Opinion ID: 6105520
Heading Depth: 2
Heading Rank: 2

Heading: Failure to Consider Effect Upon Competition

Text: ICE contends the Final Order was arbitrary and capricious because the SEC failed to consider whether the Order would “promote efficiency, competition, and capital formation.” See 15 U.S.C. § 78c(f). Although the Final Order thoroughly discusses the effect the proposed rules would have upon IDS’s competitors, it did not, ICE maintains, respond to the argument that subjecting the Wireless Connections to SEC oversight would hamper IDS’s ability to compete efficiently. 23 As the SEC correctly points out, however, this argument conflates two distinct questions: (1) whether an organization is one the Congress decided ought to be subjected to the ruleapproval process, and (2) whether the SEC ought to approve a particular rule proposed by an SRO. The provision ICE cites in support of its argument deals with the latter question, as it speaks of the SEC’s duties “in the review of a rule of a selfregulatory organization.” Id. It is thus of a piece with Section 6(b), which requires that rules of an exchange must “provide for the equitable allocation of reasonable dues, fees, and other charges,” “promote just and equitable principles of trade,” and not “impose any burden on competition not necessary or appropriate in furtherance of the purposes of [the Securities Exchange Act].” Id. § 78f(b)(4), (5), (8). That the SEC is required to consider all this when reviewing a rule proposed by an SRO has nothing to do with whether that SRO is subject to the rule-approval process in the first place. The SEC is not tasked with deciding whether subjecting an organization to the rule-approval process would burden its ability to compete. That decision was made by the Congress: Because the Wireless Connections satisfy the statutory definitions in Sections 3(a) and (b), its rules must be filed with and approved by the SEC — full stop. C. Consistency with SEC Regulations and Prior Orders ICE argues that the Final Order is unlawful because it contradicts SEC regulations defining “exchange.” ICE further argues that the Final Order was arbitrary and capricious because it departed from agency precedent without acknowledging and explaining its change of position. These arguments are meritless. 24
An SEC regulation defining the terms used in Section 3(a)(1) provides: An organization, association, or group of persons shall be considered to constitute, maintain, or provide “a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange,” as those terms are used in section 3(a)(1) of the Act, (15 U.S.C. 78c(a)(1)), if such organization, association, or group of persons:
securities of multiple buyers and sellers; and
methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade. 17 C.F.R. § 240.3b-16(a)(1)-(2). The Wireless Connections do not process orders from buyers and sellers, let alone establish methods for such orders to interact with each other. Therefore, ICE argues, the Final Order ignored this regulation in concluding that the Wireless Connections are subject to the jurisdiction of the SEC as facilities of an exchange. 25 The cited regulation has no bearing upon this case; it merely describes characteristics an exchange as a whole — that is, the group of persons that together constitute an exchange — must have. Not every part of an exchange, nor every person that is part of a group that constitutes an exchange, must have all these characteristics. That the Wireless Connections lack these characteristics, therefore, does not preclude their being regulated as part of an exchange. ICE also points to a regulation providing that merely “[r]out[ing] orders to a national securities exchange” does not make something an exchange. 17 C.F.R. § 240.3b-16(b)(1). This is a red herring. The SEC held not that the Wireless Connections are exchanges because they route orders to a national security exchange but that they are included in the statutory definition of exchange because they are part of a group of persons that together perform and facilitate exchange functions going far beyond merely routing orders.
adequate explanation ICE also argues that in concluding the Wireless Bandwidth Connection and the Wireless Data Connection are subject to its jurisdiction, the SEC departed from two agency precedents without providing a reasoned explanation. The first precedent to which ICE points is a 2007 order that dealt with a “neutral communications service that allow[ed] Nasdaq members and non-members to route orders to one another.” Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, to Remove Provisions Governing the Operation of the ACES System, 72 Fed. Reg. 46118 (Aug. 2007). The SEC held the system was not a “facility” within the meaning of the Exchange Act: “the . . . system is not linked 26 with the Exchange’s core systems” and “[i]t is not possible for an order to be routed to the Nasdaq Market Center via the . . . system.” Id. at 46119. The same points, ICE argues, describe the Wireless Bandwidth Connection and the Wireless Data Connection. Therefore, the argument goes, the SEC was obligated to acknowledge the 2007 Order and either follow it or explain its reason for departing from it. This argument fails because, as the SEC points out, the 2007 Order, which the petitioners never cited in their filings with the Commission, did not purport to set forth a rule that a “facility” must be linked directly to an exchange. The lack of a direct connection was significant in that case because the system under review merely routed orders between broker-dealers, making it easier for them to fulfill their best-execution obligations. Neither of the Wireless Connections involves the mere routing of orders between broker-dealers, so the 2007 Order is simply irrelevant. ICE’s second example of a purported departure from precedent involves a 2008 Order regarding an index dissemination service through which the Nasdaq calculated and disseminated index information based upon publicly available data. Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving Proposed Rule Change as Modified by Amendment Nos. 1 and 2 Thereto to Remove from Rule 7019 the Fees for Receiving Index Values, 73 Fed. Reg. 66952 (Nov. 2008). Although that service is unlike either of the Wireless Services, ICE points to the following wording in the 2008 Order: “If, however, Nasdaq were to propose to tie pricing for the index dissemination service to exchange services . . . Nasdaq would have to file a proposed rule change with the Commission.” Id. at 66953. Based upon this snippet, ICE argues the Final Order here under review departed from agency precedent by holding the Wireless Connections are 27 “facilities” even though their pricing is not in any way tied to “exchange services.” There is nothing to this argument either. In the 2008 Order, having concluded that the index dissemination service was not a “facility,” the SEC unremarkably pointed out that the service might be one if the Nasdaq were later to tie its pricing to a service that is a “facility.” That has nothing to do with our case, in which the SEC determined the Wireless Connections independently come within the definition of “facility” and are themselves properly characterized as “exchange services.”