Nasdaq Stock Mkt., LLC v. Sec. & Exch. Comm'n

• Decision Date: 05 June 2020
• Docket Number: No. 18-1292,C/w 18-1293,18-1292
• Citation: 961 F.3d 421
• Parties: The NASDAQ STOCK MARKET, LLC, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent Securities Industry and Financial Markets Association, Intervenor
• Court: U.S. Court of Appeals — District of Columbia Circuit

961 F.3d 421

The NASDAQ STOCK MARKET, LLC, Petitioner

v. SECURITIES AND EXCHANGE COMMISSION, RespondentSecurities Industry and Financial Markets Association, Intervenor

No. 18-1292

C/w 18-1293

United States Court of Appeals, District of Columbia Circuit.

Argued February 18, 2020

Decided June 5, 2020

Thomas G. Hungar argued the cause for petitioner The NASDAQ Stock Market LLC. On the brief were Eugene Scalia, Amir C. Tayrani, Jacob T. Spencer, Daniel G. Swanson, and Stephen D. Susman.

Douglas W. Henkin argued the cause for petitioner NYSE Arca, Inc. With him on the briefs was Richard M. Zuckerman.

Dominick V. Freda, Assistant General Counsel, Securities and Exchange Commission, argued the cause for respondent. With him on the brief were Michael A. Conley, Solicitor, and Benjamin Vetter, and Dina B. Mishra, Senior Counsel.

Carter G. Phillips argued the cause for intervenor. With him on the brief were Michael D. Warden, Eric D. McArthur, and David J. Feith.

Benjamin Beaton was on the brief for amici curiae Bloomberg L.P., et al. in support of respondent and intervenor.

Hyland Hunt and Ruthanne M. Deutsch were on the brief for amicus curiae Investors Exchange LLC in support of respondent and intervenor.

Before: Millett and Wilkins, Circuit Judges, and Sentelle, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge Wilkins.

Wilkins, Circuit Judge:

For the third time in this long-running dispute, we are asked to consider whether fees that national securities exchanges charge for access to their "depth-of-book" data violate the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq . Ten years ago, we upheld the Security and Exchange Commission's "market-based" test for determining whether fees for this type of product are fair and reasonable. NetCoalition v. S.E.C., 615 F.3d 525, 534 (D.C. Cir. 2010) (" NetCoalition I "). Three years later, we concluded that a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) ("Dodd-Frank Act"), deprives us of jurisdiction to review the Commission's decision not to suspend a fee rule within 60 days under Section 19(b)(3)(C) of the Exchange Act. NetCoalition v. S.E.C. , 715 F.3d 342, 343 (D.C. Cir. 2013) (" NetCoalition II "). However, we noted in NetCoalition II the Commission's position that these fees might be challengeable under Section 19(d) of the Exchange Act, 15 U.S.C. § 78s(d), which allows the Commission to review an exchange's decision to "limit" a person's access to its services. Id. at 353. Such a challenge, if proper, would open the door for judicial review. Id. ("[A] party aggrieved by the Commission's disposition of a section 19(d) petition undoubtedly may obtain judicial review of that disposition in the court of appeals."). The NetCoalition II petitioners then filed a Section 19(d) complaint, and the Commission concluded that Section 19(d) is available as a means of reviewing the reasonableness of the fees. After a hearing, an ALJ found for the exchanges, but the Commission reversed, finding the fees unreasonable. The exchanges have petitioned our Court for review, arguing primarily that the fees at issue here cannot be challenged under Section 19(d).

Today, we hold that Section 19(d) is not available as a means to challenge the reasonableness of generally-applicable fee rules. Section 19(d)’s text does not contemplate challenges to generally-applicable fee rules, and the remedy and notice provisions are incompatible with a challenge to fee rules that do not target specific individuals or entities. Exercising jurisdiction under 15 U.S.C. § 78y(a), we grant the petitions for review, vacate the Commission's decision, and remand for further proceedings.

I.

The petitioners in this case—NYSE Arca, Inc. and Nasdaq Stock Market, LLC ("the Exchanges")—are national securities exchanges under the Exchange Act, which governs the major securities markets in the United States. As such, they are quasi-governmental entities called "self-regulatory organizations," or SROs. See 15 U.S.C. § 78c(a)(26). "Although self-regulatory, [SROs] remain[ ] subject to comprehensive SEC oversight and control." NetCoalition I , 615 F.3d at 528. When an SRO wishes to impose or change a fee for its services or products, it must file a rule change with the Commission, 15 U.S.C. § 78s(b), and the Commission must ensure that the rule change is "not designed to permit unfair discrimination between customers, issuers, brokers, or dealers" and does not "impose any [unnecessary] burden on competition," id. § 78f(b)(5), (8).

