Bloomberg L.P. v. Sec. & Exch. Comm'n
| Decision Date | 16 August 2022 |
| Docket Number | 21-1088 |
| Citation | 45 F.4th 462 |
| Parties | BLOOMBERG L.P., Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent Financial Industry Regulatory Authority, Intervenor |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Keith Bradley argued the cause for petitioner. With him on the briefs was ScheLeese Goudy.
Thomas A. Burns was on the brief for amicus curiae Healthy Markets Association in support of petitioner.
Theodore J. Weiman, Senior Litigation Counsel, Securities and Exchange Commission, argued the cause for respondent. With him on the brief were Michael A. Conley, Solicitor, and Tracey A. Hardin, Assistant General Counsel.
Nowell D. Bamberger was on the brief for intervenor Financial Industry Regulatory Authority, Inc. in support of respondent. Giovanni P. Prezioso entered an appearance.
Paul S. Mishkin and David B. Toscano were on the brief for amici curiae Intercontinental Exchange, Inc., et al. in support of respondent.
Before: Wilkins, Katsas and Jackson* , Circuit Judges.
Petitioner Bloomberg L.P. ("Bloomberg") seeks review of the Securities and Exchange Commission's (the "Commission" or "SEC") decision to approve new reporting requirements proposed by the Financial Industry Regulatory Authority, Inc. ("FINRA"), Intervenor-for-Respondent, affecting underwriter members in the corporate bond market. FINRA represented to the SEC that market inefficiencies in the corporate bond market reduce market participation, decrease liquidity, and increase transaction and opportunity costs. To address these problems, FINRA proposed to consolidate and provide market-wide access to "core" reference data for new issues of corporate bonds through a subscription-based service. The Commission ultimately concluded that FINRA's proposal would impose a limited burden on competition and enable market participants to obtain broad, uniform access to corporate bond reference data before the first transaction in a new-issue bond. Accordingly, the Commission approved FINRA's proposal.
Importantly, though, during the rulemaking process, various commenters raised concerns about FINRA's proposed data service. In relevant part, Bloomberg commented that FINRA did not provide any information about how much it will cost to build and maintain the database, and to what extent FINRA will pass those costs along to market participants.
For the reasons explained below, we find that pursuant to the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), the Commission's approval of FINRA's proposal was arbitrary and capricious because the Commission neglected to give a reasoned explanation in response to Bloomberg's significant concerns about the costs that FINRA, as well as market participants, will incur in connection to the creation and maintenance of the data service. Accordingly, we grant Bloomberg's petition for review on the grounds that the Commission's failure to respond to significant public comments about the costs associated with FINRA's proposal was arbitrary and capricious. We deny Bloomberg's petition for review with respect to its remaining arguments. We remand without vacatur for the Commission to respond appropriately.
FINRA is a private association of securities broker-dealers that regulates the conduct of broker-dealers—people or firms in the business of buying or selling securities on behalf of customers, their own accounts or both—and formulates and enforces standards for trading and brokerage. Because of its status as a self-regulatory organization, Section 19(b)(2)(C)(i) of the Securities and Exchange Act of 1934 (the "Exchange Act" or "Act"), 15 U.S.C. § 78s(b)(2)(C)(i), imposes on FINRA "a duty to promulgate and enforce rules governing the conduct of [its] members, under the oversight of the SEC." See NetCoalition v. SEC , 715 F.3d 342, 344–45 (D.C. Cir. 2013) (" NetCoalition II ") (internal quotation marks and citations omitted). The Act provides that FINRA must submit any proposed rules or rule changes to the SEC, which "shall approve" proposals if it finds them "consistent with the requirements of" the Exchange Act and applicable SEC rules and regulations. 15 U.S.C. § 78s(b)(2)(C)(i).
Bloomberg is a global business and financial information company. Among other things, it is a private data vendor that dominates the market for private data services. See Pet'r's Opening Br. at 8. Bloomberg obtains newly issued bond reference data from underwriters—usually before other data vendors and market participants—and then sells that data to market participants.
