New York Stock Exchange LLC v. SEC

962 F.3d 541

• Court: Court of Appeals for the D.C. Circuit
• Decided: June 16, 2020
• Docket: 19-1042
• Status: Published

Opinion

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 11, 2019 Decided June 16, 2020

No. 19-1042

NEW YORK STOCK EXCHANGE LLC, ET AL., PETITIONERS

v.

SECURITIES AND EXCHANGE COMMISSION, RESPONDENT

Consolidated with 19-1043, 19-1046, 19-1049, 19-1053, 19-1054

On Petitions for Review of a Rule of the Securities & Exchange Commission

Thomas G. Hungar argued the cause for petitioners. With him on the briefs were Amir C. Tayrani, Joshua M. Wesneski, Paul S. Mishkin, George L. Brandley, Paul Greenwalt III, and Michael K. Molzberger.

Robert T. Smith and Eric T. Werlinger were on the brief for amici curiae GTS Securities LLC, et al. in support of petitioners and vacatur of rule.

Tracey A. Hardin, Assistant General Counsel, Securities and Exchange Commission, argued the cause for respondent. 2 With her on the brief were Michael A. Conley, Solicitor, and John B. Capehart, Senior Counsel.

Thomas A. Sporkin was on the brief for amicus curiae RBC Capital Markets, LLC in support of respondent and denial of the petitions for review.

Dennis M. Kelleher and Stephen W. Hall were on the brief for amicus curiae Better Markets, Inc. in support of respondent.

Hyland Hunt and Ruthanne M. Deutsch were on the brief for amicus curiae Investors Exchange LLC in support of respondent.

James A. Brigagliano, Eric D. McArthur, and Paul Schott Stevens were on the brief for amici curiae Investment Company Institute, et al. in support of respondent and denial of the petitions for review.

Before: PILLARD, Circuit Judge, and EDWARDS and SENTELLE, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge EDWARDS.

Concurring opinion filed by Circuit Judge PILLARD.

EDWARDS, Senior Circuit Judge: On December 19, 2018, purportedly acting pursuant to its authority under the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et seq., the Securities and Exchange Commission (“Commission” or “SEC”) adopted a Pilot Program, denominated Rule 610T, reprinted in Joint Appendix (“J.A.”) J.A. 20-124. The Pilot Program was not a trial run of a new regulation. Rather, it was 3 designed “to gather data” so that the Commission might be able to determine in the future whether regulatory action was necessary. Id. at 21. In February 2019, the New York Stock Exchange LLC and other registered national securities exchanges (“Petitioners”) filed timely petitions for review challenging Rule 610T.

An outline of Rule 610T is as follows:

The Commission’s plan is to assign 1,460 randomly selected stocks to one of two “Test Groups.” Half of those stocks will be subject to a $0.0010 cap on the transaction fees that national securities exchanges can charge for executing trades—a substantial reduction of the current $0.0030 cap established by the Commission in 2005. Stocks assigned to the other Test Group will be subject to a prohibition on exchanges’ payment of rebates to broker-dealers who send orders to the exchange for execution. All other publicly traded stocks will be assigned to a “Control Group” and will not be subject to either of these restrictions. And even with respect to the 1,460 stocks in the two Test Groups, the Rule’s restrictions on fees and rebates will not apply evenhandedly: The Rule will apply to transactions in those stocks executed on national securities exchanges, but not to transactions on alternative trading systems (“ATSs”) or other off-exchange trading venues, which together account for nearly 40% of securities transactions.

Br. for Petitioners at 1-2.

Petitioners contend that “[t]he Rule exceeds the Commission’s statutory authority under the Exchange Act, 4 which does not authorize the Commission 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.” Id. at 20. Petitioners also point out that “the Commission conceded that the Rule might ‘harm execution quality and/or market quality,’ increase transaction costs for investors, and impair competition.” Id. at 21 (quoting J.A. 84). Petitioners additionally argue that Rule 610T cannot survive review because: (1) the Commission failed to determine the Rule’s effects on efficiency, competition, and capital formation; (2) the Rule discriminates against some securities exchanges; and (3) the Commission failed to meaningfully consider alternatives to the Rule.

The Commission, in turn, contends that, although the Pilot Program is not expressly authorized by the Exchange Act, it is within the Commission’s general rulemaking authority under 15 U.S.C. §§ 78w(a), 78k-1(a)(2). The Commission also claims that it was not required to adopt a “permanent” rule, nor prohibited from collecting data through experimentation. Finally, the Commission argues that its adoption of Rule 610T was reasonable because it considered and explained the economic consequences of the Pilot Program, as well as its possible effects on efficiency, competition, and capital formation, and considered alternatives proposed by Petitioners.

