required to give their propriety source code
data at the request of a CFTC staffer. After pushback from
regulated entities and commentators, the CFTC required that the
CFTC must vote in order to gain access to source code.
The CFTC's proposed rule received pushback because it
eliminated due process for companies and individuals with
proprietary ownership over source code data. After all, owners
of source code have a legal right as property owners against
the seizure of their property by the federal government. If the
CFTC, or any other agency, wants to obtain proprietary or
source code data, basic notions of due process demands a
subpoena. In his statement of dissent then- Commissioner
Giancarlo observed that Reg AT as-proposed would be open to a
constitutional challenge because it could be classified as an
unreasonable search and seizure. On October 4, 2017, CFTC
Commissioner Brian Quintez said the CFTC's controversial source
code repository proposal was ``D-E-A-D.''
Nonetheless, the CFTC's overreaching proposal raised
concerns that other government agencies could follow their
lead. In his dissent from Reg AT, Chairman Giancarlo predicted
as much: ``If the CFTC adopts the source code provisions of the
Supplemental Notice, the [SEC] will likely copy it and so will
other U.S. and overseas regulators--and not just regulators of
financial markets.'' Thus, it became incumbent on Congress to
ensure that other regulators, including the SEC, do not follow
suit.
On August 10, 2016, Congressman Sean Duffy sent a letter to
former SEC Chair Mary Jo White to express his concerns with Reg
AT and inquired as to whether the SEC might apply a similar
approach to companies and individuals that they oversee. In a
response letter, Chair White did not foreclose the possibility
that the SEC would follow a similar course as the CFTC and did
not provide comments on the CFTC rule and whether it would
inform future SEC actions.
H.R. 3948 removes any such doubt and would prohibit the SEC
from compelling the production of source code or similar
intellectual property without a subpoena. Not only does H.R.
3948 ensure important due process protections, H.R. 3948 will
help ensure the security of SEC-regulated entities' proprietary
data and information. Companies invest billions of dollars to
ensure the integrity of their information technology systems.
During a hearing on October 11, 2017, Rep. David Scott noted
that source code is the ``secret sauce'' of the industry. In
other words, the seizure of proprietary data essentially
equates to the seizure of the company. Given the 2017
announcement of the breach of the SEC's EDGAR system and valid
concerns about the SEC's ability to protect sensitive data, it
is even more important to place safeguards on the SEC's ability
to access, without cause, highly sensitive, proprietary trading
data.
Notably, H.R. 3948 balances due process right and cyber
security concerns while still preserving the SEC's ability to
obtain this information in its normal course upon an
appropriate showing. Generally, the SEC relies on its subpoena
authority to obtain such data; this bill only codifies that
approach in order to head off the possibility that the SEC
could follow the groundwork laid by the CFTC's proposed
approach. Allowing a federal agency, such as the SEC, to more
freely collect highly sensitive proprietary trading algorithms
without sufficient due process protections will only increase
the SEC's attractiveness as a highly-prized target for cyber
intrusions. Due process and security concerns thus far outweigh
any benefit the SEC may gain from being able to request such
data without demonstrating an appropriate need for it.
Hearings
The Committee on Financial Services held a hearing
examining matters relating to H.R. 3948 on April 26, 2017, and
April 28, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
October 11, 2017, and October, 12, 2017 and ordered H.R. 3948
to be reported favorably to the House as amended by a recorded
vote of 46 yeas to 14 nays (Record vote no. FC-94), a quorum
being present. Before the motion to report was offered, the
Committee adopted an amendment offered by Mr. Foster by voice
vote.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House as amended. The motion
was agreed to by a recorded vote of 46 yeas to 14 nays (Record
vote no. FC-94), a quorum being present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 3948
will prevent the SEC from mandating that companies turnover
their source code and other intellectual property without a
subpoena.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 8, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3948, the
Protection of Source Code Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 3948--Protection of Source Code Act
H.R. 3948 would require the Securities and Exchange
Commission (SEC) to issue a subpoena before it could compel
people or entities that are regulated under various securities
laws to provide their algorithmic trading source code to the
agency.
