[House Report 115-883]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-883
======================================================================
EXCHANGE REGULATORY IMPROVEMENT ACT
_______
August 3, 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
[To accompany H.R. 3555]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 3555) to amend the Securities Exchange Act of
1934 to provide that the definition of a facility of an
exchange does not apply to a line of business the purpose of
which is not to effect or report a transaction on an exchange,
having considered the same, report favorably thereon with
amendments and recommend that the bill as amended do pass.
The amendments are as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Exchange Regulatory Improvement Act''.
SEC. 2. FINDINGS.
The Congress finds the following:
(1) Over time, national securities exchanges have expanded
their businesses beyond listings and trading to include the
sale of additional products and services to their members and
listed companies.
(2) The Securities and Exchange Commission should be
transparent in its interpretation of the term ``facility'' in
section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)).
SEC. 3. FACILITY DEFINED.
(a) In General.--Not later than 360 days after the date of enactment
of this Act, the Securities and Exchange Commission (the
``Commission'') shall adopt regulations to further interpret the term
``facility'' under section 3(a) of the Securities Exchange Act of 1934.
Such regulations shall set forth the facts and circumstances the
Commission considers when determining whether any premises or property,
or the right to use any premises, property, or service is or is not a
facility of an exchange.
(b) Application to Proposed Rules.--The Commission shall apply the
facts and circumstances set forth in the regulations issued pursuant to
subsection (a) in determining whether any proposed rule is or is not
required to be submitted as a proposed rule filing pursuant to section
19 of the Securities Exchange Act of 1934 and the rules and regulations
issued thereunder.
Amend the title so as to read:
A bill to require the Securities and Exchange Commission to
issue regulations to further interpret the term ``facility''
under the Securities Exchange Act of 1934.
PURPOSE AND SUMMARY
On July 28, 2017, Representative Barry Loudermilk
introduced H.R. 3555, the ``Exchange Regulatory Improvement
Act''. As modified by an amendment in the nature of a
substitute, H.R. 3555 acknowledges that over time national
securities exchanges have expanded their businesses beyond the
listing and trading of securities to include the sale of
additional products and services to their members, market
participants, and listed companies. This bill requires the U.S.
Securities and Exchange Commission (SEC or Commission) to more
clearly communicate to the public how it regulates national
securities exchanges and set forth the facts and circumstances
it considers for what is or is not a ``facility'' of an
exchange and to apply those facts and circumstances in
determining whether any proposed rule is or is not required to
be submitted as a proposed rule filing.
BACKGROUND AND NEED FOR LEGISLATION
The SEC oversees twenty-one national securities exchanges
(equity and options). A national securities exchange is a
securities exchange that has registered with the SEC under
Section 6 of the Securities Exchange Act of 1934 (Exchange
Act). The SEC's Division of Trading and Markets (Division)
assists the Commission to execute its responsibility to
maintain fair, orderly, and efficient markets, which is one-
third of the SEC's Congressionally mandated mission. The
Division provides day-to-day oversight of these national
securities exchanges, reviews, and in some cases approves under
authority delegated from the Commission, proposed new rules and
proposed changes to existing rules filed by these national
securities exchanges. All rules and rule amendments filed and
approved by the SEC are pursuant to Section 19 of the
Securities and Exchange Act of 1934 and Rule 19b-4 thereafter.
The goal of H.R. 3555 is to enhance regulatory clarity and
transparency as national securities exchanges business models
evolve by requiring the SEC to set forth the facts and
circumstances it considers in determining what is a
``facility'' of an exchange and to apply those in determining
whether a proposed rule is or is not required to be submitted
as a proposed rule filing. Section 3(a)(2) of the Exchange Act
defines a ``facility'' of an exchange to include four parts:
the premises of the exchange, property of the exchange, the
right of an exchange to use any premises or property or
service, or any right of the exchange to use any such property
or service.
Securities exchanges in the United States historically have
been member-owned and -operated entities. In 1998 the SEC
confirmed that exchanges could structure as for-profit
entities, and many securities exchanges have converted to
demutualized and shareholder-owned entities. Consequently,
exchanges have placed an increased emphasis on the
profitability of business lines that go beyond the traditional
exchange businesses to list and trade securities and ensure
compliance with exchange rules and the actual regulatory
activity of operating the exchange itself. Some of these non-
traditional businesses developed by national securities
exchanges include regulatory compliance software, e-mortgage
registries, and data analytics.
