August 9, 2020

Volume X, Number 222

August 07, 2020

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U.S. House Bill Aims to Curtail SEC Staff’s Ability to Obtain Algorithmic Trading Source Code

On October 4, 2017, U.S. Representative Sean P. Duffy [R-WI-7] introduced U.S. House of Representatives Bill H.R.3948 entitled the “Protection of Source Code Act.”

If enacted, the Bill would amend the Securities Act, the Securities Exchange Act, the Investment Company Act and the Investment Advisers Act to prohibit the SEC staff from obtaining algorithmic trading source code without a subpoena. This would prevent the SEC staff from obtaining source code through OCIE exam requests or during the early stages of an investigation before the staff has obtained authority to issue subpoenas.

Specifically, the bill would block SEC staff from compelling a person “to produce or furnish source code, including algorithmic trading source code or similar intellectual property that forms the basis for design of or provides insight to the source code, to the Commission unless the Commission first issues a subpoena.” The Bill was co-sponsored by Representatives Randy Hultgren [R-IL-14], David Scott [D-GA-13] and Luke Messer [R-IN-6].  Various industry groups have submitted a letter in support of the proposed legislation.  The Bill does not articulate Congress’ intention to extend protections to “intellectual property that forms the basis for design of or provides insight to the source code.”  The Bill also does not distinguish between algorithmic trading source code that may be deployed in live trading environments from those that are utilized in a simulated or test trading setting.

The Bill was referred to the House of Representatives Committee on Financial Services. On October 12th, by a vote of 46-14, the committee approved the Bill for consideration by the whole chamber.  However, Representative Duffy’s office has indicated that it is uncertain when the Bill will be introduced to the full House.

If enacted, the resulting revisions to the major federal securities acts would likely impose additional safeguards from the SEC staff’s investigatory process for matters involving hedge and other private fund advisers utilizing algorithmic trading programs. This follows upon the decision of then-Acting SEC Chairman Michael Piwowar to institute a policy change revoking the previously “delegated authority” to issue a formal order of investigation (a precursor to the ability to issue a subpoena in a matter).  This reported change removed authority to approve a formal order from about 20 senior SEC officials and represented a reversal of the agency’s existing policy previously authorized in 2009.

© 2020 Proskauer Rose LLP. National Law Review, Volume VII, Number 307


About this Author

Christopher M Wells, Proskauer Rose Law Firm, Private Investment Attorney

Christopher M. Wells is a Partner and head of the Hedge Funds Group. Chris advises hedge funds, funds of funds and other pooled investment vehicles and their managers on all aspects of fund formation, operations and compliance.

Robert G Leonard, Proskauer Rose Law Firm, Private Investment Attorney

Robert G. Leonard is a Partner in the Hedge Funds Group. For more than 25 years Rob has been structuring, organizing and representing hedge funds, funds of funds and other private investment funds (both domestic and offshore) and investment advisers.

Michael F Mavrides, Proskauer Rose Law Firm, Private Investment Attorney

Michael F. Mavrides is a Partner in the Hedge Funds Group. Mike focuses his practice on representing domestic and offshore hedge funds, funds of funds and other private investment funds, including private equity and real estate investment funds. He regularly advises funds and their managers on a wide variety of issues, including formation and structuring, seed capital, anchor capital and other strategic arrangements, placement agency, solicitation and other marketing arrangements, succession planning, separately managed accounts, and all types of portfolio management, trading and...

Joshua Newville, Proskauer Rose, regulatory enforcement attorney, industry compliance legal counsel, securities exchange commission lawyer

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset...

Anthony M. Drenzek, Special regulatory Counsel, Proskauer Rose, Attorney, Finance Policy Lawyer
Special Regulatory Counsel

Tony is special regulatory counsel in the Corporate Department and a member of the Private Funds Group and the Private Equity & Hedge Fund Litigation team. His practice focuses on advising U.S. and offshore private fund managers on all aspects of federal, state and SRO organizational and operational compliance, with a specific emphasis on the Investment Advisers Act of 1940.

Tony assists U.S. and offshore private fund clients in registering with the SEC as investment advisers, or reporting as exempt reporting advisers, and complying with...