79–006 

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 

2 

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 

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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. 

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Insert offset folio 5 here HR549.001
5 

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 appropriaVerDate Sep 11 2014 07:06 Feb 09, 2018 Jkt 079006 PO 00000 Frm 00005 Fmt 6659 Sfmt 6602 E:\HR\OC\HR549.XXX HR549
6 

tion; 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). 

7 

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 

8 

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 representVerDate Sep 11 2014 07:06 Feb 09, 2018 Jkt 079006 PO 00000 Frm 00008 Fmt 6659 Sfmt 6602 E:\HR\OC\HR549.XXX HR549
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ative 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 PROP- ERTY.—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 stateVerDate Sep 11 2014 07:06 Feb 09, 2018 Jkt 079006 PO 00000 Frm 00009 Fmt 6659 Sfmt 6601 E:\HR\OC\HR549.XXX HR549
10 

ments 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 

11 

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 

12 

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 

13 

(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 

14 

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; 

15 

(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 informaVerDate Sep 11 2014 07:06 Feb 09, 2018 Jkt 079006 PO 00000 Frm 00015 Fmt 6659 Sfmt 6601 E:\HR\OC\HR549.XXX HR549
16 

tion 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, nonpublic 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. 

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(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. 

ø(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 

18 

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. 

* * * * * * * 

(19) 

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 

20 

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. VELA ́ ZQUEZ. 

CAROLYN B. MALONEY. 

AL GREEN. 

WM. LACY CLAY. 

STEPHEN LYNCH. 

VICENTE GONZALEZ. 

Æ