Using information from the SEC, CBO estimates that
implementing H.R. 3948 would require the agency to spend less
than $500,000 to update its guidance documents. Moreover, the
SEC is authorized to collect fees sufficient to offset its
annual appropriation; therefore, CBO estimates that the net
effect on discretionary spending would be negligible, assuming
appropriation actions consistent with that authority.
Enacting H.R. 3948 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
CBO estimates that enacting H.R. 3948 would not increase
net direct spending or on-budget deficits in any of the four
consecutive 10-year periods beginning in 2028.
H.R. 3948 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Stephen Rabent.
The estimate was approved by H. Samuel Papenfuss, Deputy
Assistant Director for Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 3948 as the ``Protection of Source
Code Act.''
Section 2. Procedure for obtaining certain intellectual property
This section amends the Securities Act of 1933, the
Securities Exchange Act of 1934, the Investment Company Act of
1940, and the Investment Advisers Act of 1940 such that each
states the SEC is not allowed to require the turnover of source
code and similar intellectual property unless the Commission
first issues a subpoena.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
SECURITIES ACT OF 1933
TITLE I--
* * * * * * *
taking effect of registration statements and amendments thereto
Sec. 8. (a) Except as hereinafter provided, the effective
date of a registration statement shall be the twentieth day
after the filing thereof or such earlier date as the Commission
may determine, having due regard to the adequacy of the
information respecting the issuer theretofore available to the
public, to the facility with which the nature of the securities
to be registered, their relationship to the capital structure
of the issuer and the rights of holders thereof can be
understood, and to the public interest and the protection of
investors. If any amendment to any such statement is filed
prior to the effective date of such statement, the registration
statement shall be deemed to have been filed when such
amendment was filed; except that an amendment filed with the
consent of the Commission, prior to the effective date of the
registration statement, or filed pursuant to an order of the
Commission, shall be treated as a part of the registration
statement.
(b) If it appears to the Commission that a registration
statement is on its face incomplete or inaccurate in any
material respect, the Commission may, after notice by personal
service or the sending of confirmed telegraphic notice not
later than ten days after the filing of the registration
statement, and opportunity for hearing (at a time fixed by the
Commission) within ten days after such notice by personal
service or the sending of such telegraphic notice, issue an
order prior to the effective date of registration refusing to
permit such statement to become effective until it has been
amended in accordance with such order. When such statement has
been amended in accordance with such order the Commission shall
so declare and the registration shall become effective at the
time provided in subsection (a) or upon the date of such
declaration, whichever date is the later.
(c) An amendment filed after the effective date of the
registration statement, if such amendment, upon its face,
appears to the Commission not to be incomplete or inaccurate in
any material respect, shall become effective on such date as
the Commission may determine, having due regard to the public
interest and the protection of investors.
(d) If it appears to the Commission at any time that the
registration statement includes any untrue statement of a
material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading, the Commission may, after notice by personal
service or the sending of confirmed telegraphic notice, and
after opportunity for hearing (at a time fixed by the
Commission) within fifteen days after such notice by personal
service or the sending of such telegraphic notice, issue a stop
order suspending the effectiveness of the registration
statement. When such statement has been amended in accordance
with such stop order the Commission shall so declare and
thereupon the stop order shall cease to be effective.
(e) The Commission is hereby empowered to make an examination
in any case in order to determine whether a stop order should
issue under subsection (d). In making such examination the
Commission or any officer or officers designated by it shall
have access to and may demand the production of any books and
papers of, and may administer oaths and affirmations to and
examine, the issuer, underwriter, or any other person, in
respect of any matter relevant to the examination, and may, in
its discretion, require the production of a balance sheet
exhibiting the assets and liabilities of the issuer, or its
income statement, or both, to be certified to by a public or
certified accountant approved by the Commission. If the issuer
or underwriter shall fail to cooperate, or shall obstruct or
refuse to permit the making of an examination, such conduct
shall be proper ground for the issuance of a stop order.