Because the SEC acted without delegated authority from Congress when it adopted Rule 610T, we will grant the petitions for review. The Pilot Program emanates from an aimless “one-off” regulation, i.e., a rule that imposes significant, costly, and disparate regulatory requirements on affected parties merely to allow the Commission to collect data to determine whether there might be a problem worthy of regulation. Before acting, the Commission “identified a fundamental disagreement among exchanges, market 5 participants, academics, and industry experts regarding the impact of [maker-taker] fees and rebates on the markets.” J.A. 56. However, the Commission took no position in these debates; and it did not identify any problems with existing regulatory requirements or propose rules that might rectify any perceived issues. Rather, according to the Commission, the purpose of Rule 610T was to induce “an exogenous shock” to the market that might offer insights into “the effects of fees and rebates on the markets and market participant behavior.” J.A. 44. In other words, the Commission acted solely to “shock the market” to collect data so that it might ponder the “fundamental disagreements” between parties affected by Commission rules and then consider whether to regulate in the future. This was an unprecedented action that clearly exceeded the SEC’s authority under the Exchange Act. See 15 U.S.C. § 78w(a)(2); id. § 78k-1(a)(2).

The Commission points to no authority that expressly authorizes it to adopt a “one-off” rule of this sort. Rather, the Commission argues that because it has rulemaking authority under the Exchange Act, the Pilot Program is permissible because “it is reasonably related to the purposes of the [SEC’s] enabling legislation.” Br. for Respondent at 24 (quoting Mourning v. Family Publ’ns Serv., Inc., 411 U.S. 356, 369 (1973)). This is a shortsighted view of the applicable law. Mourning (the case cited by the Commission) was decided decades ago, before the Supreme Court issued Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), changing the framework for judicial review of agency action. And Mourning has been effectively diluted by later cases. See, e.g., Ragsdale v. Wolverine World Wide, Inc., 535 U.S. 81, 92 (2002).

The controlling principle here is that “[a]n agency’s general rulemaking authority does not mean that the specific 6 rule the agency promulgates is a valid exercise of that authority.” Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 466 F.3d 134, 139 (D.C. Cir. 2006). When an agency acts pursuant to its rulemaking authority, a reviewing court determines whether the resulting regulation exceeds the agency’s statutory authority or is arbitrary and capricious. Sullivan v. Zebley, 493 U.S. 521, 528 (1990). A court does not simply assume that a rule is permissible because it was purportedly adopted pursuant to an agency’s rulemaking authority. See Michigan v. EPA, 135 S. Ct. 2699, 2706-07 (2015). Nor does a court presume that an agency’s promulgation of a rule “is permissible because Congress did not expressly foreclose the possibility.” Motion Picture Ass’n of Am. v. FCC, 309 F.3d 796, 805 (D.C. Cir. 2002).

Nothing 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. “Regardless of how serious the problem an administrative agency seeks to address . . . it may not exercise its authority ‘in a manner that is inconsistent with the administrative structure that Congress enacted into law.’” Ragsdale, 535 U.S. at 91 (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 125 (2000)). The Commission acted without delegated authority when it adopted the Pilot Program. Accordingly, we grant the petition for review, vacate the Rule, and remand the case. 7 I. BACKGROUND

A. Regulatory Background

1. The Exchange Act

Section 11A of the Exchange Act authorizes the SEC “to facilitate the establishment of a national market system [NMS] for securities.” 15 U.S.C. § 78k-1(a)(2). The Act directs the Commission, “having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to use its authority” to achieve this goal. Id.

Section 23 of the Act gives the Commission “power to make such rules and regulations as may be necessary or appropriate to implement the provisions” of the Act for which it is responsible. Id. § 78w(a)(1). The Act also states that, “in making rules and regulations,” the Commission:

[(1)] shall consider . . . the impact any such rule or regulation would have on competition[;] . . . [(2)] shall not adopt any such rule or regulation which would impose a burden on competition not necessary or appropriate in furtherance of the purposes of this chapter[;] . . . [and (3)] shall include in the statement of basis and purpose incorporated in any rule or regulation . . . , the reasons for the Commission’s . . . determination that any burden on competition imposed by such rule or regulation is necessary or appropriate in furtherance of the purposes of this chapter.

Id. § 78w(a)(2). 8 2. Transaction Fee Structures

Petitioners and their affiliated exchanges are national securities exchanges registered with the Commission to provide trading in equity securities. See id. § 78f. The Commission regulates the principal functions of the exchanges’ operations, including their transaction fees. See id. § 78f(b)(4).

