House Subcommittee Hears Testimony on Stock Exchange Reform

At the "Oversight of America's Stock Exchanges: Examining Their Role in Our Economy" hearing, the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets considered proposed legislation on market exchange reform.

In the Majority Memorandum, the staff observed that among the 24 SEC registered stock exchanges, 17 are owned by three companies – the Intercontinental Exchange, Nasdaq, Inc., and Cboe Global Markets, Inc. – and that these exchanges account for over 52 percent of daily equity trading. Further, the Majority Staff noted that between 2000 and 2010, all three exchanges "carried out the process of 'demutualization' to become for-profit, publicly traded companies."

The Subcommittee considered the following proposed legislation:

• H.R. 4865, the "Registration for Index-Linked Annuities Act," requiring the SEC to create new registration forms for index-linked annuities;
• H.R. 5795, the "Main Street Growth Act," granting national venture securities exchanges the opportunity to register with the SEC;
• H.R. ___, the "Securities Exchange Reform Act of 2022," revising existing securities law to (i) clarify exchange liability stemming from commercial transactions, (ii) restrict an exchange's ability to place limitations on its liability and (iii) give entities involved in Regulation NMS plans the right to vote;
• H.R. ___, the "Free-market Accountability through Investor Rights Act of 2022," prohibiting "multi-class structures at certain large issuers that are subject to bad actor disqualifications under the securities laws or have been fined in the preceding five years more than $5 billion in aggregate amount";
• H.R. ___, the "Fairness in Exchange Transaction Pricing Act," requiring the SEC to create rules prohibiting or limiting rebate payments by certain exchanges;
• H.R. ___, requiring the SEC to approve exchange SRO filings related to fees;
• H.R. ___, (i) mandating that exchanges provide notice to the SEC and the public of any proposals, (ii) requiring the SEC to make public its review regarding exchange files, and (iii) limiting an exchange's ability to immediately enforce its filings; and
• H.R. ___, obligating multi-class stock companies to (i) reach certain exchange listing standards and (ii) provide a seven-year plan to restructure the company to one with equal voting power.

The Subcommittee heard testimony from:

• Robert J. Jackson Jr., former SEC Commissioner and Professor at the New York University School of Law, who called attention to (i) the effects on the market from the lack of competition at the stock exchanges, (ii) the need to prohibit exchanges from using governmental immunity to shield themselves from liability and (iii) challenges to come from the lack of competition among stock exchanges;
• Michael S. Piwowar, former Commissioner and Acting Chair of the SEC and Executive Director of the Milken Institute Center for Financial Markets, who addressed the importance of retrospective review of SEC rules and pilot studies in order to maintain fair, orderly and efficient markets;
• Ellen Greene, Managing Director of Equity and Options Market Structure at SIFMA, who expressed concern over current federal securities laws and the "special privileges" enjoyed by exchanges as a result, while also proposing reforms to amend the Exchange Act;
• Nandini Sukumar, CEO of The World Federation of Exchanges, who noted that WFE member exchanges fulfill important functions such as (i) being unbiased in the price formation of financial assets, (ii) supporting fair and transparent trading, (iii) acting as an impartial facilitator of business and (iv) portraying themselves as a trusted third party to investors; and
• Manisha Kimmel, Chief Policy Officer of Maystreet, who recommended that Congress (i) prohibit SRO fee filings from receiving "effective upon filing" status, (ii) create a filing reviewal process for the SEC, (iii) reconsider and rephrase certain definitions for requirements imposed by the Exchange Act and (iv) give the SEC "direct control over the public market data system."