Chicago Board Options Exchange v. SEC

• Court: Court of Appeals for the Seventh Circuit
• Decided: May 7, 2018
• Docket: 16-3423
• Status: Published

Opinion

In the

United States Court of Appeals For the Seventh Circuit ____________________ No. 16-3423 CHICAGO BOARD OPTIONS EXCHANGE, INC. Petitioner, and

NASDAQ OMX PHLX, LLC, Intervening Petitioner,

v.

SECURITIES AND EXCHANGE COMMISSION, Respondent, and

CITADEL SECURITIES, LLC, et al. Intervening Respondents. ____________________

Petition for Review of an Order of the Securities and Exchange Commission. No. 3-17189 ____________________

ARGUED MARCH 29, 2018 — DECIDED MAY 7, 2018 ____________________

Before BAUER, FLAUM, and MANION, Circuit Judges. 2 No. 16-3423

FLAUM, Circuit Judge. In Citadel Securities, LLC v. Chicago Board Options Exchange, Inc., we held that “the district court did not abuse its discretion in dismissing [the] case [of certain securities firms] for failure to exhaust administrative reme- dies.” 808 F.3d 694, 701 (7th Cir. 2015) [hereinafter Citadel I]. Following that decision, the securities firms filed a petition before the Securities and Exchange Commission (“SEC” or “Commission”) seeking damages from various securities ex- changes for improper fees. The SEC dismissed that petition for lack of jurisdiction. The securities exchanges now appeal that order. We affirm. I. Background Following our decision in Citadel I,1 certain securities firms (the “Market Makers”)2 filed a petition with the SEC. The pe- tition alleged that over a ten-year period the Chicago Board

1 We laid out the full history of this litigation in Citadel I. See 808 F.3d at 697–98. For purposes of this appeal, we focus primarily on the events subsequent to our decision in that case, providing additional background as necessary. 2 A “market maker” is a “broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to fa- cilitate trading in that security.” Jaclyn Freeman, Note, Limiting SRO Im- munity to Mitigate Risky Behavior, 12 J. on Telecomm. & High Tech. L. 193, 214 n.174 (2014) (citation omitted). “[M]arket makers create liquidity by being continuously willing to buy and sell the security in which they are making a market.” Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 268 (3d Cir. 1998) (en banc). Relevant to this appeal, the Market Makers include: Citadel Securities, LLC; Ronin Capital, LLC; Susque- hanna Securities; and Susquehanna Investment Group. No. 16-3423 3

Options Exchange and Nasdaq (the “Exchanges”)3 “mis- charged the Market Makers potentially millions of dollars.” Specifically, the Market Makers claimed that the Exchanges improperly imposed fees under Payment for Order Flow (“PFOF”) programs.4 The petition requested that the Com- mission compel the Exchanges to (1) “provide a full account- ing” of the fees wrongly charged; and (2) award damages in that amount, or in the alternative, order disgorgement of the improperly charged fees. On April 1, 2016, the SEC ordered briefing as to whether it had jurisdiction to review the Market Makers’ petition. The Market Makers argued the “the Commission ha[d] no statu- tory authority to exercise jurisdiction over this matter.” The

3 The Exchanges are both national securities exchanges registered with the SEC. They operate as self-regulatory organizations (“SROs”) and regulate markets in conformance with securities laws under the Exchange Act. See Citadel I, 808 F.3d at 697. 4 As we explained in Citadel I: PFOF is an arrangement by which a broker receives payment from a market maker in exchange for sending order flow to them. These fees are imposed to attract order flow to a market, thereby increas- ing liquidity in that market. [The Exchanges] impose[] PFOF fees on a market maker when a trade is made for a “customer”; how- ever, these fees are not imposed for proprietary “house trades,” where a firm trades on its own behalf. [The Exchanges] have adopted rules creating the PFOF programs, as required under the Exchange Act. According to the SEC, the rules creating the PFOF programs are “designed to ensure that market makers that may trade with customers on the exchange contribute to the cost of attracting that order flow.” 808 F.3d at 697 (quoting Competitive Developments in the Options Mar- kets, 69 Fed. Reg. 6,124, 6,129 (Feb. 9, 2004)). 4 No. 16-3423