According to the Commission:

NMS stocks are currently traded on 13 registered national securities exchanges and 32 Alternative Trading Systems (“ATSs”)—non-exchange trading platforms that are subject to different regulatory treatment under the securities laws. Some orders are also “internalized” by broker-dealers, which fill them through their own systems. When the Pilot was adopted, approximately 66% of trading volume occurred on exchanges. The remaining 34% of trading volume occurred off-exchange at ATSs (14%) or internalizing broker-dealers and wholesalers (20%).

Broker-dealers consider a number of factors in choosing the trading venue for their orders, including quoted prices, transaction costs, routing incentives, impact of execution, and the certainty and speed of execution. The pricing and fee structures in place at various trading venues can thus have profound effects on the NMS, influencing market efficiency, competition between and among market participants and trading venues, broker-dealers’ ability to obtain best execution for their clients, and the opportunities for execution of investors’ orders. 9 A typical NMS transaction involves two parties: the “maker” who supplies liquidity by posting a displayed offer to buy or sell a security at a given price, and the “taker” of that liquidity who accepts the maker’s offer. Historically, exchanges and other trading venues charged transaction fees to all parties to a trade on their systems. In the late 1990s, some venues began offering rebates to makers who posted liquidity on their venues. These rebates are typically subsidized by transaction fees charged to the taker, and where that fee is greater than the rebate, the venues retain the difference. This “maker-taker” fee model is now used by seven of the thirteen operating national equities exchanges and accounts for the majority of volume transacted across U.S. exchanges today. [Footnote 2: Four exchanges have a “taker- maker” model, in which they charge makers a fee and pay takers a rebate. Two others charge a flat (or no) fee and offer no rebates.]

Br. for Respondent at 6-7, 7 n.2 (footnote and citations omitted).

The record also indicates that exchanges offer rebates to “enhance liquidity by incentivizing broker-dealers to publicly display quotes and compete with one another in a manner that narrows the bid-ask spread to the ultimate benefit of all market participants. As a result, rebates have a beneficial effect on the price discovery and formation function that publicly displayed quotations provide.” Comment Letter from Douglas A. Cifu, CEO, Virtu Fin. Inc., to Brent J. Fields, Sec’y, SEC 3 (May 23, 2018), J.A. 251. In addition, broker-dealers can use rebates “to help fund price improvement and payment for order flow programs for retail investors. As such, rebates indirectly provide benefits to retail investors in the form of better 10 execution prices and lower commission rates, both of which help reduce overall trading costs.” Id. (footnote omitted).

3. Fee Caps

In 2005, the Commission adopted a rule prohibiting exchanges from imposing transaction fees in excess of $0.0030 per share for the execution of an order against a “protected quotation.” See 17 C.F.R. § 242.610(c) (2020). The Commission determined that the fee limitation would “harmoniz[e] quotation practices and preclud[e] the distortive effects of exorbitant fees,” and it selected the $0.0030 level because it was “consistent with current business practices.” Br. for Petitioners at 9 (alterations in original) (quoting Regulation NMS, 70 Fed. Reg. 37,496, 37,545 (June 29, 2005)).

Ultimately, however, because of a continuing debate over whether the fee cap was appropriate and whether the maker- taker model furthered or frustrated Congress’s goals for the national market system, the Commission proposed a transaction fee pilot program. The Pilot Program is discussed below.

B. Factual Background

1. The Debate Leading to the Pilot Program

“For several years, academics and industry participants have questioned both whether the fee cap remains appropriate and whether the maker-taker model furthers or frustrates Congress’s goals for the NMS.” Br. for Respondent at 8. The Commission explained the situation, as follows:

[S]ome have questioned whether the prevailing fee structure has created a conflict of interest for broker- 11 dealers, who must pursue the best execution of their customers’ orders while facing potentially conflicting economic incentives to avoid fees or earn rebates— both of which typically are not passed through the broker-dealer to its customers—from the trading centers to which they direct those orders for execution. . . . Others have expressed concern that maker-taker access fees may (a) undermine market transparency since displayed prices do not account for exchange transaction fees or rebates and therefore do not reflect the net economic costs of a trade; (b) serve as a way to effectively quote in sub-penny increments on a net basis when the effect of a maker-taker exchange’s sub-penny rebate is taken into account even though the minimum quoting increment is expressed in full pennies; (c) introduce unnecessary market complexity through the proliferation of new exchange order types (and new exchanges) designed solely to take advantage of pricing models; and (d) drive orders to non-exchange trading centers as market participants seek to avoid the higher fees that exchanges charge to subsidize the rebates they offer.

By contrast, others have indicated that the maker- taker model may have positive effects by enabling exchanges to compete with non-exchange trading centers and narrowing quoted spreads by subsidizing posted prices. In particular, maker-taker fees may narrow displayed spreads in some securities insofar as the liquidity rebate effectively subsidizes the prices of displayed liquidity. In turn, that displayed liquidity may establish the national best bid and offer, which is often used as the benchmark for marketable order flow, including retail order flow, that is executed off- exchange by either matching or improving upon those 12 prices. Accordingly, retail orders may benefit indirectly from the subsidy provided by maker-taker exchanges.

