Big Win for Stock Exchanges as DC Circuit Court Grounds SEC Transaction Fee Pilot

On June 16, the United States Court of Appeals for the D.C. Circuit dealt a blow to the SEC by overturning the agency’s “Transaction Fee Pilot.” The court ruled that the SEC’s adoption of the Pilot “was an unprecedented action that clearly exceeded the SEC’s authority under the Exchange Act.”

Analyzing transaction fees that exchanges charge their members is one of several “market structure” initiatives the SEC has attempted to tackle under the leadership of Chairman Clayton along with Trading and Markets Director Redfearn. At the end of 2018, the SEC adopted a temporary “Pilot Program” (as Rule 610T) that was designed “to gather data” on transaction fees. As the SEC stated at that time, “[t]he pilot is designed to generate data that will help the [SEC] analyze the effects of exchange transaction fee and rebate pricing models on order routing behavior, execution quality, and market quality generally.” The SEC intended to use the data “to facilitate an empirical evaluation of whether the exchange transaction-based fee and rebate structure is operating effectively to further statutory goals and whether there is a need for any potential regulatory action in this area.”

Several exchanges sued the SEC to prevent the Pilot from getting off the ground. The SEC paused the launch of the Pilot while the suit was pending. It now appears that the Pilot will stay grounded.

The court ruled that the SEC acted without the proper authority when it adopted the Pilot. The opinion was quite harsh, referencing that 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.” The opinion also referenced that the SEC “did not identify any problems with existing regulatory requirements or propose rules that might rectify any perceived issues,” instead, the SEC “acted solely to ‘shock the market’ to collect data so that it might ponder the ‘fundamental disagreements’ between parties affected by [SEC] rules and then consider whether to regulate in the future.”

This marks the second big win for the exchanges this month. On June 5, 2020, the same court overturned prior SEC action relating to market data fees the exchanges charge.