(f) Any notice required under this section shall be sent to
or served on the issuer, or, in case of a foreign government or
political subdivision thereof, to or on the underwriter, or, in
the case of a foreign or Territorial person, to or on its duly
authorized representative in the United States named in the
registration statement, properly directed in each case of
telegraphic notice to the address given in such statement.
(g) Procedure for Obtaining Certain Intellectual Property.--
The Commission is not authorized to compel under this title a
person to produce or furnish source code, including algorithmic
trading source code or similar intellectual property that forms
the basis for design of the source code, to the Commission
unless the Commission first issues a subpoena.
* * * * * * *
----------
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
rules, regulations, and orders; annual reports
Sec. 23. (a)(1) The Commission, the Board of Governors of the
Federal Reserve System, and the other agencies enumerated in
section 3(a)(34) of this title shall each have power to make
such rules and regulations as may be necessary or appropriate
to implement the provisions of this title for which they are
responsible or for the execution of the functions vested in
them by this title, and may for such purposes classify persons,
securities, transactions, statements, applications, reports,
and other matters within their respective jurisdictions, and
prescribe greater, lesser, or different requirements for
different classes thereof. No provision of this title imposing
any liability shall apply to any act done or omitted in good
faith in conformity with a rule, regulation, or order of the
Commission, the Board of Governors of the Federal Reserve
System, other agency enumerated in section 3(a)(34) of this
title, or any self-regulatory organization, notwithstanding
that such rule, regulation, or order may thereafter be amended
or rescinded or determined by judicial or other authority to be
invalid for any reason.
(2) The Commission and the Secretary of the Treasury, in
making rules and regulations pursuant to any provisions of this
title, shall consider among other matters the impact any such
rule or regulation would have on competition. The Commission
and the Secretary of the Treasury shall not adopt any such rule
or regulation which would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of this
title. The Commission and the Secretary of the Treasury shall
include in the statement of basis and purpose incorporated in
any rule or regulation adopted under this title, the reasons
for the Commission's or the Secretary's determination that any
burden on competition imposed by such rule or regulation is
necessary or appropriate in furtherance of the purposes of this
title.
(3) The Commission and the Secretary, in making rules and
regulations pursuant to any provision of this title,
considering any application for registration in accordance with
section 19(a) of this title, or reviewing any proposed rule
change of a self-regulatory organization in accordance with
section 19(b) of this title, shall keep in a public file and
make available for copying all written statements filed with
the Commission and the Secretary and all written communications
between the Commission or the Secretary and any person relating
to the proposed rule, regulation, application, or proposed rule
change: Provided, however, That the Commission and the
Secretary shall not be required to keep in a public file or
make available for copying any such statement or communication
which it may withhold from the public in accordance with the
provisions of section 552 of title 5, United States Code.
(b)(1) The Commission, the Board of Governors of the Federal
Reserve System, and the other agencies enumerated in section
3(a)(34) of this title shall each make an annual report to the
Congress on its work for the preceding year, and shall include
in each such report whatever information, data, and
recommendations for further legislation it considers advisable
with regard to matters within its respective jurisdiction under
this title.
(2) The appropriate regulatory agency for a self-regulatory
organization shall include in its annual report to the Congress
for each fiscal year, a summary of its oversight activities
under this title with respect to such self-regulatory
organization, including a description of any examination
conducted as part of such activities of any organization, any
material recommendation presented as part of such activities to
such organization for changes in its organization or rules, and
any such action by such organization in response to any such
recommendation.
(3) The appropriate regulatory agency for any class of
municipal securities dealers shall include in its annual report
to the Congress for each fiscal year a summary of its
regulatory activities pursuant to this title with respect to
such municipal securities dealers, including the nature of and
reason for any sanction imposed pursuant to this title against
any such municipal securities dealer.