Proposed Rules, Transaction Fee Pilot for NMS Stocks, 83 Fed. Reg. 13,008, 13,010-11 (Mar. 26, 2018), J.A. 127-28 (footnotes omitted).

The Commission expressed no views on these issues. Rather, it decided to adopt the Pilot Program.

2. The Proposal to Adopt a Pilot Program

On March 26, 2018, the Commission published a proposal to adopt an experimental program “to study the effects that transaction-based fees and rebates may have on, and the effects that changes to those fees and rebates may have on, order routing behavior, execution quality, and market quality more generally.” Proposed Rules, Transaction Fee Pilot for NMS Stocks, 83 Fed. Reg. 13,008 (Mar. 26, 2018), J.A. 125-95. The Commission expressed no intention of promulgating new regulations on a trial basis. Instead, the Commission indicated that any pilot program would be adopted merely to collect information that might “facilitate a data-driven evaluation of the need for regulatory action.” Id. at 125.

Initially, the Commission’s proposal was

to create three test groups of 1,000 NMS stocks each and to cap the transaction fees at different levels: $0.0015/share for Test Group 1; $0.0005/share for Test Group 2; and for Test Group 3, permit transaction fees at the current $0.0030/share cap, but prohibit transaction rebates and “linked pricing.” Trading data from stocks in these groups would be 13 analyzed against that of a control group, which would continue trading under existing rules. The pilot would apply to all equities exchanges, and all NMS stocks— including Exchange Traded Products (“ETPs”)— would be subject to the pilot if they satisfied certain pricing and volume criteria.

Br. for Respondent at 12 (footnote and citations omitted).

The Commission solicited comments on this proposal and received 150 letters in response, which included many letters from issuers of publicly traded securities objecting to the proposed rule and seeking to opt out if the proposal was adopted. J.A. 30 n.137 (citing company issuer letters that expressed concern about how the Pilot Program would affect trading in their securities).

Before adopting a final rule, the Commission narrowed the design of its proposal. It “reduced the Pilot to two test groups instead of three, each containing 730 NMS stocks instead of 1,000.” Br. for Respondent at 13. The Commission also “effectively combined the proposed $0.0015/share and $0.0005/share test groups into a single group with a $0.0010/share fee cap.” Id. at 14. The final Pilot Program “continues to include as its second test group a ‘zero rebate’ group in which the existing $0.0030 fee cap applies, but rebates and linked pricing are prohibited. Likewise, the Pilot applies to ‘all equities exchanges regardless of fee model’ but not ATSs, and ETPs are subject to assignment in a Pilot test group if they satisfy the Pilot’[s] stock pricing and volume criteria.” Id. (citation omitted). “The Pilot will automatically sunset after one year unless the Commission continues it for a second year, and it includes six-month pre- and post-Pilot periods to accommodate collection of benchmark data to assess the Pilot’s effects.” Id. 14

3. Rule 610T and the Pilot Program

On December 19, 2018, the Commission formally adopted Rule 610T. Transaction Fee Pilot for NMS Stocks, Release No. 34-84875 (Dec. 18, 2018), published at 84 Fed. Reg. 5202 (Feb. 20, 2019), J.A. 20-124. The Rule is outlined in the introduction to this opinion.

The purpose of the Pilot Program is vague. According to the Commission, the Pilot Program is intended to “facilitate an empirical evaluation of whether the existing exchange transaction-based fee and rebate structure is operating effectively to further statutory goals.” Id. at 20. The Commission explained that it intended to gather data “to study fees and rebates that exchanges assess to broker-dealers and observe the impacts of those fees and rebates on the markets and market participants.” Id. at 62. The Commission expressed the hope that the data would reveal “the extent . . . to which broker-dealers route orders in ways that benefit the broker- dealer but may not be optimal for customers, and the extent to which exchange pricing models create distortions that may have adverse impacts.” Id. The Commission assumed that the data collected would “inform future regulatory initiatives to the ultimate benefit of investors.” Id. The Commission also noted that, without the data, it could “use theory—and [its] best judgment based on [its] expertise—to guide [its] decision making.” Id. at 66. However, the Commission expressed the belief that, in this case, “empirically assessing the various theories, causal impacts, and effects of the transaction fee-and rebate pricing model is appropriate.” Id. 15 4. The Troubling Aspects of the Pilot Program

As noted above, Rule 610T is a “one-off” regulation, i.e., it imposes significant, costly, and disparate regulatory requirements merely to secure data that may or may not indicate to the SEC whether there is a problem worthy of regulation. There is no serious dispute between the parties over this.

