Does Bill HR3555 Present a Potential Conflict?

A new bill was just introduced by Representative Loudermilk (R-GA), which would amend the Securities and Exchange Act of 1934 to reduce or eliminate regulation overreach into business models of exchanges that do not involve either reporting or effecting a transaction on the exchange.  This may have been prompted by the flurry of lawsuits following the publication of Michael Lewis’ Flash Boys.  One such lawsuit was thrown out when the judge claimed the exchanges had immunity under quasi-government powers.  

Since the filing of the combined lawsuits, the Securities and Exchange Committee (SEC) commented by saying that they had no authority to adjudicate the lawsuit, and that “immunity only applied when stock exchanges acted as a regulator, and not as an operator of a market”.  This means that the SEC is stating that exchanges are NOT entitled to absolute immunity arising from commercial activities such as enriched data feeds or selling collocation.

This could be weighing on the minds of the executives of the exchanges, prompting the proposal of HR3555.   The bill must pass the House and Senate before becoming law and will most likely be reviewed by committee before it’s sent to the House.  

If passed, Loudermilk’s bill appears to give protection from investor lawsuits stemming from unfair advantages granted to HFT firms.  The implied intent is to skirt the SEC’s role of protecting investors by finding a way around them in Congress.  Just by adding one paragraph to the original Securities Exchange Act of 1934, the SEC could be prevented from acting as a regulator of stock exchanges for any issue surrounding the selling of speed.  

Potential Conflict?

If HR3555 removes the non-execution portions of their business from regulation, wouldn’t that also remove those from their immunity? That would take it out from under SEC regulation, but it seems that it would also take it out from under the immunity umbrella afforded to “quasi-government” stock exchange activities.

If they carve out those activities from those regulated under the SEC Act of 1934, how could they then claim immunity for the removed activities? They would have it both ways – not included under the Exchange umbrella for regulatory purposes, but included when courts look at immunity granted to Exchanges.

We will be watching the progress on HR3555 as it moves through the legislative process.

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