U.S. House Committee Passes Legislation to Advance Investor Protections

August 10, 2021

The House Financial Services Committee passed multiple bills aimed at protecting investors and reducing conflicts of interest born out of payment for order flow, and strengthening protections for the LIBOR transition. Among the bills passed were:

Short Sale Transparency and Market Fairness Act (H.R. 4618). This bill would shorten the reporting period for certain filed disclosures from quarterly to monthly, require such reports to be filed within 10 days of the end of each month, expand the list of items to be disclosed to include certain derivatives, direct the SEC to complete rulemaking pursuant to the Dodd-Frank Act.
To amend the Securities Exchange Act of 1934 to prohibit trading ahead by market makers, and for other purposes (H.R. 4619). This bill would statutorily prohibit market makers from “trading ahead” or engaging in insider trading. It would also require the CEO of each market maker to annually certify that the CEO has performed reasonable due diligence during the reporting period to ensure the market maker has not engaged in the prohibited activities.
Family Office Regulation Act of 2021 (H.R. 4620). This bill would limit the use of the family office exemption from registration as an investment adviser with the SEC to offices with $750 million or less in assets under management and prevent persons who are barred or subject to final orders for conduct constituting fraud, manipulation, or deceit from being associated with a family office. Family offices with more than $750 million assets under management (AUM) would have to register with the SEC as “exempt reporting advisers” (ERA).

The Adjustable Interest Rate (LIBOR) Act of 2021 (H.R. 4616). This bill would establish a process for certain financial contracts that reference the London Interbank Offered Rate (LIBOR) and do not contain sufficient language that would allow them to continue to function as originally intended after LIBOR is discontinued, to instead reference Secured Overnight Financing Rate (SOFR), or an appropriately adjusted form of SOFR without the need to be amended or subject to litigation.

Order Flow Improvement Act (H.R. 4617). This bill directs the SEC to study and consider banning or limiting the payment for order flow (PFOF) in the form of exchange rebates or payments from market centers to broker dealers, conflicts of interest based on PFOF arrangements, and the impact of PFOF on the quality of order execution.

Trading Isn't A Game Act (H.R. 4685). This bill would require the GAO to conduct a study on the positive and negative impacts of the trend of gamification of online trading platforms, such as the use of nudging and other inducement, and require the GAO to issue a report to Congress with recommendation.

Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2021 (H.R. 935). This bill codifies a long-standing SEC no-action letter that exempts certain merger-and-acquisition brokers from securities registration requirements that facilitate the transfer of ownership in privately held companies with earnings or revenues under specified thresholds, provided such brokers meet certain conditions.

Financial Exploitation Prevention Act of 2021 (H.R. 2265). This bill would codify a SEC no-action letter by amending the Investment Company Act of 1940 to allow a company or agent of the company to postpone a payment or redemption of security, provided they meet certain conditions, when they suspect the request of payment or redemption is the result of exploitation of an elder.