Reference data is very important. When corporations issue bonds, the underwriters who buy and sell those bonds to market participants compile certain reference data—details and terms, such as the name of the issuer and identification numbers—and provide them to data vendors like Bloomberg. Without reference data, trading platforms cannot list a bond for trading.
Timing matters, too. The hours and days that immediately follow a bond offering are generally a highly active trading period. Accordingly, market participants, namely investors, seek out timely reference data about new corporate bonds coming to market from vendors like Bloomberg. According to FINRA, because each reference data provider collects and distributes new issue reference data "from different sources and at different speeds[,]" the reference data is not necessarily "consistent, timely and accurate across reference data providers." J.A. 1–2.
In 2017, the SEC established the Fixed Income Market Structure Advisory Committee ("FIMSAC" or "Advisory Committee") to offer advice and recommendations to the Commission on the structure of the fixed income market. (Corporate bonds are considered fixed income securities.) FIMSAC is composed of individuals representing a range of perspectives on the fixed income markets, including corporate bond investors, broker-dealers, underwriters, academics, and data vendors. FIMSAC's Technology and Electronic Trading Subcommittee (the "Subcommittee"), which represents a cross-section of fixed income market participants, determined that there are gaps in the corporate bond reference data market, both in terms of when data vendors make data available and the data's accuracy. The Subcommittee attributed these disparities to (1) the fact that private data vendors—like Bloomberg—are not obligated to provide impartial access to new issue reference data; (2) vendors lacking equal access to information from underwriters; and (3) the resulting confusion, which increases transaction costs and impedes competition in the corporate bond market.
The Subcommittee met several times over the course of seven months to fill the gaps in the corporate bond reference data market. It ultimately recommended that FINRA, as an impartial entity, establish a consolidated new issue reference data service that makes core reference data available to all subscribers in a timely and commercially reasonable manner.
The Subcommittee's recommendation paralleled another proposal the SEC had previously approved. In 2008, the SEC accepted the Municipal Securities Rulemaking Board's proposal to establish a centralized, self-regulatory organization-mandated data service that would provide participants in the municipal bond market with timely access to "core" reference data and streamline the trade of municipal bonds. The petition before us concerns a proposal for a similar service in the corporate bond market.
FIMSAC unanimously endorsed the Subcommittee's recommendation. In October 2018, FIMSAC recommended that FINRA establish a corporate bond new issue reference data service—similar to the municipal bond market service that the SEC approved in 2008—to mitigate the disparities in the market for corporate new issue reference data.
To that end, FINRA performed an Economic Impact Assessment: an analysis of the corporate bond market. FINRA coordinated independent outreach to eleven participants in the corporate bond market: four data vendors, three underwriters, two trading platforms, and two clearing firms. Insights from these entities led FINRA to discover the same problems FIMSAC did: data vendors receive reference data through different channels at different times, which leads to untimely, inconsistent, and inaccurate distribution of corporate bond new issue reference data to market participants. Thereafter, FINRA set out to develop a solution that would address gaps in the availability of accurate, complete, and timely access to corporate bond new issue reference data.
FINRA developed a proposal to establish a centralized new issue reference data service for corporate bonds. First, FINRA would require its member underwriters to report to FINRA—before trading on a new issue begins—32 unique data elements that are integral to the valuation, trade, and settlement of corporate bonds. Collectively, these elements constitute "core" reference data. Next, FINRA would create a database to consolidate the data and provide market-wide access through a fee subscription.
On March 27, 2019, pursuant to Section 19(b)(1) of the Exchange Act, 15 U.S.C. § 78s(b)(1), FINRA proposed to the SEC the establishment of a consolidated fee-based data service that would provide market-wide access to new issue reference data.
FINRA Rule 6760 "requires certain data elements—those sufficient to identify the security accurately—to be reported before the execution of the first transaction, and all remaining data elements to be reported within 15 minutes of the Time of Execution of the first transaction." J.A. 2 n.4. Rule 6760(b) currently requires underwriters to provide certain new issue reference data to FINRA. FINRA's proposal would amend Rule 6760(b) to require underwriters to report additional data elements to FINRA. In relevant part, the amended version of Rule 6760(b) would require underwriters to report the following core information:
(A) The International Securities Identification...
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