By Rodney F. Tonkovic, J.D.
A joint amicus brief has been filed by several securities industry organizations and exchanges supporting the SEC's reforms to the market data system. The amici maintain that the present governance of the data plans distorts the markets and interferes with the distribution of and access to information. The brief is meant to give the court the benefit of the amici's experience and to inform it as to how the order at issue would better align the system with the Congressional mandate. The amici are the Council for Institutional Investors, the Securities Industry and Financial Markets Association, Inc., Investors' Exchange LLC, and MEMX LLC (The Nasdaq Stock Market LLC v. SEC, January 15, 2021).
Order to draft plan. In May 2020, the SEC issued an order directing the exchanges and FINRA to draft a new national market system plan (NMS plan) with a modernized governance structure for the production of public consolidated equity market data and the dissemination of trade and quote data from trading venues. The new plan would replace the existing, decades-old, tiered system in which consolidated public data feeds are distributed through three equity data plans. At minimum, the new plan must provide for the orderly transition of functions and responsibilities from the three existing equity data plans and allow voting on plan matters by representatives of non-SRO actors in the nation’s stock markets, such as institutional investors and retail investors.
In October 2020, the Commission published a notice seeking comments on a proposed plan filed by the equity exchanges and FINRA. The new plan would take the form of a limited liability company agreement for a new Delaware limited liability company, CT Plan LLC, and be made up of any registered national securities exchange or national securities association.
Challenge to the order. Some of the SROs behind the proposed plan have challenged the Commission's order. In June 2020, Nasdaq Stock Market, Nasdaq BX, and Nasdaq PHLX petitioned the D.C. Circuit to review the SEC's order while asking the Commission to stay its order pending the final resolution of the case. The exchanges argue that the Commission's promulgation of the order is not in accordance with the law because, among several other reasons, the securities laws do not permit the SEC to grant persons or entities other than SROs voting power on the operating committee of a national market system plan.
Brief takes SEC's side. In asking the court to deny the petition, the brief argues that the reforms are necessary because the existing system, which has changed little over the past 40 years despite many changes in the market structure over time, is flawed. The exchanges now sell proprietary data feeds that are more complete and delivered more quickly than the consolidated data, and the exchanges, as for-profit enterprises, have conflicts of interest with the goal of the data plan, the amici say. In addition, the current payment process for the public data is "onerous" and lacking transparency. For example, pricing is determined in part through audits of subscribers' usage that are run by the plan administrators and are expensive and time-consuming.
Next, the amici argue that the primary cause of the current problems with market data is conflicts of interest inherent in the governance of the plans. As noted above, the major exchanges have an interest in maintaining a status quo in which their proprietary data products are superior to the publicly-disseminated feeds. And, the major exchanges currently have the voting power to dominate the administration of the plans. The petitioners, the amici state, have never explained how their regulatory obligations as SROs can be expected to ensure that their exclusive administration of the data plans will override their obvious conflicts of interest. As a result, non-SRO voting rights are essential, the brief argues, and the plan administrator must be independent.
Finally, the brief affirms that the SEC's order is consistent with its statutory authority under Exchange Act Section 11A. The brief points specifically to the petitioners' argument that the Commission cannot mandate non-SRO participation in data plan governance. The fact that Section 11A authorized the SEC to require the SROs to act jointly with respect to the national market system does not exclude the involvement of non-SROs, and the court should not accept so narrow a reading, the brief contends.
The case is No. 20-1181.