Davis Polk achieved a significant victory this week for its client, the New York Stock Exchange (“NYSE”), in a dispute between the three largest U.S. stock-exchange groups and the Securities and Exchange Commission (“SEC”) regarding a pilot program planned by the SEC known as the Transaction Fee Pilot (“TFP”).

The SEC approved the TFP in a December 2018 final rule, explaining that the TFP would test the impact of restricting the amount of transaction fees and rebates that national securities exchanges could charge or offer for transactions in particular securities. The exchange groups sued in February 2019 to block the program, arguing (among other points) that the Exchange Act did not authorize the SEC to change the regulatory standards applicable to transactions in publicly traded securities simply to determine the impact of those new standards on the securities market. In March 2019, the SEC granted in substantial part Davis Polk’s petition for a stay on behalf of NYSE to delay implementation of the TFP pending the resolution of the stock exchange group’s petition in the D.C. Circuit.

On June 16, 2020, the D.C. Circuit held that—as argued by the exchange groups—the SEC did not have the necessary delegated authority from Congress to enact the TFP, and therefore failed under Chevron step one. The three-judge appellate panel rejected the SEC’s contention that it properly passed the rule under its Exchange Act Section 23(a) rulemaking authority. The D.C. Circuit concluded the TFP did not meet the requirements of Exchange Act Section 23(a)(2) because the SEC had failed to show that the TFP imposed a necessary or appropriate burden on competition in furtherance of the purposes of the Exchange Act.

In its opinion, the D.C. Circuit also took issue with the SEC’s adoption of the TFP without a clear regulatory agenda. The D.C. Circuit referenced the SEC’s statements that the TFP was a one-year pilot intended to “shock the market” for the purposes of data collection and the SEC’s concession that the TFP may cause greater harm than benefit. The D.C. Circuit ruled that “[n]othing in the Commission’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 Davis Polk litigation team included partners Paul S. Mishkin and Howard Shelanski, counsel Matthew A. Kelly and associates Daniel S. Magy and Brett J. Workman. The Financial Institutions Group team included partner Annette L. Nazareth and counsel Zachary J. Zweihorn. Members of the Davis Polk team are based in the New York and Washington DC offices.