Netcoalition v. Sec.

• Decision Date: 30 April 2013
• Docket Number: 10–1422,11–1001,Nos. 10–1421,11–1065.,s. 10–1421
• Citation: 715 F.3d 342
• Parties: NETCOALITION and Securities Industry and Financial Markets Association, Petitioners v. SECURITIES AND EXCHANGE COMMISSION, Respondent NASDAQ OMX PHLX LLC, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

715 F.3d 342

NETCOALITION and Securities Industry and Financial Markets Association, Petitioners

v. SECURITIES AND EXCHANGE COMMISSION, RespondentNASDAQ OMX PHLX LLC, et al., Intervenors.

Nos. 10–1421, 10–1422, 11–1001, 11–1065.

United States Court of Appeals,District of Columbia Circuit.

Argued Nov. 13, 2012.

Decided April 30, 2013.

On Petitions for Review of Orders of the Securities & Exchange Commission.

Carter G. Phillips argued the cause for the petitioners. Dennis C. Hensley, Kevin J. Campion, Eric D. McArthur, Roger D. Blanc, John R. Oller, Jeffrey B. Korn and Norman P. Ostrove were on brief.

Mark R. Pennington, Assistant General Counsel, Securities and Exchange Commission, argued the cause for the respondent. Michael A. Conley, Deputy General Counsel, and Jacob H. Stillman, Solicitor, were on brief. Luis de la Torre, Senior Litigation Counsel, entered an appearance.

Eugene Scalia argued the cause for the intervenors. Amir C. Tayrani, Ryan J. Watson and Douglas W. Henkin were on brief.

Before: HENDERSON and ROGERS, Circuit Judges, and SENTELLE, Senior Circuit Judge.

KAREN LeCRAFT HENDERSON, Circuit Judge:

In 2010, three securities exchanges, NASDAQ, NASDAQ OMX PHLX (PHLX) and NYSE Arca—the intervenors in this case—filed with the Securities Exchange Commission (SEC or Commission) proposed changes to their fee-setting rules for the acquisition of certain proprietary market data. Two trade associations, NetCoalition and the Securities Industry and Financial Markets Association (collectively the petitioners), requested the Commission to suspend the rules pursuant to its authority under section 19(b)(3)(C) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78s(b)(3)(C) (2006 & Supp. IV 2011), contending that they are unlawful under NetCoalition v. SEC, 615 F.3d 525 (D.C.Cir.2010)(NetCoalition I). When the SEC failed to do so, the petitioners sought review in this Court. Concluding that the Congress's recent overhaul of the Exchange Act dubbed the Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub.L. No. 111–203, 124 Stat. 1376 (2010) (Dodd–Frank Act), ousts us of jurisdiction, we dismiss the petitions.

I

In NetCoalition I, we reviewed a Commission order approving intervenor NYSE Arca's change to one of its market data fee rules. Concluding that the order was arbitrary and capricious because the Commission's reasoning was deficient, we vacated and remanded it to the Commission for further approval proceedings. NetCoalition I, 615 F.3d at 544. But the Congress intervened. Responding to the national financial downturn affecting the securities markets in 2008, the Congress enacted the Dodd–Frank Act. Before that Act, the Exchange Act required the Commission to approve a change in market data fee rules before such change became effective. See15 U.S.C. § 78s(b)(1) (2006). The Commission approved 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. Id. § 78s(b)(2). The Dodd–Frank Act, however, abandoned the approval requirement. Changes to rules setting fees for market data now “take effect upon filing with the Commission.” 15 U.S.C. § 78s(b)(3)(A) (2006 & Supp. IV 2011). The Commission retains the authority to suspend a rule change “if it appears to the Commission that such action is necessary or appropriate to the public interest, for the protection of investors, or otherwise in furtherance of the purposes of” the Exchange Act. Dodd–Frank Act § 916(c)(2)(A), 124 Stat. at 1835 (codified at 15 U.S.C. § 78s(b)(3)(C) (2006 & Supp. IV 2011)). A suspension triggers the requirement for notice-and-comment approval proceedings. Id. § 916(c)(2)(B), 124 Stat. at 1835 (codified at 15 U.S.C. § 78s(b)(3)(C) (2006 & Supp. IV 2011)).

After our remand in NetCoalition I, the three intervenors filed with the Commission changes to certain rules establishing fees for various market data products. Before proceeding to the specific rule changes at issue in this case, we briefly lay out the relevant statutory framework.

A.

