7th Circuit Upholds Dismissal of Market Makers’ SEC Petition

The Nasdaq MarketSite in New York’s Times Square. (Photo credit: Luis Villa del Campo/Wikipedia)

(CN) – The Securities and Exchange Commission did not have jurisdiction over a petition by a number of securities firms claiming the Chicago Board Options Exchange and Nasdaq mischarged them millions of dollars, the Seventh Circuit ruled.

A group of market maker firms challenged the exchanges in court, taking issue with fees imposed under payment for order flow (PFOF) programs.

The firms sought a full accounting of the PFOF fees that were allegedly mischarged, as well as damages or disgorgement of those fees.

In 2013, they sued the exchanges in Cook County Circuit Court over fees charged on public orders between 2004 and 2011, which were imposed “without any consequences or responsibility of any kind,” according to the complaint.

The firms claimed that during that time period, the Chicago Board of Options Exchange took more than $637 million in PFOF fees.

Four of the market makers petitioned the SEC after their lawsuit was dismissed.

In July 2016, the agency concluded that it did not have jurisdiction over the firms’ petition, even though the Securities and Exchange Act calls for review of allegedly improper fees.

Their petition sought damages, which the SEC concluded was “incongruous” with its authority. The petition was “in effect, a billing dispute,” the SEC wrote.

It concluded that it did not have jurisdiction to discipline the exchanges based on claims by private parties like the firms.

The Chicago Board Options Exchange appealed the decision to the 7th Circuit, and Nasdaq and the firms both intervened.

On May 7, the Seventh Circuit panel affirmed the dismissal of the petition, finding the SEC’s interpretation of the law reasonable.

“[The Securities and Exchange Act] provides the Commission only with discretionary authority to conduct an enforcement proceeding, and sanction an exchange for a rule violation,” Judge Joel Flaum wrote in the 11-page opinion.“The SEC sensibly concluded that the text ‘does not provide for Commission jurisdiction over lawsuits initiated by and between private parties.’”

Flaum’s opinion was joined by Judges William J. Bauer and Daniel A. Manion.

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