The Committee is concerned that as exchanges have worked to
innovate and grow these business lines, the SEC has asserted
its jurisdiction and made regulatory inquiries (such as
requests to examine the ``books and records'') regarding
business lines that are unrelated to effecting or reporting a
transaction on a national securities exchange--in other words,
product and services that are not so connected to the activity
of regulating an exchange that they deserve the same scrutiny
as the core regulated functions of the exchange. As a result,
exchanges either must adhere to these requests or pay for an
opinion of counsel to justify that the specific business line
is in fact not a ``facility'' of the exchange under the
statutory definition. Either way, the lack of regulatory
clarity regarding what the SEC intends to regulate and how it
determines as much results in wasted time and resources,
particularly if the business line does not qualify as a
facility of an exchange.
In a December 7, 2017, letter to Rep. Barry Loudermilk, the
sponsor of H.R. 3555, SEC Chairman Jay Clayton observed:
Our markets have evolved significantly in recent
years, and we must ensure that the regulatory framework
keeps pace with market developments. . . . I believe
care should be taken to ensure that the Commission
retains oversight of important exchange functions, such
as those relating to (1) exchange market data products,
(2) listing standards, (3) member and market
regulation, (4) co-location and connectivity services,
and (5) order routing services, and that any
modifications do not inadvertently exclude from
Commission oversight exchange functions that do not
currently exist but that may evolve in the future.
Importantly, though, the sponsors of H.R. 3555 have
consistently emphasized that the intent of the legislation is
not to hinder the SEC's ability to regulate such exchange
functions.
Some broker-dealers and other market participants have
expressed skepticism to changing the statutory definition of a
``facility'' under the Exchange Act, which has remained
unchanged since the original 1934 law and appears numerous
times in statute and regulation. They have argued in part that
such a statutory change will result in prolonged litigation
with respect to the scope of the SEC's authority to regulate
exchanges. Specifically, they are concerned that a statutory
change could weaken the ability of market participants to
challenge rules, policies, and fees of the exchanges for the
products and services used by market participants that actually
do in fact relate to exchange trading.
But H.R. 3555, as amended, simply directs the SEC to
conduct a rulemaking to explain its process to determine what
constitutes a ``facility'' of an exchange. The legislation, as
amended, does not instruct the Commission to narrow its
interpretation of ``facility'' or its corresponding
jurisdiction over exchange operations, but rather the
legislation requires the SEC to clarify how it determines
whether any premises, property, or service is a facility.
This rulemaking is intended to provide clarity regarding
the facts and circumstances the SEC considers when determining
whether an exchange product is a ``facility,'' while still
giving the SEC flexibility in determining what constitutes a
``facility'' to respond to exchange developments. This clarity
will allow for exchanges to develop diverse products and
services with a better understanding of what the SEC will
consider to be subject to regulation as an exchange facility,
while retaining authority and flexibility for the SEC to
continue regulating relevant exchange functions, including
exchange market data. Nothing in this bill exempts from
regulation functions of exchanges that are for the purpose of
effecting or reporting a transaction on an exchange or that
currently are subject to regulation by the SEC, such as
exchange market data, exchange listing standards, and co-
location services.
HEARINGS
The Committee on Financial Services and the subcommittee on
Capital Markets, Securities, and Investment held hearings
examining matters relating to H.R. 3555 on June 27, 2017, and
October 4, 2017.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
July 11, 2018, and ordered H.R. 3555 to be reported favorably
to the House, as amended, 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. On
a motion by Chairman Hensarling to adopt the amendment in the
nature of substitute the amendment was adopted by voice vote, A
subsequent motion by Chairman Hensarling to report the bill
favorably to the House, as amended, was agreed to by a voice
vote, 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. 3555
will enhance transparency regarding how exchanges are
regulated.
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, July 17, 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. 3555, H.R. 6177,
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R.
6324.
If you wish further details on these estimates, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Mark P. Hadley
(For Keith Hall, Director).
Enclosure.
