Trid Improvement Act of 2017
Floor Speech
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Ms. MAXINE WATERS of California. Madam Speaker, I yield myself such time as I may consume.
Madam Speaker, I rise in strong opposition to H.R. 3978, the TRID Improvement Act of 2017.
H.R. 3978 has been dramatically expanded without input from Democrats to include several highly problematic and damaging bills. If enacted, this amended package of bills would ease the ability of high frequency traders to manipulate the stock markets undetected, encourage a regulatory race to the bottom in our Nation's stock exchanges, and harm investors and small businesses by weakening efforts to prevent accounting fraud at smaller public companies.
Taken together, this deregulatory package could
significantly undermine market stability and gut investor and consumer protections at a time when our financial markets are already rattled.
Madam Speaker, from January 26 until last Thursday, the stock markets plunged just over 10 percent, becoming what the financial services industry calls ``stock market correction,'' and for the past two trading days, markets have rebounded the most since 2016.
Although market corrections are not new, what distinguishes today's volatility is that it is driven by complex computer strategies designed to buy and sell stocks and options millions of times a day. As many of us have witnessed, the Dow Jones Industrial Average may be up 500 points and then down 600 in less than a few minutes. For the average American who was hoping to one day retire with dignity by investing her hard-earned savings in the stock market, it can be distressing to see such wild swings always wondering whether the markets are truly fair or whether she is going to be fleeced. Unfortunately, the passage of H.R. 3978 would likely make those swings more extreme and increase the likelihood of problems going forward.
I am going to walk through each of the problematic provisions in this bill. Beginning with title IV, this provision is identical to H.R. 4546, the National Securities Exchange Regulatory Parity Act, which would weaken the standards for listing public companies for trading at U.S. stock exchanges. Today, exchanges listing standards set minimum requirements for a company's shares to be sold to the public without having to comply with State law. Exchanges can only revise these standards if the Securities and Exchange Commission first finds that new standards are substantially similar to the listing standards of the New York Stock Exchange.
This bill would remove any separate analysis for changing the standards and, thus, automatically preempt State oversight. As a result, the bill would encourage a race to the bottom of listing standards as exchanges compete with each other to attract companies with less restrictions, even if the standards are beneficial to the investors.
I believe that we should be strengthening the current analysis to promote fair and rigorous listing standards and only preempt State law when companies meet high standards. This is why I worked with the cosponsors last Congress to strike a bipartisan compromise which passed the House unanimously to require the SEC to develop a core qualitative listing standard. Unfortunately, my Republican colleagues have reversed their position in favor of empowering the industry over the investing public.
Turning to title III which is identical to H.R. 1645, the so-called Fostering Innovation Act, this provision would eliminate the independent audit of a company's financial reporting controls for up to 10 years for newly public companies provided that they have $50 million or less in gross revenues and less than $700 million in outstanding shares. Passed in the wake of the Enron and WorldCom accounting scandals, the requirement that public companies conduct an independent audit of financial controls is one of the many accounting provisions required by the bipartisan Sarbanes-Oxley Act that directly benefits investors and public companies by improving the accuracy of their financial reporting.
In fact, companies that are not subject to such review by an independent auditor are more likely to issue corrections to their financial reports leading to investor losses and higher losses for the company.
Investors like these audits because they improve the veracity of the reports they rely on to make investment decisions. Today, truly small public companies--those with less than $75 million worth of shares--are already exempt from the audit requirement. But this bill would extend the exemption to large companies that are nearly ten times that size. The law already provides newly public companies with an exemption for 5 years. Extending it to a decade would harm investor confidence and all such companies, hurting the very companies the bill's supporters purport to help.
Title II of this bill is the same language as H.R. 3948, the Protection of Source Code Act. This bill bans the SEC from inspecting source code used by regulated entities to engage in algorithmic or computer-driven trading and other activities that impact the securities markets and investors without first obtaining a subpoena. This provision would severely hamper the ability of the SEC to effectively examine persons like high-frequency traders and to investigate market disruptions.
