The U.S. House of Representatives passed a bill that would direct the CFTC and SEC to jointly create a digital assets working group.

The bill would require that the working group include at least one individual representing each of the following groups: (i) financial technology firms providing digital assets products or services; (ii) financial firms within the jurisdiction of the SEC or the CFTC; (iii) institutions or organizations conducting academic research or engaging in advocacy efforts concerning the use of digital assets; (iv) small businesses using financial technology; (v) organizations concerned with investor protection; and (vi) institutions and organizations advocating for investment in historically underserved businesses.

Additionally, the bill would require that, within a year of its enactment, the working group must submit a report to the SEC, the CFTC and “relevant committees” that includes, among other things, an analysis of:

• the United States’ legal and regulatory framework concerning digital assets, including the effect of (i) the ambiguity of the framework on primary and secondary digital assets markets, and (ii) domestic legal and regulatory digital assets regimes on the “competitive position of the United States”;
• recommendations regarding (i) the implementation, maintenance and enhancement of primary and secondary digital assets markets, including the improvement of “fairness, orderliness, integrity, efficiency, transparency, availability and efficacy” of those markets, and (ii) standards for custody, private key management, cybersecurity and business continuity as it pertains to digital asset intermediaries; and
• best practices to (i) decrease the prevalence of digital assets fraud and manipulation in cash, leveraged and derivatives markets, (ii) enhance investor protections for participants in such markets and (iii) aid in compliance with the Bank Secrecy Act’s AML anti-terrorism financing provisions.

LOFCHIE COMMENT

Why is it necessary to have the SEC and CFTC conduct a joint study, with each naming the same number of members? Would it not make more sense to empower one agency (generally the SEC) and direct it to consult with other agencies, including the CFTC and, for example, FinCEN, if AML is a topic of concern?

Second, explicit directions as to the members of the joint study detract from the efficacy of the study. Do the legislators believe that because one financial firm – subject to the regulation of the SEC – is included in the study, that firm can speak on behalf of all the other regulated financial firms?

Third, the topics seem to be a grab bag of wholly unrelated issues: is there some link between digital custody and historically underserved businesses where the same committee members will bring value to both discussions? If so, it is not obvious. If Congress wants both issues (or any of these issues) studied, it should direct the SEC to conduct the studies, and let the SEC figure out how to do so.

Primary Sources

1. H.R. 1602: The “Eliminate Barriers to Innovation Act of 2021”

The Congressional Research Service (“CRS”) reviewed the role that “payment for order flow” (“PFOF”) plays in the “surge in retail investor securities trading at major discount broker-dealers.”

In its report, CRS described PFOF as a controversial rebate subsidizing the “non-existent commissions.” CRS stated that when broker-dealers do not pass the PFOF rebates onto clients, the economic incentives to send retail orders to rebating market-makers create potential conflicts of interest. CRS noted that this argument is why the United Kingdom has “effectively banned” PFOF.

Advocates for PFOF argue that investors benefit from the subsidized low or zero commission rates. Critics argue that PFOF raises conflicts-of-interest concerns over a brokers’ duty of best execution.

LOFCHIE COMMENT

While payment for order flow is a legitimate area for discussion, the more significant issue is why customers don’t use full-service brokers that provide them with some level of guidance. Congress and the SEC should consider whether over-regulation and the threat of enforcement actions are killing the business of full-service brokerage, leaving retail customers essentially on their own.

Unfortunately, asking the question as to whether regulation may be excessive or have unintended consequences is not a current priority. Rather, the tendency in response to any unusual event is to seek to adopt more regulations, as if more rules are always the panacea. Whether or not payment for order flow survives, the more significant reality is that retail investors are now effectively pushed to obtain their investment advice not from a regulated institution, but from a subreddit. See generally GameStop: Regulators Should Focus Less on “Solving the Problem”; More on “Improving the Situation.”