Dodd-Frank Redo Would Limit SEC Access to Source Code

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By Andrew Ramonas and Richard Hill

The SEC couldn’t gain nearly unrestricted access to trading systems’ computer software under a new Republican proposal to overhaul the Dodd-Frank Act.

House Financial Services Chairman Jeb Hensarling (R-Texas) would require the SEC to obtain a subpoena before getting access to source code, according to a committee memo laying out changes to his Financial Choice Act.

The proposal comes as the Commodity Futures Trading Commission is considering a rule that would establish a lower threshold for access to proprietary codes from high-speed trading firms. The proposed CFTC rule would allow access by vote of the commission rather than a subpoena approved by a judge.

The SEC generally currently needs a subpoena for the data, but opponents of the CFTC’s proposal have expressed concern that other government agencies could follow the commodities regulator’s lead and lower the threshold in the future.

“Our government shouldn’t be able to take any intellectual property without due process,” William Harts, chief executive officer of Modern Markets Initiative, an industry association representing electronic and high-frequency trading firms, told Bloomberg BNA on April 12.

Duffy’s Amendment

Hensarling’s “Choice 2.0” legislation would be “consistent” with Rep. Sean Duffy’s (R-Wis.) subpoena amendment to the Commodity End-User Relief Act, which passed the House in January, according to the memo. The provision would bar the CFTC from compelling firms to hand over algorithmic trading source code without a subpoena.

In August 2016, Duffy told then-SEC Chairman Mary Jo White he was worried about the SEC adopting a rule like the proposal the CFTC was reviewing at the time, saying due process rights would be “undercut” by the commodities regulator’s plan. In a response to Duffy, White declined to take a position on the CFTC’s rulemaking.

“Chair White’s response to Rep. Duffy’s letter about automated trading left the door wide open for the SEC to pursue a similar course of action toward proprietary trading source code as the CFTC did,” a Duffy aide, who declined to be identified, told Bloomberg BNA.

An SEC spokeswoman declined to comment.

CFTC Proposal

The CFTC first released a proposal in 2015 in which firms would have had to give up their proprietary computer source codes at the request of a staffer. After significant industry pushback, the commission reproposed the rule in November to require a commission vote for access to the valuable source code.

Industry and, perhaps more importantly, acting CFTC Chairman J. Christopher Giancarlo weren’t satisfied. Giancarlo, then a commissioner, called the reproposal a threat to the U.S.’s liberty and security and said it likely would be challenged in court if adopted. He also predicted that the CFTC’s final source code rule would set precedent across the government and internationally, adding to its importance.

The CFTC extended the comment period on the reproposal by three months shortly after Giancarlo took over as acting commissioner in January. Observers, however, say the source code provision has almost no chance of being adopted in its current state under Giancarlo, who has been nominated to be chairman.

On Capitol Hill, the updated Financial Choice Act “will be released in the next few weeks,” a Hensarling spokeswoman said April 11.

To contact the reporters on this story: Andrew Ramonas in Washington at; Richard Hill in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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