(4) The Commission shall also include in its annual report to
the Congress for each fiscal year--
(A) a summary of the Commission's oversight
activities with respect to self-regulatory
organizations for which it is not the appropriate
regulatory agency, including a description of any
examination of any such organization, any material
recommendation presented to any such organization for
changes in its organization or rules, and any action by
any such organization in response to any such
recommendations;
(B) a statement and analysis of the expenses and
operations of each self-regulatory organization in
connection with the performance of its responsibilities
under this title, for which purpose data pertaining to
such expenses and operations shall be made available by
such organization to the Commission at its request;
(C) the steps the Commission has taken and the
progress it has made toward ending the physical
movement of the securities certificate in connection
with the settlement of securities transactions, and its
recommendations, if any, for legislation to eliminate
the securities certificate;
(D) the number of requests for exemptions from
provisions of this title received, the number granted,
and the basis upon which any such exemption was
granted;
(E) a summary of the Commission's regulatory
activities with respect to municipal securities dealers
for which it is not the appropriate regulatory agency,
including the nature of, and reason for, any sanction
imposed in proceedings against such municipal
securities dealers;
(F) a statement of the time elapsed between the
filing of reports pursuant to section 13(f) of this
title and the public availability of the information
contained therein, the costs involved in the
Commission's processing of such reports and tabulating
such information, the manner in which the Commission
uses such information, and the steps the Commission has
taken and the progress it has made toward requiring
such reports to be filed and such information to be
made available to the public in machine language;
(G) information concerning (i) the effects its rules
and regulations are having on the viability of small
brokers and dealers; (ii) its attempts to reduce any
unnecessary reporting burden on such brokers and
dealers; and (iii) its efforts to help to assure the
continued participation of small brokers and dealers in
the United States securities markets;
(H) a statement detailing its administration of the
Freedom of Information Act, section 552 of title 5,
United States Code, including a copy of the report
filed pursuant to subsection (d) of such section; and
(I) the steps that have been taken and the progress
that has been made in promoting the timely public
dissemination and availability for analytical purposes
(on a fair, reasonable, and nondiscriminatory basis) of
information concerning government securities
transactions and quotations, and its recommendations,
if any, for legislation to assure timely dissemination
of (i) information on transactions in regularly traded
government securities sufficient to permit the
determination of the prevailing market price for such
securities, and (ii) reports of the highest published
bids and lowest published offers for government
securities (including the size at which persons are
willing to trade with respect to such bids and offers).
(c) The Commission, by rule, shall prescribe the procedure
applicable to every case pursuant to this title of adjudication
(as defined in section 551 of title 5, United States Code) not
required to be determined on the record after notice and
opportunity for hearing. Such rules shall, as a minimum,
provide that prompt notice shall be given of any adverse action
or final disposition and that such notice and the entry of any
order shall be accompanied by a statement of written reasons.
(d) Cease-and-Desist Procedures.--Within 1 year after the
date of enactment of this subsection, the Commission shall
establish regulations providing for the expeditious conduct of
hearings and rendering of decisions under section 21C of this
title, section 8A of the Securities Act of 1933, section 9(f)
of the Investment Company Act of 1940, and section 203(k) of
the Investment Advisers Act of 1940.
(e) Procedure for Obtaining Certain Intellectual Property.--
The Commission is not authorized to compel under this title a
person to produce or furnish source code, including algorithmic
trading source code or similar intellectual property that forms
the basis for design of the source code, to the Commission
unless the Commission first issues a subpoena.
