The U.S. Securities and Exchange Commission (SEC or Commission) and its staff have recently taken several actions indicating closer scrutiny of fees charged by self-regulatory organizations (SROs) like national securities exchanges.1 For example, the SEC staff in the Division of Trading and Markets (TM) issued new guidance to national securities exchanges and other SROs regarding expectations for proposed changes to fees, including market data fees (TM Fee Guidance).2 Chairman Clayton also issued a statement clarifying that, as is always the case with staff guidance, the TM Fee Guidance reflects the view of the staff and is not a rule, regulation or statement of the Commission.3 A brief summary of the TM Fee Guidance and other notable actions in the area of SRO fees is provided below along with a discussion of related SEC regulatory initiatives that may soon follow.
Division of Trading and Markets Fee Filing Guidance
SROs generally file a proposed fee change with the SEC pursuant to authority under the Securities Exchange Act of 1934 (Exchange Act) providing that a proposed fee change becomes effective upon filing with the SEC, subject to the SEC’s authority to “temporarily suspend” the fee change within 60-days of filing.4 Fee filings are required to meet applicable statutory requirements including that the fees be: (i) reasonable, (ii) equitably allocated, (iii) not unfairly discriminatory, (iv) and do not unduly burden competition.5 SROs bear the burden of proof to demonstrate that their proposed fees, or changes to existing fees, meet these statutory requirements.6
In the TM Fee Guidance, the SEC staff stresses the need for a “plain English” description of the proposed fees and a clear articulation of whether the fees are “reasonable” based on an evaluation of whether the exchange is constrained by significant competitive forces under a “mark-based approach” to evaluating whether fees are consistent with the Exchange Act.7 The TM Fee Guidance sets forth several factors the Staff will consider when evaluating whether there are “significant competitive forces” constraining a fee.8
Where an SRO is not subject to, does not assert or cannot demonstrate that it is subject to “significant competitive forces,” a cost-based discussion may be an alternative basis upon which to show consistency with the Exchange Act. In such case, the TM Fee Guidance notes that an SRO should include in their fee filing quantitative rather than merely qualitative analysis.9 The TM Fee Guidance also makes clear that the SEC staff expects SROs to clearly specify in each fee proposal certain details that have not previously been expressly required.10
The staff further articulated that it expects SROs, in connection with their obligation to demonstrate that a fee does not unduly burden competition, to address both intramarket competition and intermarket competition. Discussion should focus in particular on how certain proposals do not unduly burden smaller broker-dealers.
Other Related Developments in SRO Fees
The TM Fee Guidance is merely the latest action by the SEC and its staff in the area of SRO fees. Over the last year, the following significant developments have occurred in this area:
- Transaction Fee Pilot – In December of 2018, the SEC adopted a transaction fee pilot to study the maker-taker pricing model (Transaction Fee Pilot) that predominates exchange fee models.11 A coalition of the three largest exchange groups—NYSE, Nasdaq and Cboe Global Markets—filed suit challenging the SEC’s authority to institute the Transaction Fee Pilot.12
- Market Data Fee Decision – The SEC issued the latest decision in multi-year dispute dating back to 2013 relating to certain exchange fee proposals relating to the provision of market data proposed by NYSE Arca, Inc. and Nasdaq Stock Market LLC (the Market Data Fee Decision).13 Specifically, the SEC set aside the challenged fees, finding that the exchanges had not met their statutory obligation to demonstrate that the fees were consistent with the Exchange Act.14 The SEC found that the exchanges had not adequately demonstrated that these fees are fair and reasonable and not unreasonably discriminatory.15
- Remanding 400 Challenges to Market Data and Market Access Fees – While the SEC was considering the dispute that led to the Market Data Fee Decision, Securities Industry and Financial Markets Association (SIFMA) and Bloomberg L.P. filed an additional 61 applications for review that challenged over 400 rule changes filed by national securities exchanges and plan amendments to National Market System (NMS) plans relating to market data.16 Without expressing a view as to the merits of these challenges, the SEC remanded these challenges back to the exchanges so that they can be considered in light of the SEC’s Market Data Fee Decision.17
- SEC Roundtable on Market Data and Market Access – The SEC hosted a roundtable discussion on market data and market access in October 2018. These discussions focused on, among other things, core market data infrastructure, the need and usefulness of core market data versus non-core market data, and governance considerations relating to the securities information processors (SIPs), which disseminate the core (i.e., consolidated top-of-book market data) from the exchanges. This roundtable may form the basis for future rulemaking by the SEC.
