CFTC Rule: Little Scrutiny, Lots of Pitfalls

All too often, government regulatory proposals fly under taxpayers’ radar, which is normally set to scan for more obvious threats such as tax hikes or deficit-financed spending schemes. Unfortunately, this is a perfect way to conduct a sneak attack on our economy, as a recent rule from the Commodity Futures Trading Commission (CFTC) vividly demonstrates

Recently, the CFTC issued a “Supplemental Notice of Proposed Rulemaking on Regulation Automated Trading” (Reg. AT) nearly a year after it was initially published. The crux of Reg. AT would allow the CFTC to force regulated companies to turn over their automated trading algorithms to the government without a subpoena.

Ostensibly the CFTC’s rule is designed to give regulators information about volatility in the futures markets. Trading algorithms are, after all, the “secret formulas” by which investment firms strategize to balance returns and risk for their clients. Yet , there are enormous problems with Reg. AT and the implications extend far beyond the futures market.

For starters, the CFTC can already obtain algorithms pursuant to a subpoena if they believe a market participant has committed any sort of impropriety – it simply needs a subpoena.  Keeping the subpoena process in place provides a safeguard for the property rights of owners of proprietary technologies and trade secrets. As CFTC Commissioner Giancarlo wrote in dissent to the updated proposal, “[the subpoena process] allows property owners an opportunity to challenge the scope, timing and manner of discovery and whether any legal privileges apply to the process of surrendering property to the government.” CFTC’s proposed Reg. AT would eliminate due process for intellectual property owners of their closely guarded trading methods.

Further, the government does not have the greatest track record in protecting sensitive data. Hackers have breached the networks of the IRS, the Federal Deposit Insurance Corporation, the Federal Reserve, and the Office of Personnel Management, among other agencies.

Most troubling, however, is the precedent the CFTC’s proposed rule would set. As Commissioner Giancarlo wisely warned, the CFTC’s decision could open the door for the Federal Communications Commission to “demand source code for Apple’s iPhone. The Federal Trade Commission may seek source code used in the matching engines of Google, Facebook and Snapchat. The National Security Agency may demand to see the source code of Cisco’s switches and Oracle’s servers. The Department of Transportation may demand Uber’s auction technology and Tesla’s driverless steering source code.” In short, the possibilities are endless. Even the IRS could use Reg. AT as a pretext to expand their already considerable powers to demand more information from taxpayers in audits.

Supporters of limited government should be outraged by the implications of the CFTC’s proposed Reg. AT. National Taxpayers Union (NTU) will monitor the developments of the rule and alert taxpayers to the potential problems with it.