* * * * * * *
----------
INVESTMENT COMPANY ACT OF 1940
TITLE I--INVESTMENT COMPANIES
* * * * * * *
accounts and records
Sec. 31. (a) Maintenance of Records.--
(1) In general.--Each registered investment company,
and each underwriter, broker, dealer, or investment
adviser that is a majority-owned subsidiary of such a
company, shall maintain and preserve such records (as
defined in section 3(a)(37) of the Securities Exchange
Act of 1934) for such period or periods as the
Commission, by rules and regulations, may prescribe as
necessary or appropriate in the public interest or for
the protection of investors. Each investment adviser
that is not a majority-owned subsidiary of, and each
depositor of any registered investment company, and
each principal underwriter for any registered
investment company other than a closed-end company,
shall maintain and preserve for such period or periods
as the Commission shall prescribe by rules and
regulations, such records as are necessary or
appropriate to record such person's transactions with
such registered company. Each person having custody or
use of the securities, deposits, or credits of a
registered investment company shall maintain and
preserve all records that relate to the custody or use
by such person of the securities, deposits, or credits
of the registered investment company for such period or
periods as the Commission, by rule or regulation, may
prescribe, as necessary or appropriate in the public
interest or for the protection of investors.
(2) Minimizing compliance burden.--In exercising its
authority under this subsection, the Commission shall
take such steps as it deems necessary or appropriate,
consistent with the public interest and for the
protection of investors, to avoid unnecessary
recordkeeping by, and minimize the compliance burden
on, persons required to maintain records under this
subsection (hereafter in this section referred to as
``subject persons''). Such steps shall include
considering, and requesting public comment on--
(A) feasible alternatives that minimize the
recordkeeping burdens on subject persons;
(B) the necessity of such records in view of
the public benefits derived from the
independent scrutiny of such records through
Commission examination;
(C) the costs associated with maintaining the
information that would be required to be
reflected in such records; and
(D) the effects that a proposed recordkeeping
requirement would have on internal compliance
policies and procedures.
(b) Examinations of Records.--
(1) In general.--All records required to be
maintained and preserved in accordance with subsection
(a) shall be subject at any time and from time to time
to such reasonable periodic, special, and other
examinations by the Commission, or any member or
representative thereof, as the Commission may
prescribe.
(2) Availability.--For purposes of examinations
referred to in paragraph (1), any subject person shall
make available to the Commission or its representatives
any copies or extracts from such records as may be
prepared without undue effort, expense, or delay as the
Commission or its representatives may reasonably
request.
(3) Commission action.--The Commission shall exercise
its authority under this subsection with due regard for
the benefits of internal compliance policies and
procedures and the effective implementation and
operation thereof.
(4) Records of persons with custody or use.--
(A) In general.--Records of persons having
custody or use of the securities, deposits, or
credits of a registered investment company that
relate to such custody or use, are subject at
any time, or from time to time, to such
reasonable periodic, special, or other
examinations and other information and document
requests by representatives of the Commission,
as the Commission deems necessary or
appropriate in the public interest or for the
protection of investors.
(B) Certain persons subject to other
regulation.--Any person that is subject to
regulation and examination by a Federal
financial institution regulatory agency (as
such term is defined under section 212(c)(2) of
title 18, United States Code) may satisfy any
examination request, information request, or
document request described under subparagraph
(A), by providing to the Commission a detailed
listing, in writing, of the securities,
deposits, or credits of the registered
investment company within the custody or use of
such person.
(c) Regulatory Authority.--The Commission may, in the public
interest or for the protection of investors, issue rules and
regulations providing for a reasonable degree of uniformity in
the accounting policies and principles to be followed by
registered investment companies in maintaining their accounting
records and in preparing financial statements required pursuant
to this title.
(d) Exemption Authority.--The Commission, upon application
made by any registered investment company, may by order exempt
a specific transaction or transactions from the provisions of
any rule or regulation made pursuant to subsection (e), if the
Commission finds that such rule or regulation should not
reasonably be applied to such transaction.
(e) Procedure for Obtaining Certain Intellectual Property.--
The Commission is not authorized to compel under this title an
investment company to produce or furnish source code, including
algorithmic trading source code or similar intellectual
property that forms the basis for design of the source code, to
the Commission unless the Commission first issues a subpoena.
