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Waters Floor Statement in Opposition to Bill That Could Undermine Market Stability

Today, Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, gave the following floor statement in opposition to H.R. 3978, a bill that threatens many of the important reforms Democrats made to restore investor confidence in our capital markets after the financial crisis:

As Prepared for Delivery

Madam Speaker, I rise in strong opposition to H.R. 3978, the “TRID Improvement Act of 2018.” 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 at 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 a “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 is 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’m 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 (SEC) first finds that new standards are “substantially similar” to the listing standards of the New York Stock Exchange (NYSE), NYSE AMEX, or Nasdaq. 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 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 sponsor last Congress to strike a bipartisan compromise, which passed the House unanimously, to require the SEC to develop core quantitative listing standards. 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 ten 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 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 costs 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 five years—extending it to a decade would harm investor confidence in 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% in less than two weeks, has been exacerbated by high frequency traders using complex computer algorithms to determine when to buy and sell millions of trades a 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 costs of the bill by taking $2 million dollars 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 the 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, the “TRID Improvement Act of 2017” the Committee previously considered, would amend a mortgage disclosure, known as the TRID or the “Know Before You Owe” disclosure, that informs homebuyers 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 borrowers in states that do not provide such special rates to homebuyers, 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 S.A.F.E. Transitional 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 the other deeply problematic and destructive bills, sensible relief to these individuals that has broad bipartisan support is being held hostage by Republicans efforts to rollback 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 in 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 front line combating securities fraud on the state level, and by nonpartisan organizations 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.

I urge everyone to reject this harmful package of bills, and vote “No” on H.R. 3978.

I reserve the balance of my time.


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