- Suspension of Exchange Fee Proposals – In at least three instances the SEC suspended the fee proposal of a self-regulatory organization.
- BOX Connectivity Fees – In July 2018, BOX Exchange LLC (BOX) filed a proposed rule change to establish certain connectivity fees and classify its high speed vendor feed connection as a port fee, ostensibly consistent with similar fees charged by other exchanges that the SEC previously allowed.18 The SEC staff, pursuant to delegated authority, suspended the proposal19 and eventually disapproved the proposed fee changes in February 2019.20 BOX has attempted to re-propose the same changes to its fees in several subsequent proposed rule filings and has filed a petition for review of the February 2019 disapproval order, which was granted on May 23, 2019.21
- MIAX Connectivity Fees – In August 2018, Miami International Securities Exchange LLC (MIAX) proposed certain increases to its connectivity fees, similar to those proposed by BOX,22 that also appeared to be in line with existing fees of other exchanges reviewed by the SEC.23 The SEC suspended this proposed rule change on September 17, 2018, noting a comment letter received on the proposal objecting to the Exchange’s alleged reliance on the fees of other exchanges to demonstrate that its fee increases are consistent with the Exchange Act.24 A day later on September 18, 2018, MIAX withdrew the initial proposal and reproposed the connectivity fee increases offering additional reasons to justify the fee increases under the Exchange Act, largely describing increased costs associated with supporting its network.25 Notwithstanding the additional justification provided by MIAX, the SEC suspended this filing on October 3, 2018, and instituted proceedings to determine whether to approve or disapprove the proposal.26 MIAX subsequently withdrew the filing.27 MIAX has similarly attempted to refile the proposed fee change on several occasions.
- OCC Capital Plan – On February 13, 2019, the SEC issued an order disapproving a proposed rule change regarding a capital plan and related fee structure for The Options Clearing Corporation (OCC). The SEC found that it had insufficient information to determine whether the capital plan was adopted in a manner consistent with OCC’s own rules. The SEC originally approved the proposed rule change in February 2016,28 but certain market participants sought judicial review, and the Court of Appeals for the D.C. Circuit remanded the case to the agency stating that the SEC inappropriately relied on the SRO’s analysis and assertions without independently considering whether the relevant Exchange Act criteria were met.29
These events, and the suspended exchange fee proposals in particular, appear to have spurred the SEC staff to issue the TM Guidance to clarify the SEC staff’s heightened expectations of SRO fee filings.
What Might Come Next: The Big Picture and Regulation NMS II
In a speech in March 2019, Brett Redfearn, TM Director, indicated that the staff is considering a number of policy initiatives relating to exchange fees, particularly relating to market data and market access.30 These initiatives, which might be called “Regulation NMS II,” could represent the first set of significant amendments to Regulation NMS since its adoption in 2005.31 These enhancements to Regulation NMS might include the following:
- Increased Transparency – The SEC might propose to increase required disclosures relating to the costs associated with providing market data and connectivity to exchanges. The SEC generally requires that fees relating to the market data generated by the SIPs to be tied to some form of cost-based standard,32 but exchange fee proposals need not be, subject to the TM Fee Guidance noted above which would require a discussion of an exchange’s costs where the exchange is not able to demonstrate that its subject to significant competitive forces.
- Amending SIP Governance Structures – The SEC might propose to add greater diversity to the governance structure of the SIPs by adding other types of market participants to the board of directors of the NMS Plans that oversee the SIPs. Currently, the governance structure includes only the exchanges and FINRA and do not include any broker-dealers or other market participants.
- Odd Lots – Odd-lot quotations account for the best bid or offer or both for approximately 75 percent of the trading day for stocks priced over $500. The SEC might propose to adjust the round lot size of more expensive securities (e.g., from 100 shares to 10 shares) and/or to include odd-lot information as part of core data more generally.
- Expanding Core Data to Include Depth-of-Book Data – The SEC might propose to include liquidity beyond the top of each market’s order book (i.e., depth of book) as part of core market data.
- Competing Consolidators – The SEC might propose to adopt a model whereby market data is aggregated by competing consolidators of such data and offered to market participants rather than continuing to use the existing SIP model in which there is a single consolidator of core market data.
Such proposals, if eventually adopted, would substantively impact what the exchanges may charge market participants and the services market participants stand to receive, particularly with respect to market data. For now, exchanges are likely to face significantly greater scrutiny with respect to all of their fee filings, even when they are replicating a fee currently charged by another exchange.
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