By Bill Flook
The SEC acted outside of its authority in implementing a pilot program testing the effects of restricting stock exchanges’ “maker-taker” fees and rebates, a three-judge D.C. Circuit panel ruled on June 16, 2020.
The ruling, which tosses out the controversial rules, hands a victory to exchanges that had sued the market regulator in February 2019 to halt the pilot.
Nasdaq, the New York Stock Exchange (NYSE), and Cboe Global Markets had argued that the SEC was improperly expanding its rulemaking authority in order to run what was essentially an experiment to collect data on the market.
The D.C. Circuit largely agreed.
“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,” wrote Senior Circuit Court Judge Harry T. Edwards in the opinion.
The SEC in December 2018 published final rules in Release No. 34-84875, Transaction Fee Pilot for NMS Stocks, to launch a pilot program limiting the fees exchanges can charge to attract brokers to trade on their platforms.
The market regulator had sought to conduct the pilot under new Rule 610T of Regulation NMS, to test the effects of the changes on “order routing behavior, execution quality, and market quality generally,” according to the SEC.
Exchanges use the fees, also called access fees, to encourage liquidity by giving a per-share rebate to brokers who place resting orders on the exchange, and charging a fee to the broker, or taker, who executes against that order.
Critics argue the fees distort the market and present a conflict of interest for brokers, while exchanges say the practice results in tighter bid-ask spreads, as well as greater transparency by luring trades away from dark pools.
At several points in Release No. 34-84875, the commission acknowledged uncertainty about the effects of the rules, an admission the exchanges seized on in their legal challenge. Exchanges had claimed that the SEC calling the rule an “experiment” was not enough to evade its obligation under the Securities Exchange Act of 1934.
Investor advocates had pushed back against the exchange’s arguments that the SEC failed to properly forecast the rulemaking’s effects on the markets. Those arguments, should they be accepted by the court, would leave the commission and other agencies facing “nearly impossible hurdles” when regulating the markets, activist group Better Markets had asserted in an August 2019 amicus brief.
The ruling comes a little more than week after the D.C. Circuit, in a separate decision, sided with exchanges in a long-running dispute with a securities industry trade group and the SEC over how fees for so-called “depth-of-book” data are regulated.
This article originally appeared in the June 17, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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