Petitioners’ concerns about the Pilot Program usefully highlight some of the troubling aspects of Rule 610T:

[F]ar from finding that the Rule’s requirements [are necessary or appropriate for the protection of investors, and for the maintenance of fair and orderly markets or that the Rule] will benefit market participants, the Commission conceded that the Rule might “harm execution quality and/or market quality,” increase transaction costs for investors, and impair competition. JA84. . . .

The Commission also failed to make a determination about the Rule’s effects on efficiency, competition, and capital formation, see 15 U.S.C. § 78c(f), which the Commission declared itself “unable to determine ex ante,” JA98. . . .

In addition, the Rule . . . discriminates against issuers whose stock is included in the two Test Groups and against securities exchanges. . . . Because the Rule applies only to exchanges, not to off-exchange venues, it . . . disadvantages securities exchanges in comparison with ATSs and other off-exchange trading venues with which exchanges directly compete to attract order flow. The Commission failed 16 to provide a reasoned justification for . . . exempting off-exchange trading venues from new regulatory restrictions that will impede exchanges’ ability to attract order flow.

Br. for Petitioners at 21-22.

In response, the Commission’s brief to the court does not seriously deny that the Pilot Program would impose significant, costly, and disparate regulatory requirements. Rather, it says that:

The Commission reasonably considered the economic consequences of the Pilot. It comprehensively explained the Pilot’s potential costs and benefits, as well as its possible effects on efficiency, competition, and capital formation. It provided detailed, quantified estimates of those effects where it could, and exhaustive qualitative analyses where it could not.

Br. for Respondent at 22. The Commission objects that for it “to venture an unsupported guess about the Pilot’s impact in the absence of the data the Pilot is designed to obtain would do nothing to further inform consideration of its potential economic consequences.” Id. However, this objection does not really counter Petitioners’ outline of some of the many uncontested costs and other adverse effects that will likely be caused by the regulatory requirements of the Pilot Program. See Br. for Petitioners at 15-18; see also J.A. 85-98 (setting forth the Commission’s discussion of the anticipated costs of the Pilot Program).

In sum, it is clear from the record in this case that, if implemented, the regulatory requirements of Rule 610T would 17 have significant, costly, and disparate effects on the market and on regulated parties. It is also undisputed that the Pilot Program is not, and was never intended to be, a trial run of a new regulation. The Commission adopted the Pilot Program without any regulatory agenda. Indeed, the record makes it plain that the Commission does not know whether data from the Pilot Program might be useful. Nor does the Commission know whether it might pursue any regulatory initiatives at the conclusion of the Pilot Program if the plan is implemented.

C. Procedural History

On February 14 and 15, 2019, Petitioners filed their petitions for review in this court. As a protective measure, Petitioners filed additional petitions for review on February 21 and 25, 2019. Petitioners also filed a motion with the Commission seeking a stay of Rule 610T pending judicial review. The Commission granted in part the request for a stay, leaving unchanged the exchanges’ data-compilation obligations. Order Issuing Stay in the Matter of Rule 610T of Regulation NMS, Exchange Release No. 34-85447, Admin. Proc. File No. 3-19124 (Mar. 28, 2019), https://www.sec.gov/rules/other/2019/34-85447.pdf.

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Before turning to the merits of Petitioners’ claims, we first address the Commission’s challenge to Petitioners’ standing to contest the Pilot’s treatment of issuers. The Commission argues that Petitioners have no “standing to complain about the Pilot’s potential effects on securities issuers because they have failed to show that any of the issuer-specific harms they allege would affect them.” Br. for Respondent at 22. The Commission does not contest Petitioners’ standing to challenge the Pilot Program on their own behalf. 18

In response, Petitioners argue, somewhat obscurely, that they “are the ‘regulated parties’ that would be injured by implementation of the Rule, and [their] argument that the Rule impermissibly discriminates against issuers would result in vacatur of the Rule in its entirety. Because that relief would provide ‘redress for injuries done to’ petitioners—rather than merely redress for injuries done to issuers—petitioners [contend that they] have standing to challenge the Rule’s discrimination against issuers.” Reply Br. for Petitioners at 20- 21 (citations omitted).

We view this debate as much ado about nothing. In order to establish Article III standing, a plaintiff “must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016) (citing Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992)). And it is generally understood that, in establishing standing, a plaintiff must assert and rely on its own alleged injuries, not those of a third party who is not a plaintiff in the case. See Sessions v. Morales- Santana, 137 S. Ct. 1678, 1689 (2017). However, the Supreme Court has made it plain that “[t]he fact that [a plaintiff’s] injury may be suffered by a large number of people does not of itself make [the plaintiff’s] injury a nonjusticiable generalized grievance.” Spokeo, 136 S. Ct. at 1548 n.7.