Securities and Exchange Commission Legislation
On July 11, the House Committee on Financial Services
ordered eight bills to be reported related to the rules,
regulations, and operations of the Securities and Exchange
Commission (SEC). The bills are:
H.R. 3555, the Exchange Regulatory
Improvement Act, would require the Securities and
Exchange Commission (SEC) to issue regulations
regarding its definition of what constitutes a facility
used by a national securities exchange;
H.R. 6177, the Developing and Empowering our
Aspiring Leaders Act of 2018, would direct the SEC to
conduct a rulemaking to expand what types of asset
acquisitions are considered qualifying investments for
a venture capital fund;
H.R. 6319, the Expanding Investment in Small
Business Act, would require the SEC to conduct a study
on the limitation on the amount of outstanding
securities a closed-end fund may hold from a single
issuer and still be classified as diversified;
H.R. 6320, the Promoting Transparent
Standards for Corporate Insiders Act, would require the
SEC to conduct a study of various proposals to change
agency rules regarding the use of written trading plans
by certain securities traders;
H.R. 6321, the Investment Adviser Regulatory
Flexibility Improvement Act, would require the SEC to
revise the definitions of a small business and small
organization applicable for assessing the effect of the
agency's rulemakings under the Investment Advisers Act
of 1940 on those entities;
H.R. 6322, the Enhancing Multi-Class Share
Disclosures Act, would direct the SEC to issue a rule
requiring securities issuers with multi-class stock
structures to make disclosures regarding the voting
power of certain individuals;
H.R. 6323, the National Senior Investor
Initiative Act of 2018, would direct the SEC to
establish a taskforce to identify challenges that
senior investors face and to report on its findings
every two years; and
H.R. 6324, the Middle Market IPO
Underwriting Cost Act, would direct the SEC to study
the costs associated with small and medium-sized
companies undertaking an initial public offering and to
report on its findings.
Using information from the SEC regarding the costs of
similar activities, CBO estimates that implementing seven of
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R.
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of
about $1 million for the agency to conduct the required studies
and rulemakings and to issue reports. CBO estimates that
implementing the eighth bill--H.R. 6323--would have a gross
cost of $7 million over the 2019-2023 period for the SEC to
establish and carry out the functions of the taskforce
established under the bill.
However, the SEC is authorized to collect fees sufficient
to offset its annual appropriation; therefore, CBO estimates
that the net effect on discretionary spending of implementing
each of those bills would be negligible, assuming appropriation
actions consistent with that authority. H.R. 6323 also would
require the Government Accountability Office (GAO) to conduct a
study on the economic costs of the financial exploitation of
senior citizens and CBO estimates that implementing that
section would cost GAO less than $500,000; such spending would
be subject to the availability of appropriated funds.
None of the bills would affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply for any of the
eight bills.
None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods
beginning in 2029, CBO estimates.
None of the bills contain intergovernmental mandates as
defined in the Unfunded Mandates Reform Act (UMRA) and would
not affect the budgets of state, local, or tribal governments.
All of them would require the SEC to take actions that could
raise the agency's administrative costs and the fees it
collects to offset those costs. If the SEC increased fees, it
would increase the cost of an existing mandate on private
entities required to pay those fees. CBO estimates that none of
the bills would increase fees in an amount that would exceed
the annual threshold for private-sector mandates established in
UMRA ($160 million in 2018, adjusted annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed 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 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 rule
makings: The Committee estimates that the bill requires one
directed rule making within the meaning of such section, such
that the SEC must adopt regulations to further interpret the
term ``facility'' under Section 3(a) of the Exchange Act.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This section cites H.R. 3555 as the ``Exchange Regulatory
Improvement Act.''
Section 2. Findings
This section states the finding of Congress in regards to
how the businesses of national securities exchanges have
expanded over time and the need for the SEC to be transparent
in how it interprets the term ``facility.''
Section 3. Facility defined
This section requires the SEC to, not later than 360 days
after the date of enactment of the act, to adopt regulations to
further interpret the term ``facility'' under Section 3(a) of
the Exchange Act. Such regulations are to set forth the facts
and circumstances the Commission considers when determining
whether any premises or property, or the right to use any
premises, property, or service is or is not a facility of an
exchange, and the Commission must apply the facts and
circumstances set forth in the regulations in determining
whether a proposed rule is or is not to required to be
submitted as a proposed rule filing under section 19 of the
Exchange Act.
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: H.R. 3555 does not
repeal or amend any section of a statute. Therefore, the Office
of Legislative Counsel did not prepare the report contemplated
by clause 3(e)(1)(B) of rule XIII of the Rules of the House of
Representatives.
[all]