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

• Decision Date: 05 July 2022
• Docket Number: 21-1167,C/w 21-1168, 21-1169
• Citation: 38 F.4th 1126
• Parties: The NASDAQ STOCK MARKET LLC, et al., Petitioners v. SECURITIES AND EXCHANGE COMMISSION, Respondent
• Court: U.S. Court of Appeals — District of Columbia Circuit

38 F.4th 1126

The NASDAQ STOCK MARKET LLC, et al., Petitioners

v.SECURITIES AND EXCHANGE COMMISSION, Respondent

No. 21-1167

C/w 21-1168, 21-1169

United States Court of Appeals, District of Columbia Circuit.

Argued March 24, 2022

Decided July 5, 2022

Thomas G. Hungar argued the cause for petitioners. With him on the briefs were Paul S. Mishkin, Amir C. Tayrani, Joshua M. Wesneski, Paul E. Greenwalt III, and Michael K. Molzberger. Matthew A. Kelley entered an appearance.

Tracey A. Hardin, Assistant General Counsel, Securities and Exchange Commission, argued the cause for respondent. With her on the brief were Dan M. Berkovitz, General Counsel, Michael A. Conley, Solicitor, and Emily True Parise, Senior Litigation Counsel.

Robert A. Skinner and Douglas H. Hallward-Driemeier were on the brief for amicus curiae Investment Company Institute in support of respondent.

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

Karen LeCraft Henderson, Circuit Judge:

The Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78a et seq. , directs the Securities and Exchange Commission (Commission) to facilitate the establishment of a national market system (NMS), a key component of which is the public dissemination of market data regarding quotations for and transactions in equity securities. Equity market data is collected, consolidated and disseminated pursuant to NMS plans governed and operated by "self-regulatory organizations" (SROs), groups comprising, in large part, the major national securities exchanges for equity securities. Beginning in 2020, the Commission issued two orders aimed at consolidating the existing NMS plans governing the dissemination of equity market data into a single, consolidated plan (CT Plan) and modifying the governance structure to increase efficiencies, mitigate conflicts of interest among the securities exchanges and facilitate greater involvement by non-exchange stakeholders. See Order Directing the Exchanges and the Financial Industry Regulatory Authority To Submit a New National Market System Plan Regarding Consolidated Equity Market Data, 85 Fed. Reg. 28,702 (May 13, 2020) (Governance Order); Order Approving, as Modified, a National Market System Plan Regarding Consolidated Equity Market Data, 86 Fed. Reg. 44,142 (Aug. 11, 2021) (CT Plan Order).

A group of national securities exchanges associated with Nasdaq, Inc. (Nasdaq), the New York Stock Exchange (NYSE) and Cboe Global Markets (Cboe) (collectively, petitioners) challenge the Commission's orders, arguing that several elements are arbitrary and capricious under the Administrative Procedure Act (APA), 5 U.S.C. § 551 et seq. , or contrary to the text and goals of the Exchange Act. In particular, petitioners challenge three provisions of the final, Commission-approved CT Plan: (1) the inclusion of representatives of non-SROs as voting members of the CT Plan's operating committee; (2) the grouping of SROs based on corporate affiliation for voting; and (3) the requirement that the administrator of the CT Plan be "independent," meaning independent of any SRO that sells equity market data products.

As detailed infra , we grant petitioners' three petitions as to the first challenged provision—non-SRO representation—and deny them in all other respects. Further, because the non-SRO-representation provision is not severable from the CT Plan Order, we vacate that Order in its entirety. We do, however, uphold in large part the Governance Order, which preceded the CT Plan Order and merely directed the SROs to propose an NMS plan that included the three challenged provisions.

I. BACKGROUND

A.

In 1975, the Congress sought to modernize regulation of the securities markets through the establishment of a national market system to "distribute market data economically and equally and to promote fair competition among all market participants," NetCoalition v. SEC , 615 F.3d 525, 528 (D.C. Cir. 2010), superseded by statute as stated in NetCoalition v. SEC , 715 F.3d 342, 344 (D.C. Cir. 2013) ; see also Bradford Nat'l Clearing Corp. v. SEC , 590 F.2d 1085, 1091 (D.C. Cir. 1978) (citing "operational breakdowns and economic distortions" in securities markets as impetus for reforms (quoting H.R. Rep. No. 94-229, at 91 (1975))), and its efforts culminated in the Securities Acts Amendments of 1975, Pub. L. No. 94-29, 89 Stat. 97. The Securities Acts Amendments granted the Commission "broad, discretionary powers" to ensure "maximum flexibility" in "oversee[ing] the development of a national market system" and "implement[ing] its specific components in accordance with the findings and ... objectives" of the legislation. See S. Rep. 94-75, at 7 (1975); see also Bradford , 590 F.2d at 1091.