* * * * * * *
----------
INVESTMENT ADVISERS ACT OF 1940
TITLE II--INVESTMENT ADVISERS
* * * * * * *
annual and other reports
Sec. 204. (a) In General.--Every investment adviser who makes
use of the mails or of any means or instrumentality of
interstate commerce in connection with his or its business as
an investment adviser (other than one specifically exempted
from registration pursuant to section 203(b) of this title),
shall make and keep for prescribed periods such records (as
defined in section 3(a)(37) of the Securities Exchange Act of
1934), furnish such copies thereof, and make and disseminate
such reports as the Commission, by rule, may prescribe as
necessary or appropriate in the public interest or for the
protection of investors. All records (as so defined) of such
investment advisers are subject at any time, or from time to
time, to such reasonable periodic, special, or other
examinations by representatives of the Commission as the
Commission deems necessary or appropriate in the public
interest or for the protection of investors.
(b) Records and Reports of Private Funds.--
(1) In general.--The Commission may require any
investment adviser registered under this title--
(A) to maintain such records of, and file
with the Commission such reports regarding,
private funds advised by the investment
adviser, as necessary and appropriate in the
public interest and for the protection of
investors, or for the assessment of systemic
risk by the Financial Stability Oversight
Council (in this subsection referred to as the
``Council''); and
(B) to provide or make available to the
Council those reports or records or the
information contained therein.
(2) Treatment of records.--The records and reports of
any private fund to which an investment adviser
registered under this title provides investment advice
shall be deemed to be the records and reports of the
investment adviser.
(3) Required information.--The records and reports
required to be maintained by an investment adviser and
subject to inspection by the Commission under this
subsection shall include, for each private fund advised
by the investment adviser, a description of--
(A) the amount of assets under management and
use of leverage, including off-balance-sheet
leverage;
(B) counterparty credit risk exposure;
(C) trading and investment positions;
(D) valuation policies and practices of the
fund;
(E) types of assets held;
(F) side arrangements or side letters,
whereby certain investors in a fund obtain more
favorable rights or entitlements than other
investors;
(G) trading practices; and
(H) such other information as the Commission,
in consultation with the Council, determines is
necessary and appropriate in the public
interest and for the protection of investors or
for the assessment of systemic risk, which may
include the establishment of different
reporting requirements for different classes of
fund advisers, based on the type or size of
private fund being advised.
(4) Maintenance of records.--An investment adviser
registered under this title shall maintain such records
of private funds advised by the investment adviser for
such period or periods as the Commission, by rule, may
prescribe as necessary and appropriate in the public
interest and for the protection of investors, or for
the assessment of systemic risk.
(5) Filing of records.--The Commission shall issue
rules requiring each investment adviser to a private
fund to file reports containing such information as the
Commission deems necessary and appropriate in the
public interest and for the protection of investors or
for the assessment of systemic risk.
(6) Examination of records.--
(A) Periodic and special examinations.--The
Commission--
(i) shall conduct periodic
inspections of the records of private
funds maintained by an investment
adviser registered under this title in
accordance with a schedule established
by the Commission; and
(ii) may conduct at any time and from
time to time such additional, special,
and other examinations as the
Commission may prescribe as necessary
and appropriate in the public interest
and for the protection of investors, or
for the assessment of systemic risk.
(B) Availability of records.--An investment
adviser registered under this title shall make
available to the Commission any copies or
extracts from such records as may be prepared
without undue effort, expense, or delay, as the
Commission or its representatives may
reasonably request.
(7) Information sharing.--
(A) In general.--The Commission shall make
available to the Council copies of all reports,
documents, records, and information filed with
or provided to the Commission by an investment
adviser under this subsection as the Council
may consider necessary for the purpose of
assessing the systemic risk posed by a private
fund.
