MARK R. WARNER cone BANKING, HOUSING, AND United States Senate wooer WASHINGTON, Dc 20610-4606 inrewu July 14, 2017 Hon. Jay Clayton Chairman Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Dear Chairman Clayton, Congratulations on your confirmation to serve as Chairman of the Securities and Exchange Commission (“SEC*). As Ranking Member of the Subcommittee on Securities, Insurance, and Investment, I look forward to working with you on investor protection, capital formation, and market structure issues. I write to you regarding the practice of “maker-taker” pricing, by which U.S. exchanges pay rebates to so-called liquidity providers. This practice has had, and continues to have, negative impacts on U.S. equity markets ~ principally, the creation of conflicts of interest between brokers and clients, I was heartened to see that you addressed an upcoming pilot program in your first ‘major policy speech since becoming chairman. Over the past few years, several committees in Congress, as well as members of the Securities and Exchange Commission (“SEC”), have focused on these conflicts of interest and other negative impacts of rebates. Former Sen. Levin and Sen. McCain conducted an investigation and hearing in 2014 as Chair and Ranking Member, respectively, of the Permanent Subcommittee on Investigations. They both said that the conflicts of interest created by the practice of paying rebates (or charging lower fees) threaten to erode investor confidence, which is a cornerstone of our capital markets.' Similarly, former SEC Chair White said in 2014 that “[w]hen fees and payments are not passed through from brokers to customers, they can create conflicts of interest and raise serious questions about whether such conflicts can be effectively " United States Cong. Senate. Committee on Homeland Security & Governmental Affairs, Permanent Subcommittee on Investigations. Hearing on Conflicts of interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets, June 17, 2014. 113° Cong. 2" sess. Washington: ttosif/www.hsaac.senate.gow/subcommittees,investigations/hearings/conflcts-of interest-investor-loss-of- confidence-and-high-speed-trading-in-us-stock-markets tputwamer senate govmanaged.” In addition, comments from SEC Commissioners, academies, and other stakeholders have all cited the negative impacts of maker-taker pricing. Further, on April 22, 2016, Sen. Crapo and {, as Chairman and Ranking Member, respectively, of the Senate Banking Subcommitice on Securities, Insurance, and Investment sent a letter to the Commission expressing support for a pilot program that studies the effects on U.S. equity markets of rebates, On June 27, 2017, a hearing in the House Subcommittee on Capital Markets, Securities, and Investment exposed additional concerns over the current system's inherent conflicts of interest and remarkable unity on the subject of rebates.* Two of the four witnesses on the first panel called for a zero rebate “bucket” as part of any SEC pilot study of rebates or access fees,’ a third ‘witness offered an option of eliminating rebates entirely, while a fourth witness narrowly expressed concern for less liquid stocks in a rebate-free environment. During the second panel, one exchange executive called for an outright end to rebates explaining, in part, that these rebates drive the need for many of the price controls in the equity markets and harm execution quality. Additionally, other exchange executives acknowledged the conflicts of interest caused by maker-taker pricing ~ despite their firms’ utilization of the maker-taker system. The president of one firm went further, calling for rebate reform and only opposing the immediate elimination of rebates. T appreciate the work the SEC and its Equity Market Structure Advisory Committee on a pilot to test differing levels of access fees and rebates as a step toward reforming the maker-taker system. While | am pleased to see movement toward that pilot, recent data, studies, and industry ‘comment increase and accelerate the need for reform. therefore urge the Commission to act in the interest of investors and fair and efficient markets, by pursuing the full elimination of rebates, These reforms would help to strengthen alignment — rather than conflicts ~ of interest between brokers and clients, increase price transparency, reduce fragmentation, strengthen stability, and bring U.S. equity markets closer to the competition mandate required by Securities Acts Amendinents of 1975. Consistent with this request, and given the years of discussion and broad recognition of harm, the Commission could immediately propose to eliminate rebates for liquid stocks, where permitting this conflict provides no meaningful henefit and for which there is no need for Further SEC Chair Mary Jo White, Enhancing Our Equity Market Structure, June 5, 2024, httpay//wn see gov/news/speech/20%4-spch0605 14m. See, eg,, SEC Commissioner Kara M, Stein, Remarks before Trader Forum 2014 Equity Trading Summit, Feb. 6, 2014, httns://iww see pow/news/speecnh/2014-spch02061 ¢kmst (raising questions about maker-taker’s impact on the market). * United States Cong. House. Financial Services Committee, Subcommittee on Capital Markets, Securities, and Investment, Hearing on U.S. Equity Market Structure Part I: Review of the Evolution of Today's Equity Market Structure and How We Got Here, hitps://financialservices house. cow/calendar/eventsingle.aspx?EventiD 302034 5 This view has been shated by Commissioner Piwowar. See SEC Commissioner Michael S. Piwowar, Remarks at the ‘Spring 2016 Equity Market Structure Advisory Committee Meeting, April 26, 2016, ites //ww see gow/news/etatement/olwqwar-onening-renatks:emnsag-042625 sien (expressing hope for a zero fee bucket).review. This step would quickly prove to eliminate rent-seeking, thereby increasing returns for investors while reducing issuers’ cost of equity capital and furthering our shared goals of boosting IPOs by making our equity markets more attractive for issuers and investors. Thank you for your willingness to serve and for your timely consideration of my request. Sincerely, Mok. © Manes Mark R, Warner United States Senator ce: Commissioner Kara M. Stein Commissioner Michael S. Piwowar