The D.C. Circuit was asked in  Nasdaq Stock Market, LLC vs. Securities and Exchange Commission, 2020 WL 3023116, to consider whether fees that national securities exchanges charges for access to the “depth-of-book” data violate the Securities Exchange Act of 1934 (“Exchange Act”). It held that Section 19(d) of the exchange act is not available as a means to challenge the reasonableness of generally-applicable fee rules.

The rule changes at issue here involved “depth-of-book” data, which “consists of outstanding limit orders to buy stock at prices lower than, or to sell stocks at prices higher than, the best prices on each exchange.” Id. at 2. This data “allows a trader to gain background information  about the ‘liquidity’ of a security on a particular exchange, i.e. the degree to which his total sale or purchase price will differ from what he would receive  if the entire trade were made at the prevailing best prices.” Id.  The Commission made Section 19(d) of the Exchange Act available to parties seeking review of unreasonable fees charged for market data and gave the courts judicial review by explaining that “if unreasonable fees constitute a denial of ‘access to services’ under section 19(d), the court has authority to review such fees.”  Id.  The relevant text reads as follows:

First, Section 19(d)(1) reads:

If any [SRO] imposes any final disciplinary sanction on any member thereof or participant therein, denies membership or participation to any applicant, or prohibits or limits any person in respect to access to services offered by such organization or member thereof or if any [SRO] ... imposes any final disciplinary sanction on any person associated with a member or bars any person from becoming associated with a member, the [SRO] shall promptly file notice thereof with the appropriate regulatory agency for the [SRO] and (if other than the appropriate regulatory agency for the [SRO] ) the appropriate regulatory agency for such member, participant, applicant, or other person. The notice shall be in such form and contain such information as the appropriate regulatory agency for the [SRO], by rule, may prescribe as necessary or appropriate in furtherance of the purposes of this chapter. 15 U.S.C. § 78s(d)(1).

Second, Section 19(d)(2) allows for Commission review of an exchange’s action under Section 19(d)(1):

Any action with respect to which a[n] [SRO] is required by [Section 19(d)(1) ] of this subsection to file notice shall be subject to review by the appropriate regulatory agency for such member, participant, applicant, or other person, on its own motion, or upon application by any person aggrieved thereby filed within thirty days after the date such notice was filed with such appropriate regulatory agency and received by such aggrieved person, or within such longer period as such appropriate regulatory agency may determine. Id. § 78s(d)(2).

In its opinion, the D.C. Circuit reasoned that it is “conceivable that a fee may act as a ‘limit’ on access to services under Section 19(d). But not every fee is, by mere virtue of being a fee, is challengeable as a ‘limit’ on access to exchange services under Section 19(d).”  Id. at 4. Rather, the D.C. Circuit held, “for a fee rule to be challengeable under Section 19(d), it must, at a minimum, be targeted at specific individuals or entities.” Id. The Court reached this conclusion by looking at the text and the structure of the Exchange Act. First, the court held that the text of Section 19(d) does not evidence an intent by Congress to allow challenges to generally applicable fee rules because it make not mention of fees at all. Id. The court went further to say that  even assuming that some fees are challengeable under section 19(d, the text indicates that they must as least be targeted at specific people because section 19(d) speaks to “limits [on] any person with regard to accessing the SRO’s services. Id. at 5; See 15 U.S.C. § 78s(d)(1) (emphasis added) .

Next, the D.C. Circuit examined the structure of the Exchange Act and held that allowing Section 19(d) to be available as a means of challenging the reasonableness of generally-applicable rules would be unworkable with the Act’s filing requirements and incompatible with statutory remedies. To the first point, “if [the court] construed the statute to mean that every generally-applicable fee rule could be a “limit[ation]” on “access to services,” an exchange would be required to provide notice to every person to whom the fee could conceivably apply, potentially including those who have not previously purchased but might be considering the depth-of-book products affected. Providing such individual notice seems nonsensical and likely impossible.” Id. at 6. Under Section 19(f), if the Commission concludes that an SRO’s Section 19(d) limitation violates the Exchange Act, the Commission must provide a two-part remedy. First, it must “set aside the action” of the SRO. 15 U.S.C. § 78s(f). Second, it must “grant [the aggrieved] person access to [the SRO’s] services.” Id. This second part is where the Commission runs into trouble.  As to the statutory remedies, the court held that “Commission cannot ‘grant access’ to all individuals affected by the fee increase. That is so because the Commission required no evidence that the fee increase actually limited any entities’ access to the Exchanges’ services.” Nasdaq, at 6.

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