(B) Confidentiality.--The Council shall
maintain the confidentiality of information
received under this paragraph in all such
reports, documents, records, and information,
in a manner consistent with the level of
confidentiality established for the Commission
pursuant to paragraph (8). The Council shall be
exempt from section 552 of title 5, United
States Code, with respect to any information in
any report, document, record, or information
made available, to the Council under this
subsection.
(8) Commission confidentiality of reports.--
Notwithstanding any other provision of law, the
Commission may not be compelled to disclose any report
or information contained therein required to be filed
with the Commission under this subsection, except that
nothing in this subsection authorizes the Commission--
(A) to withhold information from Congress,
upon an agreement of confidentiality; or
(B) prevent the Commission from complying
with--
(i) a request for information from
any other Federal department or agency
or any self-regulatory organization
requesting the report or information
for purposes within the scope of its
jurisdiction; or
(ii) an order of a court of the
United States in an action brought by
the United States or the Commission.
(9) Other recipients confidentiality.--Any
department, agency, or self-regulatory organization
that receives reports or information from the
Commission under this subsection shall maintain the
confidentiality of such reports, documents, records,
and information in a manner consistent with the level
of confidentiality established for the Commission under
paragraph (8).
(10) Public information exception.--
(A) In general.--The Commission, the Council,
and any other department, agency, or self-
regulatory organization that receives
information, reports, documents, records, or
information from the Commission under this
subsection, shall be exempt from the provisions
of section 552 of title 5, United States Code,
with respect to any such report, document,
record, or information. Any proprietary
information of an investment adviser
ascertained by the Commission from any report
required to be filed with the Commission
pursuant to this subsection shall be subject to
the same limitations on public disclosure as
any facts ascertained during an examination, as
provided by section 210(b) of this title.
(B) Proprietary information.--For purposes of
this paragraph, proprietary information
includes sensitive, non-public information
regarding--
(i) the investment or trading
strategies of the investment adviser;
(ii) analytical or research
methodologies;
(iii) trading data;
(iv) computer hardware or software
containing intellectual property; and
(v) any additional information that
the Commission determines to be
proprietary.
(11) Annual report to congress.--The Commission shall
report annually to Congress on how the Commission has
used the data collected pursuant to this subsection to
monitor the markets for the protection of investors and
the integrity of the markets.
(c) Filing Depositories.--The Commission may, by rule,
require an investment adviser--
(1) to file with the Commission any fee, application,
report, or notice required to be filed by this title or
the rules issued under this title through any entity
designated by the Commission for that purpose; and
(2) to pay the reasonable costs associated with such
filing and the establishment and maintenance of the
systems required by subsection (c).
(d) Access to Disciplinary and Other Information.--
(1) Maintenance of system to respond to inquiries.--
(A) In general.--The Commission shall require
the entity designated by the Commission under
subsection (b)(1) to establish and maintain a
toll-free telephone listing, or a readily
accessible electronic or other process, to
receive and promptly respond to inquiries
regarding registration information (including
disciplinary actions, regulatory, judicial, and
arbitration proceedings, and other information
required by law or rule to be reported)
involving investment advisers and persons
associated with investment advisers.
(B) Applicability.--This subsection shall
apply to any investment adviser (and the
persons associated with that adviser), whether
the investment adviser is registered with the
Commission under section 203 or regulated
solely by a State, as described in section
203A.
(2) Recovery of costs.--An entity designated by the
Commission under subsection (b)(1) may charge persons
making inquiries, other than individual investors,
reasonable fees for responses to inquiries described in
paragraph (1).
(3) Limitation on liability.--An entity designated by
the Commission under subsection (b)(1) shall not have
any liability to any person for any actions taken or
omitted in good faith under this subsection.
[(d)] (e) Records of Persons With Custody or Use.--
(1) In general.--Records of persons having custody or
use of the securities, deposits, or credits of a
client, that relate to such custody or use, are subject
at any time, or from time to time, to such reasonable
periodic, special, or other examinations and other
information and document requests by representatives of
the Commission, as the Commission deems necessary or
appropriate in the public interest or for the
protection of investors.
