Fees to access market data that are not targeted to specific individuals cannot be challenged under an Exchange Act section allowing review of an exchange's limiting a person's access to its services.
For the third time in ten years, a District of Columbia circuit panel has addressed whether exchanges' fees for certain data violate the Exchange Act. After determining that challenges to the fee rules could be brought under Section 19(d), the SEC found that the exchanges had failed to show that charges for "depth-of-book" data were fair and reasonable. On appeal, the court held that Section 19(d) is not available as a means to challenge generally-applicable fee rules. In addition to the fact that the text of that section contemplates limits to SRO services directed at specific individuals or entities, the applicable remedy and notice provisions are incompatible with generally-applicable fee rules. The Commission's decision was vacated and remanded for further proceedings (The NASDAQ Stock Market, LLC v. SEC, June 5, 2020, Wilkins, R.).
Depth of book data. The petitioners in this case (NYSE Arca, Inc. and Nasdaq Stock Market, LLC) are national securities exchanges that are, as self-regulatory organizations, subject to SEC oversight and control. At issue are whether fees charged by the exchanges for access to "depth-of-book" date were fair and reasonable under the Exchange Act. "Depth-of-book" data concerns outstanding limit orders and as such is "non-core" data not required by the SEC to be included in the consolidated data stream or made available at the time of trade execution. In May 2006, NYSE Arca filed a proposed rule change with the SEC in which it proposed to charge a fee for its depth-of-book data (which had formerly been available at no cost).
NetCoalition cases. The Commission approved the rule change in a 2008 order evaluating NYSE Arca's proposal using a "market-based" approach that emphasized the need for significant competitive market forces that would set a limit on any depth-of-book fees. An appeal by SIFMA to the D.C. Circuit Court resulted in the NetCoalition I decision that upheld the Commission's market-based approach (as opposed to a cost-based approach) for non-core data fees while finding that the administrative record did not support the Commission's conclusion that NYSE Arca was subject to competitive forces that would curb its pricing power. Subsequent changes to the statutory scheme wrought by the Dodd-Frank Act allowed exchanges to file automatically effective rule changes regarding certain data access fees. A fee rule promulgated by NYSA Arca in 2010 led the NetCoalition II decision in which the court held that the Dodd-Frank Act deprived it of jurisdiction over the appeal. In this case, the court noted in dicta that its holding was bolstered by the Commission's position that aggrieved parties could challenge the fee rules at a later stage under Exchange Act Section 19(d).
Back to the Commission. After NetCoalition II, SIFMA renewed its administrative challenges to the fees. This time, the challenge was made under Section 19(d), which provides that aggrieved parties may challenge an SRO action that prohibits or limits access to services offered by the SRO. An ALJ ruled in favor of the exchanges, concluding that the depth-of-book data pricing is subject to significant competitive forces. The Commission then reversed the decision, rejecting the argument that competition exists for depth-of-book data, to conclude that the exchanges failed to demonstrate that the fees were fair, reasonable, and not unreasonably discriminatory, as required by the Exchange Act.
Limits to access to services At issue on appeal was whether fees like the data fees at issue in this case could be challenged under Section 19(d). The SEC maintained that the fee rules were a "limitation" on SIFMA's "access to services" under Section 19(d)(1) and that SIFMA was an "aggrieved person" under Section 19(d)(2) that could seek review before the Commission. The exchanges countered that Section 19(d)(1)'s text and structure indicate that it applies only to an SRO's quasi-adjudicatory proceedings directed at a specific person or entity. The court said that the exchanges were "closer to the mark."
The court held that a fee rule is challengeable under Section 19(d) if it is targeted at specific individuals or entities. First, the court said, the text of Section 19(d), unlike, for example, Section 19(b) (which was at issue in the NetCoalition cases), does not mention fees at all. And, even if some fees are challengeable under the section, the text indicates that they must be targeted. Section 19(d), the court explained, speaks to limits on "any person" and enumerates specific actions targeted at specific individuals or entities, none of which resemble a generally-applicable fee rule. Besides the text, the court said that the structure of the Exchange Act also rendered the SEC's interpretation unreasonable, noting that an exchange's notice obligations under Section 19(d) would be impossible to meet in the context of a generally-applicable fee rule. In addition, as a remedy under Section 19(f), an aggrieved party must be granted access to the SRO's services, which in this case would mean that the exchanges would have to give their product away.
In sum, the court held that Section 19(d) is not available as a means to challenge generally-applicable fee rules. This decision, the court observed, is still consistent with the presumption favoring judicial review of agency action because a party may petition to amend a fee rule under Section 19(c)’s notice-and-comment rulemaking; if the petition to amend is denied, the party may petition the D.C. Circuit for review. The court accordingly vacated the Commission's decision and remanded for proceedings consistent with its opinion.
The case is No. 18-1292.
Attorneys: Thomas G. Hungar (Gibson, Dunn & Crutcher LLP) for The NASDAQ Stock Market, LLC. Michael Andrew Conley for the SEC.
Companies: The NASDAQ Stock Market, LLC
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