United States: House Financial Services Committee considers reform recommendations after GameStop trade event
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The United States House Financial Services Committee took into consideration reform recommendations from capital market experts on regulatory issues arising from the GameStop trade event.
At the hearing titled “Game Stopped? Who Wins and Loses when Short Sellers, Social Media and Retail Investors Collide, Pt. II,” lawmakers heard testimony about possible areas for reform. (See Memorandum prepared by Majority staff.) Witnesses discussed conflicts of interest between payment for order flow and best execution, disclosures of short sales, accelerated settlement times, market dominance and the gamification of online commerce by retail investors.
Michael Blaugrund, COO of the New York Stock Exchange testified that regulatory reform should focus on (i) disclosure to shareholders, (ii) transparency for securities lending, (iii) removing competitive barriers for public investors and (iv) moving to a one-day settlement cycle (“T + 1”). On these four topics, Mr Blaugrund recommended, respectively, that the SEC consider:
- shorten the reporting period for Form 13F and complete the public filing of Form 13F with “mechanisms” that would directly disclose to issuing companies a reportable position established or fully ceded;
- the establishment of a similar consolidated band for securities lending, such a system being described as a publication of “the quantity, charges and / or discounts, duration and other material conditions for each stock lending without attribution ”;
- harmonize stock market and over-the-counter price increase regimes, in particular by extending sub-penny trading to enlightened public stock exchanges; and
- accelerate industry settlement cycles from two days (“T + 2”) to T + 1 after the trade. Mr Blaugrund said the capital efficiency of the T + 1 cycle would outweigh the cost of potential operational errors.
Former SEC Commissioner Michael S. Piwowar, currently Executive Director of the Milken Institute Center for Financial Markets, advised this:
- the SEC should review (abolish or significantly expand) the definition of accredited investor to gain more equitable access to investment opportunities in private companies at all income levels;
- the Treasury Secretary should initiate a securities settlement workflow to coordinate how the SEC and bank branches could shorten the settlement cycle;
- the SEC should consider amending Rule 605 (“Disclosure of Order Execution Information”) and Rule 606 (“Disclosure of Order Routing Information”) under the NMS Rules; and
- With respect to transaction reporting, the SEC should distinguish between “regulatory reporting” and “public transparency” before determining whether to increase regulatory reporting and, separately, whether new information should be provided to the public.
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