The recent stock market volatility, which has seen all of the major stock indices decline by more than 10 percent in less than 2 weeks, has been exacerbated by high-frequency traders using complex computer algorithms to determine when to buy and sell millions of trades per second by making it harder for the capital markets COP to detect and stop bad actors and rein in fraudulent trading schemes. This provision will inevitably harm everyday Americans and retirees who rely on fair capital markets to invest their hard-earned savings.
To make matters worse, Republicans added a provision to pay for the cost of the bill by taking $2 million from the Securities and Exchange Commission's reserve fund. As a result, our financial watchdog will have less resources to support its capacity to oversee the markets through investments in IT and to respond to unforeseen market events like the flash crash.
In short, this bill asks taxpayers to pay for the costs of diminished capital market oversight by taking away SEC's funding to respond to emergency market situations that threaten market stability. This provision doubles down on the irresponsible policymaking we often see by the opposite side of the aisle.
The bill before us today would also make two less significant changes which I believe the Republicans included to garner additional support for the legislation. Nevertheless, even with these provisions, the package should be soundly rejected.
Title I, which includes the version of H.R. 3978, TRID Improvement Act of 2017, that the committee previously considered, would amend a mortgage disclosure known as TRID or the know-before-you-owe disclosure that informs home buyers of the terms and conditions of their mortgage. Responding to the concerns of some in the real estate industry, this provision would amend the disclosure to account for the discounts paid to borrowers in States where simultaneous lender and buyer title insurance is issued. However, the revised form does nothing for bars in States that do not provide such special rates to home buyers, and the provision eliminates the Consumer Bureau's ability to fix this aspect of the form even if a problem arises in the future.
The final provision, title V, is identical to H.R. 2948, the SAFE Mortgage Licensing Act. This title would ease the ability of individuals employed as mortgage originators to change employers by creating a temporary 120-day licensing regime so that they can continue to work at their new employer.
This bill would effectively treat mortgage originators who work for State registered firms the same as federally registered firms and was unanimously supported by committee Democrats. Unfortunately, because this legislation has been packaged with other deeply problematic and destructive bills, sensible relief to these individuals that has broad bipartisan support is being held hostage by Republicans' efforts to roll back as many safeguards as they can this year.
Madam Speaker, H.R. 3978, as amended, threatens many of the important reforms Democrats made to restore investor confidence to our capital markets after the worst financial crisis in generations. As the stock markets continue to wobble ominously in ways that threaten the savings of hardworking Americans, Congress should be strengthening oversight of the financial system, not weakening it.
Not surprisingly, H.R. 3978 is strongly opposed by the North American Association of Securities Administrators who serve on the frontline combating securities fraud on the State level and by nonpartisan organization who speak on behalf of our Nation's consumers, investors, and unions, including Consumer Federation of America, Center for American Progress, Americans for Financial Reform, AFL-CIO, and Public Citizen, and so do I.
Madam Speaker, I urge everyone to reject this harmful package of bills and to vote ``no'' on H.R. 3978.
Madam Speaker, I reserve the balance of my time.
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Ms. MAXINE WATERS of California. Madam Speaker, I yield myself such time as I may consume.
Madam Speaker, given the extreme volatility in the stock markets over the past few weeks, I am particularly troubled by title II of this bill, which would make it easier for high-frequency traders to evade regulatory oversight of their potentially disruptive automated trading algorithms.
This provision is widely opposed by nonpartisan consumer and investor advocacy groups who recognize the impact automated trading has on our markets.
Let me read for you excerpts from a few letters from these groups that highlight the dangers of title 2.
Americans for Financial Reform--a coalition of more than 200 consumer, civil rights, investor, retiree community, labor, faith- based, and business groups--wrote: ``Title II would prevent regulators from inspecting not only their raw source code used in automated trading, but also any related intellectual property that `forms the basis for the design of' source code. Examination of such intellectual property would only be possible in an enforcement context pursuant to a subpoena. This implies that the SEC would have to wait until the damage was done through a `flash crash' or similar market disruption before taking any action, which would have to be retrospective.
``In light of the significance of automated trading to modern markets, and the potential risk of high-frequency trading, it makes no sense to tie the hands of regulators in examining detailed trading strategies and methods of high frequency traders.''