In this case, the redress sought by Petitioners, vacatur, is for the alleged injuries that would be suffered by Petitioners if the Pilot Program is implemented. And the relief given by the court in this case is solely for the injuries that allegedly would be suffered by Petitioners. It is irrelevant that the relief afforded Petitioners may also benefit issuers. We understand that Petitioners suggest that the SEC’s Pilot Program would cause 19 injuries to issuers as well as to Petitioners. However, we express no view on this claim and our judgment does not rest on it. Therefore, there is no concern about standing in this case.

II. ANALYSIS

A. Standard of Review

Petitioners’ action is governed by the Court’s seminal Chevron decision. Under Chevron step one, we must first decide “whether Congress has directly spoken to the precise question at issue.” 467 U.S. at 842; see also Kingdomware Techs., Inc. v. United States, 136 S. Ct. 1969, 1976 (2016) (“[W]e begin with the language of the statute. If the . . . language is unambiguous and the statutory scheme is coherent and consistent . . . the inquiry ceases.” (internal quotation marks and citation omitted)). If the statutory provision in question is “silent or ambiguous with respect to the specific issue,” we then assess the matter pursuant to Chevron step two to determine whether the agency’s interpretation “is based on a permissible construction of the statute.” 467 U.S. at 843. See generally EDWARDS & ELLIOTT, FEDERAL STANDARDS OF REVIEW 211-22 (3d ed. 2018). “Chevron directs courts to accept an agency’s reasonable resolution of an ambiguity in a statute that the agency administers. Even under this deferential standard, however, agencies must operate within the bounds of reasonable interpretation.” Michigan v. EPA, 135 S. Ct. at 2707 (internal quotation marks and citations omitted).

“A precondition to deference under Chevron is a congressional delegation of administrative authority.” Adams Fruit Co. v. Barrett, 494 U.S. 638, 649 (1990). An agency is owed no deference if it has no delegated authority from Congress to act. La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 374 (1986) (“[A]n agency literally has no power to act . . . 20 unless and until Congress confers power upon it.”). “Mere ambiguity in a statute is not evidence of congressional delegation of authority.” Michigan v. EPA, 268 F.3d 1075, 1082 (D.C. Cir. 2001). And for an agency “[t]o suggest . . . that Chevron [deference is due] any time a statute does not expressly negate the existence of a claimed administrative power . . . is both flatly unfaithful to the principles of administrative law . . . and refuted by precedent.” Am. Bar Ass’n v. FTC, 430 F.3d 457, 468 (D.C. Cir. 2005) (first alteration and final two ellipses in original) (quoting Ry. Labor Execs.’ Ass’n v. Nat’l Mediation Bd., 29 F.3d 655, 671 (D.C. Cir. 1994) (en banc)).

Finally, under the Administrative Procedure Act, we will set aside an agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). In applying the arbitrary-and-capricious standard of review, we must assure ourselves that an agency has “examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Motor Vehicle Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co. (State Farm), 463 U.S. 29, 43 (1983) (internal quotation marks omitted). We have also made it clear that the SEC has a “statutory obligation to determine as best it can the economic implications of [a proposed] rule.” Chamber of Commerce of U.S. v. SEC, 412 F.3d 133, 143 (D.C. Cir. 2005); see also Bus. Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011).

B. The Commission Lacked Delegated Authority from Congress to Promulgate the Pilot Program

The Commission argues that it properly invoked its rulemaking authority under section 23(a) of the Exchange Act when it promulgated the Pilot Program. In particular, the 21 Commission points out that, under the Exchange Act, it is empowered to “to make such rules and regulations as may be necessary or appropriate to implement the provisions of [the Act],” 15 U.S.C. § 78w(a)(1), and that this was sufficient to justify its adoption of Rule 610T. The Commission does not contend that it has explicit authority under the Exchange Act to adopt a “one-off” regulation like Rule 610T that imposes significant, costly, and disparate regulatory requirements merely to secure information that the Commission may or may not use in the future to determine whether there is a problem worthy of regulation. Indeed, the Commission can find no such delegated authority in the Exchange Act.

Furthermore, Section 23 of the Exchange Act states that the SEC “shall not adopt any . . . rule or regulation which would impose a burden on competition not necessary or appropriate in furtherance of the purposes of [the Act].” 15 U.S.C. § 78w(a)(2). As explained above, it is uncontested that Rule 610T would impose significant burdens on competition. However, the Commission did not promulgate Rule 610T on a determination that the regulatory requirements of the Pilot Program (as distinguished from its objective of data collection) were necessary or appropriate to further the purposes of the Exchange Act.