Exchanges, citing our decision in Citadel I, maintained the SEC had jurisdiction under Section 19(h)(1) of the Securities Ex- change Act (the “Exchange Act”) and the SEC’s Rules of Prac- tice because the petition sought a determination that the Ex- changes had violated their own rules. The SEC acknowledged our conclusion in Citadel I that “the plain language of the Ex- change Act calls for SEC review of plaintiffs’ allegations of im- proper PFOF Fees,” see 808 F.3d at 699, but nevertheless held that it lacked jurisdiction over the Market Makers’ petition. First, the SEC explained that Section 19(d) of the Exchange Act, which authorizes it to review allegations that a national exchange has unduly “prohibit[ed] or limit[ed] … access to services,” see 15 U.S.C. § 78s(d)(1), did not apply to the Market Makers’ petition. It determined that the petition did not allege that the Exchanges had denied or limited access to any ser- vice. It also stated that even if it had alleged such a claim, the petition sought damages, which was “incongruous with” the SEC’s remedial authority under Section 19(d). Second, the SEC declined to exercise jurisdiction over the petition under Section 19(h)(1). That provision permits the SEC to take regulatory action against an exchange when “in its opinion such action is necessary or appropriate in the pub- lic interest, for the protection of investors, or otherwise in fur- therance of the purposes of [the Exchange Act].” Id. § 78s(h)(1). The SEC reasoned that this text “exclusively au- thorizes … the Commission, in its discretion, to commence an administrative disciplinary action against an [exchange],” but “does not authorize claims by private parties.” The SEC also determined that the provision only authorizes it “to suspend and/or impose limitations upon [an exchange] …, not to No. 16-3423 5

award damages.” Because the Market Makers are private par- ties seeking damages, the SEC held that it lacked jurisdiction under Section 19(h)(1).5 Next, in response to our statement in Citadel I that “sec- tions of the Exchange Act explicitly provide for monetary penalties,” see 800 F.3d at 701, the SEC concluded that the Ex- change Act said nothing about its power to award damages in private actions. It noted that it was permitted to impose civil penalties and seek disgorgement under certain sections of the Act, but clarified that “civil money penalties … are not dam- ages.” Because it determined that the Market Makers’ petition did not initiate a proceeding under any Exchange Act provi- sion that permitted money penalties, it held it could not “pro- vide ‘monetary compensation’ to the Market Makers.” Finally, the SEC noted that the mere fact that the dispute involved a rule overseen by the Commission did not provide it jurisdiction. As it explained, “[t]hat the fees at issue were imposed pursuant to rules subject to Commission review does not make the Commission the arbiter of any and all dis- putes about such fees or rules.”

5 The SEC further reasoned that even if it was “to commence a liti- gated proceeding under Section 19(h)(1), that litigation would not be an adversarial proceeding between the Market Makers and the Exchanges.” It explained “[t]he parties to the proceeding would be the Exchanges and our Division of Enforcement, which would pursue claims against them, and the case initiating document would be our order instituting proceed- ings, not the Petition that the Market Makers have filed.” 6 No. 16-3423

The CBOE appealed the SEC’s order to this Court, and the Market Makers and Nasdaq intervened pursuant to Federal Rule of Appellate Procedure 15.6 II. Discussion A. Standing and Jurisdiction 15 U.S.C. § 78y(a)(1) provides that “[a] person aggrieved by a final order of the Commission entered pursuant to [the Exchange Act] may obtain review of the order” by filing a pe- tition within sixty days in the appropriate United States Court of Appeals. The Market Makers argue that the SEC’s July 2016 order did not “aggrieve” the CBOE and thus it has no stand- ing to bring this appeal. We disagree. “A party is ‘aggrieved’ by an order if the order results in an ‘adverse effect in fact.’” Richards v. NLRB., 702 F.3d 1010, 1014 (7th Cir. 2012) (quoting Harrison Steel Castings, Co. v. NLRB, 923 F.2d 542, 545 (7th Cir. 1991)); see also Aggrieved, Black’s Law Dictionary (10th ed. 2014) (defining “aggrieved” as “having legal rights that are adversely affected; having been harmed by an infringement of legal rights”). “‘As long as a charging party … gets less than he requested,’ he is … ag- grieved ….” Oil, Chem. & Atomic Workers Local Union No. 6-418 v. NLRB, 694 F.2d 1289, 1294 (D.C. Cir. 1982) (per curiam) (al- teration in original) (footnote omitted) (quoting Chatham Mfg. Co. v. NLRB, 404 F.2d 1116, 1118 (4th Cir. 1968)).

6 Shortly after the Commission dismissed their petition, the Market Makers filed a third complaint in state court, again alleging that the Ex- changes improperly charged them PFOF fees. The Exchanges removed that action to a federal district court, which stayed the action pending the resolution of this appeal. No. 16-3423 7

Here, the SEC’s decision results in an “adverse effect in fact” for the Exchanges. The Exchanges affirmatively re- quested the SEC to exercise jurisdiction over the petition. The SEC did not do so. In other words, the Exchanges got “less than [they] requested.” See id. Thus, the CBOE is an “ag- grieved party” and we have jurisdiction. B. SEC Jurisdiction Over the Petition We turn next to the central issue on appeal: whether the SEC has jurisdiction over the Market Makers’ petition. The parties disagree about whether we must defer to the SEC’s de- cision that it lacks jurisdiction under the Exchange Act. “When a court reviews an agency’s construction of the statute it administers, it is confronted with two questions.” Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842 (1984). First, always, is the question whether Congress has directly spoken to the precise question at is- sue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly ad- dressed the precise question at issue, … the question for the court is whether the agency’s answer is based on a permissible construction of the statute. Id. at 842–43 (footnotes omitted). This deference is applicable to “an agency’s determination of its own jurisdiction.” City of Arlington, Tex. v. FCC, 569 U.S. 290, 297, 305 (2013) (calling the 8 No. 16-3423

