D.C. Circuit Vacates SEC Pilot Program for NMS Stocks

The U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") granted a petition for review and vacated SEC Rule 610T of Regulation NMS ("National Market Systems") and a related "Pilot Program" designed to test the effects of certain fees and rebate pricing models on the market.

As previously covered, SEC Rule 610T established a "Pilot Program" that created two test groups of national securities exchanges. Under the Pilot Program, one group of exchanges was barred "from offering rebates and linked pricing" under the current transaction fee cap of $0.0030, and the other group was limited to a transaction fee cap of $0.0010. The SEC intended the Pilot Program to collect data on the fees charged and rebates provided to broker-dealers to inform the SEC as to potential future regulatory actions regarding the NMS.

In the Petition, the NYSE, and other exchanges, argued that the SEC is not authorized to amend the regulatory standards applicable to publicly traded securities transactions for the purpose of studying their impact on the securities market. The petitioners asserted that Rule 610T "cannot survive review" since (i) the SEC did not determine the effects of Rule 610T with regard to efficiency, competition, and capital formation; (ii) Rule 610T is discriminatory against certain securities exchanges; and (iii) the SEC did not "meaningfully consider" alternatives to Rule 610T.

Granting the petition for review and vacating the rule, the D.C. Circuit stated that the "SEC acted without delegated authority from Congress when it adopted Rule 610T." The Court stated that "[n]othing in the [SEC's] rulemaking authority authorizes it to promulgate a 'one-off' regulation like Rule 610T merely to secure information that might indicate to the SEC whether there is a problem worthy of regulation."

The case was remanded to the SEC for further proceedings consistent with the D.C. Circuit opinion.