The Commission proposes to rescind the 1980s-era effective upon filing character of NMS plan core data fee change proposals by subjecting these proposals to standard rule change procedures that include advance public notice and comment followed by Commission approval.
A proposed Commission rule change would result in fee change proposals regarding core market data feeds being subjected to traditional notice and comment approval rather than the existing process for making such changes effective upon filing. The Commission’s proposing release explained that upheavals in market structure combined with the power wielded by the processors of core market data justify the reversal of what has become known as the "fee exception" to standard regulatory approval procedures. The proposal, however, is limited to core data feeds and does not address fee change proposals regarding self-regulatory organizations’ (SROs) proprietary data feeds (Rescission of Effective-Upon-Filing Procedure for NMS Plan Fee Amendments, Release No. 34-87193, October 1, 2019).
What is and is not at stake. Exchange Act Section 11A directed the SEC to "facilitate the establishment of a national market system for securities," while other language within this section provided for the registration of securities information processors (SIPs). The "fee exception" provision initially contained in Exchange Act Rule 11Aa3-2 was adopted in 1981 and, via later regulatory amendments, became part of Regulation NMS as Exchange Act Rule 608(b)(3)(i). The rule allows for the immediate effectiveness of certain fee change proposals, subject to later Commission abrogation.
The proposed change to the approval process would rescind and reserve Exchange Act Rule 608(b)(3)(i). Under the current rule, a proposed amendment is effective upon filing of the proposal with the Commission, if the sponsors of the proposal have designated it as one that establishes or changes a fee collected for sponsors or participants regarding access to (or use of) a facility under an NMS plan. The current rule also applies to changes in how net proceeds from fees are distributed. The proposed amendment would leave in place provisions for the immediate effectiveness of other types of proposed administrative, technical, and ministerial plan changes.
The proposed amendment, thus, would apply to the consolidated audit trail (CAT) Plan, the CTA Plan, the CQ Plan, the Nasdaq/UTP Plan, and the OPRA Plan. With the exception of the CAT Plan, the other four plans are focused on gathering and disseminating core market data. The proposing release noted the potential conflicts of interest between SROs’ NMS plan activities and their activities regarding sale of competing data feeds. Data cited by the proposing release for 2010 to the present indicated that the fee exception had been invoked 36 times regarding core data with only two proposals being abrogated by the Commission and six proposals being withdrawn. The CAT Plan, by comparison, had two such proposals since 2017: one was abrogated and the other was withdrawn.
A pair of rulemaking petitions submitted in 2017 and 2018 may have foreshadowed the proposed demise of the fee exception. The 2017 petition, submitted by a mix of institutional investors, exchanges, and market data providers, objected to conflicts of interest in the market data business and the lack of data on the costs of providing market data, including via the SIPs. As a result, the petition called for the removal of Exchange Act Rule 608(b)(3)(i). The 2018 petition, submitted by the Managed Funds Association and the Alternative Investment Management Association, called for, among other things, advance public notice and comment followed by Commission approval of SIP data fee changes.
The proposed amendment to Exchange Act Rule 608, however, would not impact the separate process for making fee changes regarding SROs’ proprietary data feeds. That process occurs under Exchange Act Section 19(b)(3)(A), which provides for effectiveness upon filing of a proposal for "establishing or changing a due, fee or other charge imposed by the self-regulatory organization on any person, whether or not the person is a member of the self-regulatory organization." The effective upon filing part of the provision was added by the Dodd-Frank Act to assuage concerns of SROs that approvals of rule change proposals were taking too long. As the proposing release noted, Exchange Act Section 11A, unlike Exchange Act Section 19(b)(3)(A), lacks an effective upon filing mandate, thus, allowing the Commission to create the fee exception or, pursuant to the proposal, to rescind it.
Demutualization and market structure. According to the release, changes in the market structure of SROs since the fee exception rule was adopted in 1981 are key drivers for the reversal of the fee exception. Demutualization, for example, altered the landscape by converting SRO mutual organizations that were owned by their broker-dealer members into publicly-traded exchange groups that are no longer owned by their members. Moreover, seven such groups each now operate between one to six exchanges, which results in these groups collectively controlling 23 exchanges, 22 of which are NMS plan participants.
With respect to financial arrangements, SROs set SIP fees via their membership on NMS plan operating committees and share any after-cost revenue from the SIPs. There also are a number of broker-dealer internalizers and several dozen NMS stock ATSs that subscribe to SIP data and receive rebates as FINRA members from FINRA’s SIP revenue.
The Commission highlighted early in the proposing release that structural changes augur in favor of greater transparency about SIP fees: "As a result, the Commission preliminarily believes that it is more important today than it was prior to the demutualization of the exchange SROs for members and other interested parties to have an opportunity, via the standard procedure, to express their views on a Proposed Fee Change after it is filed with the Commission but before it is effective and can be charged to market participants."
The economic analysis found that the proposal was unlikely to have much impact on SROs’ finances. The release noted that few fee change proposals are made each year and that the impact of reversing the fee exception would be limited to the Commission review period of several months, a procedural change, but without any change in the content of the materials required to support a fee change proposal. The release also posited that the SIPs have significant market power and can act in a monopolistic manner.
The proposing release also cited several key benefits of the rule change. For example, there would be increased fee transparency and subscribers would not have to even temporarily pay a fee that the Commission could later abrogate. Moreover, SRO members and SIP subscribers would get extra time to prepare for a fee change, something that is not possible under the fee exception’s effective upon filing provision. However, the proposing release also cited some potential costs, including SIPs’ loss of incremental revenue due to the longer approval process and the possibility of smaller rebates to FINRA members.
The release is No. 34-87193.
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