idea that an agency’s interpretation as to the scope of jurisdic- tion receives no deference a “misconception”). We must first determine the “precise question” at issue. The SEC and Market Makers frame the issue as whether the Act grants the Commission jurisdiction to resolve a private- party dispute requesting the repayment of improper PFOF fees. The Exchanges frame the issue as whether the Act grants the SEC jurisdiction to determine whether an Exchange has violated its rules. We agree with the SEC and Market Makers’ framing of the precise issue. The formulation urged by the Exchanges—that this is a determination about whether the Exchanges violated their own rules—is overly simplistic. By stating the issue solely in terms of the underlying violation, the Exchanges fail to account for the parties involved or the relief sought. Fur- thermore, they ignore the very reason why the SEC deter- mined it lacked jurisdiction. As the Commission explained, “the Petition alleges, in effect, a billing dispute” between two private parties, and it requests the SEC order the Exchanges to “pay damages to the Market Makers” for improperly charging them fees under their PFOF programs. Thus, the precise question before the SEC was whether it had jurisdic- tion over a petition brought by private parties seeking dam- ages for an alleged rule violation. That is narrower than simply asking whether the Exchanges violated their own rules. The Exchange Act does not speak to whether the SEC can adjudicate such a private party “billing dispute” seeking damages. Section 19(h)(1)’s authority to institute proceedings against an exchange for rule violations is entirely discretion- No. 16-3423 9

ary and contains “no mention of damages or restitution.” Cit- adel I, 808 F.3d at 701. Section 19(d) is similarly unhelpful. While it allows the SEC to adjudicate claims between two par- ties where a “person aggrieved” files a petition challenging the exchange’s conduct, see 15 U.S.C. § 78s(d)(2), that author- ity extends only to limited circumstances not applicable here.7 Finally, while the Act permits the SEC to impose civil penal- ties and disgorgement, it says nothing about the SEC’s author- ity to issue money damages. Because the Exchange Act does not speak to this issue, we consider whether the SEC’s interpretation of the statute is rea- sonable. Chevron, 467 U.S. at 844. If so, we must accept it. Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005) (“If a statute is ambiguous, and if the imple- menting agency’s construction is reasonable, Chevron requires a federal court to accept the agency’s construction of the stat- ute, even if the agency’s reading differs from what the court believes is the best statutory interpretation.”). The SEC determined that neither Section 19(h)(1) nor Sec- tion 19(d) provide it jurisdiction over the petition. We believe such a finding is reasonable. First, Section 19(h)(1) provides the Commission only with discretionary authority to conduct an enforcement proceeding and sanction an exchange for a rule violation. The SEC sensibly concluded that the text “does not provide for Commission jurisdiction over lawsuits initi-

7 The SEC can, for instance, review a national exchange decision that “imposes any final disciplinary sanction on any member …, denies mem- bership or participation to any applicant, or prohibits or limits any person in respect to access to services offered by such organization or member thereof.” 15 U.S.C. § 78s(d)(1). 10 No. 16-3423

ated by and between private parties.” Second, the SEC reason- ably found Section 19(d) did not provide it with jurisdiction because the Market Makers’ petition did not seek relief under that provision, nor allege any limitation or prevention of ac- cess to services. The petition sought only an accounting of im- proper fees and a refund of those fees, which are not cogniza- ble claims under Section 19(d).8 The Exchanges argue the SEC’s holding is unreasonable because it conflicts with our decision in Citadel I. We disagree. In Citadel I, we held that the district court did not abuse its discretion in finding the Market Makers had not exhausted their administrative remedies. 808 F.3d at 701. We merely con- cluded that the Market Makers “ha[d] not clearly shown that the SEC’s administrative procedure is futile or inadequate.” Id. at 700 (emphasis added). Critically, however, we empha- sized that “[w]e [could] envision situations in which reliance on administrative remedies would be clearly futile and SEC review might not be required, but plaintiffs [had] not convinced us that this is such a case.” Id. (emphasis added). Thus, our state- ment that “the plain language of the Exchange Act calls for SEC review of plaintiffs’ allegations of improper PFOF fees,” see id. at 699, must be read in the context of that limited hold- ing. Given the posture of the case, our holding addressed only the broad strokes of the Exchange Act in relation to PFOF rule violations, and not, as the Exchanges would have us believe, the particular nuances of SEC jurisdiction over specific peti- tions before the Board. In short, our opinion in Citadel I does

8 Moreover, as the SEC noted, the petition would be time-barred be- cause a party must appeal under Section 19(d) within thirty days. The Market Makers learned that the fees were mischarged in 2012, but only filed their petition in March 2016. No. 16-3423 11

nothing to detract from the SEC’s reasonable conclusion that the Exchange Act does not provide it jurisdiction to review the Market Makers’ claims. III. Conclusion For the foregoing reasons, we AFFIRM.