The rule changes at issue here involve fees that the Exchanges charge for their "depth-of-book" data, which "consists of outstanding limit orders to buy stock at prices lower than, or to sell stocks at prices higher than, the best prices on each exchange." NetCoalition I , 615 F.3d at 529-30. This data "allows a trader to gain background information about the ‘liquidity’ of a security on a particular exchange, i.e. , the degree to which his total sale or purchase price will differ from what he would receive if the entire trade were made at the prevailing best prices." Id. at 530. Two industry groups – the Respondent-Intervenor in this case, Securities Industry and Financial Markets Association (SIFMA), and a now-disbanded group called NetCoalition – challenged the Exchanges’ fees, but the Commission upheld them as fair and reasonable under the Exchange Act using a "market-based" approach. Id. at 532. The industry groups sought review, and in NetCoalition I we upheld the Commission's "market-based" approach for assessing the fairness and reasonableness of fees, but remanded because the record lacked sufficient support for the Commission's conclusion that market forces actually constrained the Exchanges’ pricing. Id. at 539-44.

While NetCoalition I was pending, Congress passed the Dodd-Frank Act, which overhauled the process for the filing and approval of SRO rule changes. Before the Dodd-Frank Act, "the Exchange Act required the Commission to approve a change in market data fee rules before such change became effective," and the Commission could approve "such a change only if, after notice and comment, it found that the ‘proposed rule change [was] consistent with the requirements of the’ Exchange Act." NetCoalition II , 715 F.3d at 344 (alteration in original) (quoting 15 U.S.C. § 78s(b)(2) (2006) ). The Dodd-Frank Act altered this scheme, however, providing that such a rule change "take[s] effect upon filing with the Commission" and "may be enforced by [the SRO] to the extent it is not inconsistent with" the Exchange Act and its applicable regulations. 15 U.S.C. § 78s(b)(3)(A), (C). Under Section 19(b)(3)(C), the Commission may suspend the rule within 60 days of its filing if it concludes that "such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the" Exchange Act. Id. § 78s(b)(3)(C). But the statute provides that "Commission action pursuant to [Section 19(b)(3)(C) ] ... shall not be reviewable." Id.

After we decided NetCoalition I , the Exchanges filed new rule changes to the fee structure for their depth-of-book data products, and the Commission rejected SIFMA's and NetCoalition's request to suspend the rules. NetCoalition II , 715 F.3d at 344. SIFMA and NetCoalition then petitioned our Court for review, but we dismissed their petitions in NetCoalition II , concluding that we lack jurisdiction over the Commission's decision not to suspend a rule change. Id. at 344, 354. Specifically, we held that the Commission's decision not to suspend a rule change qualifies as unreviewable "Commission action" under Section 19(b)(3)(C). Id. at 347-52.

Relevant here, we noted that our holding was "bolstered by the availability of judicial review down the road," pointing to the Commission's position that aggrieved parties could challenge the fee rules before the Commission at the "enforcement stage" under Section 19(d). Id. at 352. Section 19(d) allows aggrieved parties to challenge an SRO action that, among other things, "prohibits or limits [them] in respect to access to services offered by" the SRO. 15 U.S.C. § 78s(d)(1). Without deciding the applicability of Section 19(d), we "t[ook] the Commission at its word, to wit, that it w[ould] make the section 19(d) process available to parties seeking review of unreasonable fees charged for market data, thereby opening the gate to our review," and explained that "if unreasonable fees constitute a denial of ‘access to services’ under section 19(d), we have authority to review such fees." Id. at 353 (emphasis added).

Predictably, SIFMA then challenged the fees under Section 19(d). The Exchanges sought dismissal of the challenges, arguing that generally-applicable fee filings cannot constitute "prohibit[ions] or limit[ations]" on access under Section 19(d), because that provision is limited to review of actions targeting specific members. The Commission rejected that argument and referred the matter to an ALJ to decide whether the Exchanges’ fee rules constitute a "limit" on access to their services within the meaning of Section 19(d). After a five-day hearing, the ALJ ruled for the Exchanges, concluding that the pricing for depth-of-book data is subject to significant competitive forces. SIFMA sought review, and the Commission reversed the ALJ's decision. The Exchanges have timely petitioned for review from our Court.

II.

The first issue presented is the only one we decide today: whether the Commission erred in concluding that a generally-applicable fee rule may be challenged as a "limit[ation]" on "access to services" under Section 19(d) of the Exchange Act.¹ In order to answer that question, we must first determine what standard of review to apply.

When reviewing an agency's construction of a statute it administers, we ask "whether Congress has directly spoken to the precise question at issue." Chevron, U.S.A.,...