N.Y. Stock Exch. LLC v. Sec. & Exch. Comm'n
| Decision Date | 16 June 2020 |
| Docket Number | 19-1053,19-1049,19-1046,19-1054,No. 19-1042,C/w 19-1043,19-1042 |
| Citation | 962 F.3d 541 |
| Parties | NEW YORK STOCK EXCHANGE LLC, et al., Petitioners v. SECURITIES AND EXCHANGE COMMISSION, Respondent |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Thomas G. Hungar, Washington, DC, argued the cause for petitioners. With him on the briefs were Amir C. Tayrani, Joshua M. Wesneski, Paul S. Mishkin, George L. Brandley, New York, NY, Paul Greenwalt III, and Michael K. Molzberger., Chicago, Il
Robert T. Smith and Eric T. Werlinger were on the brief for amici curiae GTS Securities LLC, et al. in support of petitioners and vacatur of rule.
Tracey A. Hardin, Assistant General Counsel, Securities and Exchange Commission, argued the cause for respondent. With her on the brief were Michael A. Conley, Solicitor, and John B. Capehart, Senior Counsel.
Thomas A. Sporkin was on the brief for amicus curiae RBC Capital Markets, LLC in support of respondent and denial of the petitions for review.
Dennis M. Kelleher and Stephen W. Hall were on the brief for amicus curiae Better Markets, Inc. in support of respondent.
Hyland Hunt and Ruthanne M. Deutsch were on the brief for amicus curiae Investors Exchange LLC in support of respondent.
James A. Brigagliano, Eric D. McArthur, and Paul Schott Stevens were on the brief for amici curiae Investment Company Institute, et al. in support of respondent and denial of the petitions for review.
Before: Pillard, Circuit Judge, and Edwards and Sentelle, Senior Circuit Judges.
On December 19, 2018, purportedly acting pursuant to its authority under the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq., the Securities and Exchange Commission ("Commission" or "SEC") adopted a Pilot Program, denominated Rule 610T, reprinted in Joint Appendix ("J.A.") J.A. 20-124. The Pilot Program was not a trial run of a new regulation. Rather, it was designed "to gather data" so that the Commission might be able to determine in the future whether regulatory action was necessary. Id. at 21. In February 2019, the New York Stock Exchange LLC and other registered national securities exchanges ("Petitioners") filed timely petitions for review challenging Rule 610T.
An outline of Rule 610T is as follows:
The Commission's plan is to assign 1,460 randomly selected stocks to one of two "Test Groups." Half of those stocks will be subject to a $0.0010 cap on the transaction fees that national securities exchanges can charge for executing trades—a substantial reduction of the current $0.0030 cap established by the Commission in 2005. Stocks assigned to the other Test Group will be subject to a prohibition on exchanges’ payment of rebates to broker-dealers who send orders to the exchange for execution. All other publicly traded stocks will be assigned to a "Control Group" and will not be subject to either of these restrictions. And even with respect to the 1,460 stocks in the two Test Groups, the Rule's restrictions on fees and rebates will not apply evenhandedly: The Rule will apply to transactions in those stocks executed on national securities exchanges, but not to transactions on alternative trading systems ("ATSs") or other off-exchange trading venues, which together account for nearly 40% of securities transactions.
Petitioners contend that "[t]he Rule exceeds the Commission's statutory authority under the Exchange Act, which does not authorize the Commission to change the regulatory standards applicable to transactions in publicly traded securities simply to determine the impact of those new standards on the securities market." Id. at 20. Petitioners also point out that "the Commission conceded that the Rule might ‘harm execution quality and/or market quality,’ increase transaction costs for investors, and impair competition." Id. at 21 (quoting J.A. 84). Petitioners additionally argue that Rule 610T cannot survive review because: (1) the Commission failed to determine the Rule's effects on efficiency, competition, and capital formation; (2) the Rule discriminates against some securities exchanges; and (3) the Commission failed to meaningfully consider alternatives to the Rule.