Of importance here, section 11A of the amended Exchange Act, Pub. L. No. 94-29, § 7, 89 Stat. 97, 111 (codified at 15 U.S.C. § 78k-1 ), "direct[s]" the Commission to "facilitate the establishment of a national market system for securities ... in accordance with the findings and to carry out the objectives set forth" in the section. 15 U.S.C. § 78k-1(a)(2). As to those statutory findings and objectives, the Congress concluded that "[i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure," inter alia , "economically efficient execution of securities transactions," "fair competition among" market participants and "the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities." Id. § 78k-1(a)(1)(C).

To this end, section 11A "authorize[s]" the Commission, "by rule or order, to authorize or require self-regulatory organizations"—a group currently comprised in large part of the various securities exchanges, including petitioners—"to act jointly with respect to matters as to which they share authority under [the Exchange Act] in planning, developing, operating, or regulating a national market system (or a subsystem thereof) or one or more facilities thereof." Id. § 78k-1(a)(3)(B) ; see also id. § 78c(a)(26) (defining "self-regulatory organization"). Section 11A also creates a National Market Advisory Board— consisting of "persons associated with brokers and dealers (who shall be a majority) and persons not so associated who are representative of the public"—to advise the Commission on matters related to the national market system or its system of self-regulation by SROs. See id. § 78k-1(d). With respect to market data, section 11A authorizes the Commission to prescribe rules and regulations, "as necessary or appropriate" to carry out the Exchange Act's purposes, to "assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to quotations for and transactions in ... securities and the fairness and usefulness of the form and content of such information." Id. § 78k-1(c)(1)(B).

B.

At "the heart of the national market system" is the collection, consolidation and dissemination of securities market data from the various securities exchanges. H.R. Rep. No. 94-229, at 93 (1975); see also NetCoalition , 615 F.3d at 529. In 2005, the Commission adopted Regulation NMS, 70 Fed. Reg. 37,496 (June 29, 2005), in order to streamline and promote the availability of data regarding quotations for and transactions in securities. Before 2021, Regulation NMS required each securities exchange to report its "core" market data for its NMS-traded securities to one of two centralized securities information processors (SIPs), see 17 C.F.R. §§ 242.601, 242.602 (2020), which in turn consolidated and disseminated the core data to subscribers, including investors, broker-dealers and data vendors, see id. § 242.603(a)–(b). See NetCoalition , 615 F.3d at 529. Consolidated core data for an NMS-traded security consisted of (1) the price, size and venue of the last sale; (2) each exchange's current highest bid and lowest offer; and (3) the highest bid and lowest offer currently available on any exchange. Id. Possessing this data, "investors of all types have access to a reliable source of information for the best prices in NMS stocks." Regulation NMS, 70 Fed. Reg. at 37,503.¹

At present, three SRO-administered NMS plans, known as the Equity Data Plans, govern the collection, consolidation and dissemination of core market data. Two plans, referred to by the Commission as the CTA and CQ Plans, cover Tape A, the consolidated data feed for securities listed on the NYSE, and Tape B, the data feed for securities listed on exchanges other than the NYSE and Nasdaq. The third plan, referred to as the UTP Plan, covers Tape C, the data feed for securities listed on Nasdaq. A NYSE affiliate serves as the SIP for Tapes A and B and Nasdaq is the SIP for Tape C. Subscribers to a particular data feed pay fees set according to the governing Equity Data Plan. Each Equity Data Plan is controlled by an operating committee, whose voting membership is limited to the SROs participating in the particular plan. Each plan also has an administrator which, among other things, supervises the audit process for data subscriber usage and fee payments. The NYSE serves as administrator for the CTA and CQ Plans and Nasdaq serves as administrator for the UTP Plan.

C.

Since the adoption of Regulation NMS, the Commission has observed two notable changes regarding the structure of the equity markets. First, although securities exchanges were once nonprofit entities mutually owned by their members—meaning those companies whose stock is traded on the exchange—they are now, generally speaking, demutualized and for-profit entities owned by shareholders that sell proprietary-data products. These proprietary-data products often contain exchange-specific data that goes beyond the best bid and best offer quotes contained in the core data feeds and are generally delivered much faster than the core data feeds, thereby resulting in what...