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[House Report 115-883]
[From the U.S. Government Publishing Office]

115th Congress     }                                {         Report
                        HOUSE OF REPRESENTATIVES
 2d Session        }                                {         115-883

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                  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]
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