As national securities exchanges, the intervenors are self-regulatory organizations (SROs). See15 U.S.C. § 78c(a)(26) (2006) (defining SROs). They therefore “have ‘a duty to promulgate and enforce rules governing the conduct of [their] members,’ under the oversight of the SEC.” Standard Inv. Chartered, Inc. v. Nat'l Ass'n of Sec. Dealers, Inc., 560 F.3d 118, 119 (2d Cir.2009) (quoting Barbara v. N.Y. Stock Exch., Inc., 99 F.3d 49, 51 (2d Cir.1996)); see also Silver v. N.Y. Stock Exch., 373 U.S. 341, 352–53, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963) (discussing SRO's duty of self-regulation). Exchanges must file their rules with the SEC and ensure compliance therewith. See15 U.S.C. § 78f(b)(1) (2006). Section 6 of the Exchange Act requires that the rules of national securities exchanges, inter alia, “provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities”; “promote just and equitable principles of trade”; and do not “permit unfair discrimination between customers, issuers, brokers, or dealers” or “impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of” the Exchange Act. 15 U.S.C. § 78f(b)(4), (5), (8) (2006).

Section 11A imposes additional requirements for rules setting fees for the acquisition of market data. Added to the Exchange Act in 1975, section 11A sets out “to facilitate the establishment of a national market system for securities,” Securities Acts Amendments of 1975, Pub. L. 94–29 § 7(a)(2), 89 Stat. 97, 112 (codified at 15 U.S.C. § 78k–1(a)(2) (2006)), and, inter alia, “to link securities markets nation-wide in order to distribute market data economically and equally and to promote fair competition among all market participants.” NetCoalition I, 615 F.3d at 528. To ensure the wide availability and equitable dissemination of market data, section 11A requires exclusive processors of proprietary market data such as the intervenors, see15 U.S.C. § 78c(a)(22)(B) (2006) (defining exclusive processors), to distribute that data on terms that are “fair and reasonable” and “not unreasonably discriminatory.” Id.§ 78k–1(c)(1)(C), (D) (2006).

Pursuant to its section 11A mandate, Bradford Nat'l Clearing Corp. v. SEC, 590 F.2d 1085, 1094 (D.C.Cir.1978), the Commission has promulgated a series of regulations ensuring the wide availability and dissemination of market data. It has established two categories of data—core and non-core. SeeOrder Setting Aside Action by Delegated Authority and Approving Proposed Rule Change Relating to NYSE Arca Data, Release No. 34–59039, 73 Fed. Reg. 74,770, 74,779 (Dec. 9, 2008) (N.Y. SE Arca Order). Core data, which “form the heart of the national market system,” Regulation NMS, Release No. 34–51808, 70 Fed. Reg. 37,496, 37,503 (June 29, 2005) (quotation marks omitted), is reported by the exchanges to data processors, which then consolidate it into a single stream of data for each NMS stock. 17 C.F.R. §§ 242.601–.603. Because the SEC requires exchanges to provide this data, the SEC has determined that fees charged for core data “need to be tied to some type of cost-based standard in order to preclude excessive profits if fees are too high or underfunding or subsidization if fees are too low.” Regulation of Market Information Fees and Revenues, Release No. 34–42208, 64 Fed. Reg. 70,613, 70,627 (Dec. 17, 1999).

All other market data falls into the non-core category. The SEC does not require exchanges to provide specific non-core data but instead allows market forces to determine which non-core data are provided. Regulation NMS, 70 Fed. Reg. at 37,567 (The Commission “will allow market forces, rather than regulatory requirements, to determine what, if any, additional quotations ... are displayed to investors.”). The requirements of sections 6 and 11A apply to fees charged for core and non-core data alike. SeeNYSE Arca Order, 73 Fed. Reg. at 74,779.

B.

The petitioners seek review of four changes to SRO rules charging fees for non-core market data products. In No. 10–1421 and No. 11–1065, PHLX filed changes to the rules governing fees imposed for two of its options market data products. Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Fees for the PHOTO Historical Data Product, Release No. 34–63351, 75 Fed. Reg. 73,140, 73,140 (Nov. 29, 2010) (PHOTO Historical Proposal); Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX, Inc. Relating to Market Data Feeds, Release No. 34–62887, 75 Fed. Reg. 57,092, 57,092 (Sept. 17, 2010) (PHOTO Proposal). In No. 10–1422, NASDAQ filed a rule change altering the fee structure for its TotalView market data product. Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Modify Rule 7019, Release No. 34–62907, 75 Fed. Reg. 57,314, 57,314–315 (Sept. 20, 2010) (TotalView Proposal). And in No. 11–1001, NYSE Arca filed a rule change with the SEC on November 1, 2010, pursuant to which it charges fees for its ArcaBook market data product. Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NYSE Arca, Inc. Relating to Fees for NYSE Arca Depth–of–Book Data, Release No. 34–63291, 75 Fed. Reg. 70,311, 70,312 (Nov. 17, 2010) (ArcaBook Proposal).

Although the petitioners and the intervenors debate at length the merits of the proposed rules changes, the SEC declines to take a position on the merits, asserting instead that this court lacks jurisdiction to review the petitions. Its refusal to join the merits issue is well-taken. The SEC conducted no proceeding and created no administrative record documenting its decision-making process or explaining its reasoning. If we have jurisdiction, therefore, well-established norms of judicial review require us to remand the petitions to the Commission to create...