Stock Exchanges Win Fight Against SEC Over Trading Fees

Traders work on the floor of the New York Stock Exchange on March 16, 2020. (AP Photo/Craig Ruttle)

WASHINGTON (CN) — The D.C. Circuit sided with stock exchanges Tuesday, ruling that the Securities and Exchange Commission can’t order them to stage a trading fee experiment that would study brokers’ trading tendencies.

The case centers around the three major U.S. stock exchange groups – the New York Stock Exchange, Nasdaq and Cboe Global Markets – and their opposition to a so-called “transaction fee pilot” rule, first suggested in 2017 by a group of SEC-appointed market experts. The trio united to sue their federal regulator roughly a year and a half ago.

The contested SEC rule involves randomly selecting 1,460 stocks to be part of two test groups to gather data on the potential harm investors may suffer as a result of rebate payments made from the stock exchange to brokers, which critics have argued incentivize brokers to chase the biggest rebates for themselves rather than the biggest profits for their clients.

The first test group would have low, capped transaction fees and the second would not allow the rebates for brokers. The other publicly traded stocks would be put in a control group, the SEC proposed.

The SEC said it had the authority to conduct this experiment under the Securities Exchange Act of 1934, which allows it to oversee the secondary trading of U.S. securities.

But on Tuesday, a three-judge panel of the D.C. Circuit agreed with the stock exchanges, which argued that the Securities Exchange Act “does not authorize the commission to change the regulatory standards applicable to transactions in publicly traded securities simply to determine the impact of those new standards on the securities market.”

“This was an unprecedented action that clearly exceeded the SEC’s authority under the Exchange Act,” Senior U.S. Circuit Judge Harry Edwards, a Jimmy Carter appointee, wrote for the court. “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.”

Edwards was joined on the unanimous panel by Senior U.S. Circuit Judge David Sentelle, a Ronald Reagan appointee, and U.S. Circuit Judge Cornelia Pillard, appointed by Barack Obama.

The Equity Markets Association applauded the ruling in a statement sent to Courthouse News by a Nasdaq representative Tuesday.

“For the second time in as many weeks, a federal court has found the SEC to have exceeded its authority,” the group said. “The transaction fee pilot was a mistake that if put into place would have brought many unknown consequences for the investing public and the companies that list on the exchanges. There are better, less harmful and less costly solutions we can enact to improve our markets.”

Judge Pillard penned a concurring opinion, in which she stated that although the SEC acted without declaring the problem it was trying to fix in this case, she believed it “came very close to acting within its compass.”

“As part of the oversight of the markets,” Pillard wrote, “the commission has an obligation to ensure the existing regime is not harming investors. The potential problems with the current fee structure are apparent from the face of record.”

If, on remand, the SEC wishes to continue with the pilot program, Pillard said it must lay out the problem the experiment seeks to address and state why “it has grounds to believe continuing the status quo will do more harm than good.”

A representative from the SEC’s Office for General Counsel did not immediately return a call seeking comment Tuesday.

Gibson Dunn attorney Thomas Hungar, who argued on behalf of the stock exchanges in the appeals court, did not immediately return an email request for comment.

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