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Market exchanges win court case over SEC pilot program

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Case Law
Friday, June 19, 2020

The American Securities Association (ASA) touted a victory for market exchanges in a recent court case involving the Securities and Exchange Commission (SEC).

The District of Columbia Circuit Court of Appeals ruled that the SEC did not have authority to implement its Access Fee Pilot, which was created to gather data so the SEC might be able to determine in the future whether regulatory action was necessary.

“This is a big win for America’s investors and for transparency,” ASA CEO Chris Iacovella said in a release. “The government adopting a rule to tip the scales in favor of driving more trading to Wall Street dark pools was never a good idea and the courts agreed. Now that we no longer have to deal with the distraction of the Access Fee Pilot, the commission should modernize America’s equity market structure in a way that benefits market participants of all sizes.”

The case is New York Stock Exchange LLC, et al, v. Securities and Exchange Commission, and Senior Judge Harry Edwards issued the opinion in the case.

The pilot program was adopted Dec. 19, 2018, and the exchanges filed suit, contending that the program exceeded the SEC’s statutory authority. The SEC argued that although the program was not expressly authorized under the statute, it fell within the agency’s rulemaking authority.

“The pilot program emanates from an aimless ‘one-off’ regulation, i.e., a rule that imposes significant, costly, and disparate regulatory requirements on affected parties merely to allow the commission to collect data to determine whether there might be a problem worthy of regulation,” Edwards wrote. “Before acting, the commission ‘identified a fundamental disagreement among exchanges, market participants, academics, and industry experts regarding the impact of [maker-taker] fees and rebates on the markets.’ However, the commission took no position in these debates; and it did not identify any problems with existing regulatory requirements or propose rules that might rectify any perceived issues.

Rather, according to the commission, the purpose of Rule 610T was to induce ‘an exogenous shock’ to the market that might offer insights into ‘the effects of fees and rebates on the markets and market participant behavior.’ In other words, the commission acted solely to ‘shock the market’ to collect data so that it might ponder the ‘fundamental disagreements’ between parties affected by commission rules and then consider whether to regulate in the future.”

Edwards wrote that the action was unprecedented, and clearly exceeded the SEC’s authority.

“Nothing in the commission’s rulemaking authority authorizes it to promulgate a ‘one-off’ regulation like Rule 610T merely to secure information that might indicate to the SEC whether there is a problem worthy of regulation,” he wrote. “The commission acted without delegated authority when it adopted the pilot program. Accordingly, we grant the petition for review, vacate the rule, and remand the case.”

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