In Michigan v. EPA, the Supreme Court set forth the principles that govern the disposition of this case:

Not only must an agency’s decreed result be within the scope of its lawful authority, but the process by which it reaches that result must be logical and rational.

135 S. Ct. at 2706 (emphasis added) (internal quotation marks and citation omitted). As we explain below, the Commission 22 did not come close to satisfying these standards when it adopted the Pilot Program.

The Commission is of the view that the statutory reference to “regulations as may be necessary or appropriate” gave it authority to act, as it saw fit, without any other statutory authority to adopt the Pilot Program. The Supreme Court’s decision in Michigan v. EPA debunks the Commission’s position. In Michigan v. EPA, the Court makes it plain that the mere reference to “necessary” or “appropriate” in a statutory provision authorizing an agency to engage in rulemaking does not afford the agency authority to adopt regulations as it sees fit with respect to all matters covered by the agency’s authorizing statute. 135 S. Ct. at 2706-07. In that case, for instance, the Court concluded that “EPA strayed far beyond th[e] bounds [of reasonable interpretation] when it read [“appropriate and necessary”] to mean that it could ignore cost when deciding whether to regulate power plants.” Id. at 2707.

The larger point here is that an agency cannot purport to act with the force of law without delegated authority from Congress. See Chevron, 467 U.S. at 843-44; see also Gonzales v. Oregon, 546 U.S. 243, 258 (2006); Sullivan, 493 U.S. at 541. “[T]he question a court faces when confronted with an agency’s interpretation of a statute it administers is always, simply, whether the agency has stayed within the bounds of its statutory authority.” City of Arlington v. FCC, 569 U.S. 290, 297 (2013). And deference under Chevron step two is premised on either an “express delegation of authority” or an “implicit” “legislative delegation to an agency.” Chevron, 467 U.S. at 843-44; see also Am. Library Ass’n v. FCC, 406 F.3d 689, 705 (D.C. Cir. 2005); Aid Ass’n for Lutherans v. U.S. Postal Serv., 321 F.3d 1166, 1174 (D.C. Cir. 2003). 23 Merely because an agency has rulemaking power does not mean that it has delegated authority to adopt a particular regulation. See, e.g., Sullivan, 493 U.S. at 528, 541; see also Ragsdale, 535 U.S. at 92. As noted at the outset of this opinion, “[a]n agency’s general rulemaking authority does not mean that the specific rule the agency promulgates is a valid exercise of that authority.” Colo. River Indian Tribes, 466 F.3d at 139. And “[w]ere courts to presume a delegation of power absent an express withholding of such power, agencies would enjoy virtually limitless hegemony, a result plainly out of keeping with Chevron and quite likely with the Constitution as well.” Ry. Labor Execs.’ Ass’n v. Nat’l Mediation Bd., 29 F.3d 655, 671 (D.C. Cir. 1994) (en banc).

In this case, the Commission adopted the Pilot Program without any regulatory agenda. That is, the Commission acted without explaining what problems with the existing regulatory requirements it meant for the Rule to correct. Rather, the Commission promulgated Rule 610T on the belief “that the success or failure of the Pilot will be determined by whether it produces an exogenous shock that generates measurable responses capable of providing insight into the effects of fees and rebates on the markets and market participant behavior.” J.A. 44. “In the name of collecting ‘data’ for ‘subsequent’ regulatory decisions ‘that the Commission can neither predict nor commit to at this time,’ it wants to ‘shock’ the market by upheaving the current fee-and-rebate incentive structure— solely to judge reactions.” Br. for Amicus in Support of Petitioners at 17-18. The Commission also made it clear “that there is significant uncertainty regarding the effect, if any, that the Pilot will have on liquidity and trading volume on exchanges.” J.A. 98. And faced with conflicting claims from commentators regarding whether the Pilot Program would harm efficiency, competition, and capital formation, the Commission simply said that it was “unable to determine ex 24 ante” how the Pilot will impact the market. Id. Nothing in the Exchange Act gives the Commission authority to follow this aimless regulatory approach.

Indeed, as noted above, Section 23 of the Exchange Act forbids the Commission from adopting a rule that will unnecessarily burden competition, 15 U.S.C. § 78w(a)(2), and this statutory command was not met. It is also noteworthy that the regulatory requirements of the Pilot Program were adopted to collect data, not to maintain “fair and orderly markets,” 15 U.S.C. § 78k-1(a)(2), as required by the Exchange Act. The record thus indicates that the Commission acted with no obvious regard for the limits on its regulatory authority under the Exchange Act.