The Commission, in turn, contends that, although the Pilot Program is not expressly authorized by the Exchange Act, it is within the Commission's general rulemaking authority under 15 U.S.C. §§ 78w(a), 78k-1(a)(2). The Commission also claims that it was not required to adopt a "permanent" rule, nor prohibited from collecting data through experimentation. Finally, the Commission argues that its adoption of Rule 610T was reasonable because it considered and explained the economic consequences of the Pilot Program, as well as its possible effects on efficiency, competition, and capital formation, and considered alternatives proposed by Petitioners.
Because the SEC acted without delegated authority from Congress when it adopted Rule 610T, we will grant the petitions for review. 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. 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." J.A. 56. 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." J.A. 44. 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. This was an unprecedented action that clearly exceeded the SEC's authority under the Exchange Act. See 15 U.S.C. § 78w(a)(2) ; id. § 78k-1(a)(2).
The Commission points to no authority that expressly authorizes it to adopt a "one-off" rule of this sort. Rather, the Commission argues that because it has rulemaking authority under the Exchange Act, the Pilot Program is permissible because "it is reasonably related to the purposes of the [SEC's] enabling legislation." Br. for Respondent at 24 (quoting Mourning v. Family Publ'ns Serv., Inc., 411 U.S. 356, 369, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973) ). This is a shortsighted view of the applicable law. Mourning () was decided decades ago, before the Supreme Court issued Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), changing the framework for judicial review of agency action. And Mourning has been effectively diluted by later cases. See, e.g ., Ragsdale v. Wolverine World Wide, Inc., 535 U.S. 81, 92, 122 S.Ct. 1155, 152 L.Ed.2d 167 (2002).
The controlling principle here is that "[a]n agency's general rulemaking authority does not mean that the specific rule the agency promulgates is a valid exercise of that authority." Colo. River Indian Tribes v. Nat'l Indian Gaming Comm'n, 466 F.3d 134, 139 (D.C. Cir. 2006). When an agency acts pursuant to its rulemaking authority, a reviewing court determines whether the resulting regulation exceeds the agency's statutory authority or is arbitrary and capricious. Sullivan v. Zebley, 493 U.S. 521, 528, 110 S.Ct. 885, 107 L.Ed.2d 967 (1990). A court does not simply assume that a rule is permissible because it was purportedly adopted pursuant to an agency's rulemaking authority. See Michigan v. EPA, ––– U.S. ––––, 135 S. Ct. 2699, 2706-07, 192 L.Ed.2d 674 (2015). Nor does a court presume that an agency's promulgation of a rule "is permissible because Congress did not expressly foreclose the possibility." Motion Picture Ass'n of Am. v. FCC, 309 F.3d 796, 805 (D.C. Cir. 2002).
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. "Regardless of how serious the problem an administrative agency seeks to address ... it may not exercise its authority ‘in a manner that is inconsistent with the administrative structure that Congress enacted into law.’ " Ragsdale, 535 U.S. at 91, 122 S.Ct. 1155 (quoting FDA v. Brown & Williamson Tobacco Corp, 529 U.S. 120, 125, 120 S.Ct. 1291, 146 L.Ed.2d 121 (2000) ). 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.
Section 11A of the Exchange Act authorizes the SEC "to facilitate the establishment of a national market system [NMS] for securities." 15 U.S.C. § 78k-1(a)(2). The Act directs the Commission, "having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to use its authority" to achieve this goal. Id.
Section 23 of the Act gives the Commission "power to make such rules and regulations as may be necessary or appropriate to implement the provisions" of the Act for which it is responsible. Id. § 78w(a)(1). The Act also states that, "in making rules and regulations," the Commission:
[ (1) ] shall consider ... the impact any such rule or regulation would have on competition[;] ... [ (2) ] shall not adopt any such rule or regulation which would impose a burden on competition not necessary...
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