The Center for American Progress cautioned that: ``But in an era of fast-moving, `flash-crash'-prone markets, the SEC may have a wide range of regulatory reasons for why it may need to examine source codes, including approvals of new trading products or the supervision of trading venues. The SEC should only exercise that authority carefully and under the strictest protections for confidential information, but blocking it by law dangerously limits the SEC's ability to address the significant technology-based challenges to financial markets.'' The Consumer Federation of America, an association of nearly 300 consumer advocacy groups, similarly opposed title 2 because it ``would weaken SEC oversight of algorithmic trading and hamstring the agency from responding quickly to flash crashes or other market breakdowns.'' Further, the CFA wrote that: ``At a time when algorithmic trading is taking on increased importance in our capital markets, this bill would make it more difficult for the SEC to properly oversee such trading.
``The bill would require the SEC to first issue a subpoena before it could compel a person to produce or furnish to the SEC algorithmic trading source code or `similar intellectual property.' This would undermine the SEC's examination authority by creating a gaping hole in its ability to gain access to firm records relevant to the examination.
It would also have a devastating effect on the agency's ability to respond quickly in the event of another `flash crash' or such events in the future. In order to oversee the markets effectively, the SEC needs to be able to accurately and efficiently reconstruct order entry and trading activity, including for algorithmic traders.''
Public Citizen, a consumer rights advocacy group with over 400,000 members and supporters, wrote: ``Market volatility caused not by real events such as outbreak of a war, but by computers, including computer glitches, threatens to erase savings to some innocent investors and erodes general investor confidence. The recent swings in the markets attest to the need for robust and urgent supervisory inspection. The May 6, 2010 `Flash Crash,' where markets collapsed by more than $1 trillion in less than an hour, revealed that such a robust and urgent supervision has been lacking. The SEC required nearly a half year to investigate this incident before identifying a flawed algorithmic at one major trader. SEC oversight should be streamlined, not hampered.
Trading instructions and records of human traders are already subject to inspection, so it should be no different for those instructions and records generated by a machine. Hiding source code from regulatory scrutiny will leave those responsible for mistakes as well as those attempting to manipulate markets unaccountable.''
These letters demonstrate the wide opposition to title II by groups that truly understand that robust oversight of algorithmic trading is necessary for the help of our makers.
Madam Speaker, I include in the Record letters from these groups.
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Ms. MAXINE WATERS of California. Madam Speaker, I reserve the balance of my time.
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Ms. MAXINE WATERS of California. Madam Speaker, I yield myself the balance of my time.
Madam Speaker, it has become par for the course for the majority to recklessly advance harmful deregulatory packages like H.R. 3978. My friends on the other side of the aisle are moving forward with regulatory roadblocks at a furious pace, pushing dangerous bills through the House nearly every week.
It appears that they may have already completely forgotten a way that lacks financial regulation and allowed the crisis in 2008 to occur.
That crisis badly damaged the whole economy and harmed all of our constituents. The impact was enormous: $13 trillion in household wealth was lost; 11 million people lost their homes to foreclosure; and the unemployment rate reached 10 percent.
Democrats responded by enacting Wall Street reform to ensure that consumers, investors, and our economy are protected from reckless actors and bad practices, but now Republicans cannot wait to take us back to the bad old days. It makes no sense.
As we have discussed, the package of bills now before us guts important financial protections at a time when markets are already experiencing turmoil. It would allow high-frequency traders to manipulate the stock markets undetected, encourage a regulatory race to the bottom at our Nation's stock exchanges, and harm investors by weakening efforts to detect accounting fraud at smaller public companies. This package of bills threatens important progress we have made to reduce risk in the financial system and return investor confidence.
In recent weeks, we have seen volatile markets that threaten the savings of hardworking American families. These circumstances should serve as a clear reminder that Congress should be strengthening oversight of the financial system, not weakening it by undermining or removing important protections.
H.R. 3978 is strongly opposed by our State's security cops, who are at the front line of combating fraud, and it is opposed by groups representing consumers, investors, and unions.
Madam Speaker, for all of these reasons, I urge Members to oppose H.R. 3978, and I yield back the balance of my time.
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