SEC’s Pilot Program Struck Down by DC Circuit

For years there has been a debate regarding the fee caps the Commission adopted in 2005 and the impact of the maker-taker business model. Academics and industry participants have debated if the fee cap remains appropriate. They have also debated about the propriety of the maker-taker model – fees being paid in connection with liquidity – and if it frustrates the intent of Congress and the goal of having a national market system.

In an effort to collect data on the problem the Commission adopted Exchange Act Rule 610T, a Pilot Program. Under the program the agency assigned 1,460 randomly selected stocks into one of two test groups. Half of the stocks were subject to a fee cap that represented a reduction in the cap imposed by the SEC in 2005. Stocks in the other group were prohibited from paying rebates to broker-dealers who send orders to the exchange for execution. All other publicly traded stocks were the control group.

Rule 610T was adopted in mid-December 2018. Petitioner New York Stock Exchange filed suit. The complaint alleged that the Commission had exceeded its statutory authority. The Court agreed. New York Stock Exchange LLC v. Securities and Exchange Commission, No. 19-1054(D.C. Cir. Decided June 16, 2020).

The key here is the Supreme Court’s decision in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984). Under that decision a precondition to deference is a congressional delegation of administrative authority – no delegation, no deference. In this context, ambiguity is not a delegation and not entitled to deference.

The Commission claimed that it has rule making authority under Section 23(a) of the Exchange Act. That Section in part empowered the Commission “to make such rules and regulations as may be necessary or appropriate to implement the provisions . . .” of the Act. The Section also provides that the agency “shall not adopt any . . . rule or regulation which would impose a burden on competition not necessary or appropriate in furtherance of the purpose . . .” of the Act.

While there is no doubt that the SEC has rule making authority under Section 23(a) that does not mean it has delegated authority to adopt a particular regulation. At issue here is the Commission’s adoption of the Pilot Program without any regulatory agenda – there was no problem to correct with the rule. Yet it is clear that the proposed program will impose significant burdens. While the Commission claims that the program is designed to “shock” the market and develop valuable information, it is beyond dispute that the agency has never adopted such a rule. The Commission claim that the rule is reasonably related to the Act, is not sufficient. There is simply nothing in the Exchange Act that permits the SEC to adopt what it admits is a “one off” program.

“Normally, unless an agency’s authorizing statute says otherwise, an agency regulation must be designed to address identified problems” the Court stated. This is because “Rules are not adopted in search of regulatory problems to solve; they are adopted to correct problems with existing regulatory requirements that an agency has delegated authority to address.” This is not the case here.

Finally, the Commission also claim that it had implied authority to adopt Rule 610T misses the mark. The argument is based on a confused interpretation of cases involving the question of implementing an experimental initiative. That is not what happened here. To the contrary, the “problem in this case is that the Commission acted in excess of its authority under the Exchange Act. It adopted the Pilot Program without any regulatory agenda . . . without explaining what problems with the existing regulatory requirements it meant to address . . . [and] significant, costly, and disparate regulatory requirements on only a subset of the securities market just to gather data.” This, the Court concluded is not permissible. The Petition for Review was granted.

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