(2) Certain persons subject to other regulation.--Any
person that is subject to regulation and examination by
a Federal financial institution regulatory agency (as
such term is defined under section 212(c)(2) of title
18, United States Code) may satisfy any examination
request, information request, or document request
described under paragraph (1), by providing the
Commission with a detailed listing, in writing, of the
securities, deposits, or credits of the client within
the custody or use of such person.
(f) Procedure for Obtaining Certain Intellectual Property.--
The Commission is not authorized to compel under this title an
investment adviser to produce or furnish source code, including
algorithmic trading source code or similar intellectual
property that forms the basis for design of the source code, to
the Commission unless the Commission first issues a subpoena.
* * * * * * *
MINORITY VIEWS
H.R. 3948 would severely hamper the ability of the
Securities and Exchange Commission (SEC) to effectively conduct
compliance examinations and investigate computer-driven market
disruptions. Specifically, this bill imposes an overly broad
and unwarranted subpoena requirement before SEC staff could
inspect a wide array of routine business records involving
source code and related information.
Although H.R. 3948 is offered under the guise of due
process and intellectual property protections, the bill
represents a gift for hedge funds and high-frequency traders
(HFTs) seeking to avoid regulatory oversight of their
potentially disruptive automated trading systems. As history
shows, the unfettered use of these systems could jeopardize the
stability of U.S. capital markets. For example, on May 6, 2010,
in an event referred to as the ``Flash Crash,'' major U.S.
stock indices plummeted nearly $1 trillion in less than an hour
before partially rebounding. The SEC and the Commodity Futures
Trading Commission (CFTC) took an alarming five months to
investigate the incident and determined that it was caused by a
combination of a flawed execution algorithm of one
institutional investor and aggressive algorithmic trading by
HFTs.
In response to the Flash Crash, the SEC and other
regulators have worked to improve their ability to quickly
discover the cause of technology-based interference with U.S.
capital markets. H.R. 3948 would undermine the SEC's efforts in
favor of the very parties responsible for the Flash Crash by
erecting procedural hurdles to Staff's access to algorithmic
trading data.
Moreover, H.R. 3948's subpoena requirement would extend far
beyond algorithmic trading data to source code of any kind, as
well as a host of related data that does not constitute source
code. This information is routinely included in firms' books
and records, which the SEC reviews in order to evaluate
compliance with regulations designed to protect investors and
facilitate market integrity. For example, this bill would
prohibit the SEC's compliance examination staff from inspecting
computer code relating to a firm's cybersecurity controls
without first referring the matter to the Enforcement Division
or obtaining a subpoena by majority vote of the SEC's
Commissioners.
The bill was amended in Committee to strike language
extending the subpoena requirement to intellectual property
that ``provides insight to'' source code. However, even as
amended, this deeply flawed and shortsighted bill would imperil
market stability to the detriment of investors.
Several stakeholders wrote to the Committee to oppose H.R.
3948 on the grounds that it would dangerously limit oversight
of technology that has gained an increased significance in our
capital markets. These stakeholders include investor advocacy
groups like Americans for Financial Reform, Center for American
Progress, Consumer Federation of America, and Public Citizen.
The Minority believes that Congress should work to enhance
the ability of our regulators to conduct effective oversight
for the protection of investors and the stability of our
markets. H.R. 3948 is an irresponsible bill that does just the
opposite.
For these reasons, the Minority opposes H.R. 3948.
Maxine Waters.
Keith Ellison.
Gwen Moore.
Michael E. Capuano.
Emmanuel Cleaver.
Nydia M. Velazquez.
Carolyn B. Maloney.
Al Green.
Wm. Lacy Clay.
Stephen Lynch.
Vicente Gonzalez.
[all]
