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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

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                        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.

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                             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.

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