If implemented, the Pilot Program would have serious, market-altering effects. It is not merely a benign quest for data, as the Commission appears to suggest. Although the Commission has no regulatory mission, and it insists that the Pilot Program is not meant to be a trial of a new regulation, the fact is that Rule 610T establishes major regulatory requirements. However, the Commission has no delegated authority to promulgate a “one-off” regulation like Rule 610T that imposes significant, costly, and disparate regulatory requirements merely to secure information that may or may not indicate to the SEC whether there is a problem worthy of regulation. If agencies were allowed to regulate in this way, absent delegated authority from Congress, the ramifications would be extraordinary.

The Commission claims “that the Pilot will provide useful data that will better inform future policy recommendations of the effects of fees and rebates on price efficiency.” J.A. 98. Even if the Commission has authority to seek data from regulated parties, it does not follow that the Commission may 25 impose new and stringent regulatory requirements designed to “shock” the market. J.A. 44 & n.304. This is especially true in this case, where: (1) the Commission has never previously adopted a “one-off” regulation such as Rule 610T without congressional authority; (2) the Commission has no regulatory agenda (either for the present or the future) supporting the Pilot Program; (3) the Commission has taken no position on the conflicting views expressed by members of the regulated community and other commentators regarding the efficacy of the disputed Rule; (4) the Commission concededly cannot reasonably assess the effects of the new Rule; and (5) the Commission has no real idea whether the data collected will be useful or to what end. The Commission’s action is not only unprecedented, it finds no support in the law.

As noted above, the Commission relies heavily on Mourning, 411 U.S. 356, to support its claim that it has delegated authority to adopt Rule 610T. The Commission argues that the Pilot Program is permissible because it is “reasonably related to the purposes of the [Exchange Act].” Br. for Respondent at 25 (alteration in original) (quoting Mourning, 411 U.S. at 369). This argument fails.

First, as we have already explained, Michigan v. EPA, which post-dates Mourning, makes it clear that a “necessary or appropriate” provision in an agency’s authorizing statute does not necessarily empower the agency to pursue rulemaking that is not otherwise authorized. There is nothing in the Exchange Act that authorizes a “one-off” regulation like Rule 610T.

Second, the Supreme Court’s decision in Ragsdale, 535 U.S. 81, indicates that the statement in Mourning, to which the Commission refers, has little play in the post-Chevron area. Ragsdale says that the Court’s “previous decisions, Mourning included, do not authorize agencies to contravene Congress’ 26 will” by adopting an unauthorized regulation. Ragsdale, 535 U.S. at 92. And, as the Court pointed out in Ragsdale, the agency’s rulemaking authority in Mourning was broad enough to cover the rule at issue in that case. Id. (citing Mourning, 411 U.S. at 361-62, 371, 376). That is not the situation in this case.

Mourning simply suggests that when an agency acts pursuant to a clear and broad “empowering provision,” “courts will sustain a regulation that is ‘reasonably related’ to the purposes of the legislation.” Doe, 1 v. FEC, 920 F.3d 866, 870- 71 (D.C. Cir. 2019) (quoting Mourning, 411 U.S. at 369). It is noteworthy that the court’s decision in Doe only cites Mourning after finding that the agency action at issue was within the bounds of its delegated authority. This is the thrust of the Supreme Court’s decisions in Ragsdale, 535 U.S. at 92 and Sullivan, 493 U.S. at 528. In other words, “Mourning applies only after a court has determined that Congress has indeed delegated interpretative powers to [an] agency.” Chamber of Commerce of U.S. v. NLRB, 721 F.3d 152, 158 (4th Cir. 2013).

The Commission also cites United Telegraph Workers v. FCC, 436 F.2d 920 (D.C. Cir. 1970), in support of its claim that it permissibly adopted the Pilot Program under its rulemaking authority. However, the decision in United Telegraph Workers, which predates the Supreme Court’s decision in Michigan v. EPA, is easily distinguished. In that case, this court rejected a challenge to a decision by the FCC not to suspend a proposed tariff for a new telegram service offered for a two-year experimental period. In denying the petition for review, the court noted that Congress had directed the FCC “to inform itself of technical advancements and improvements,” and there was no statutory prohibition against that type of experimental program at issue in the case. Id. at 923-24. It is also noteworthy that in United Telegraph 27 Workers, the agency implemented a rule to demonstrate that it was a feasible regulatory solution to an identifiable problem, id. at 921, 923-24, not to “shock” the market solely to judge reactions.

Normally, unless an agency’s authorizing statute says otherwise, an agency regulation must be designed to address identified problems. See Mendoza v. Perez, 754 F.3d 1002, 1021 (D.C. Cir. 2014) (holding that “[a] rule is legislative if it supplements a statute, adopts a new position inconsistent with existing regulations, or otherwise effects a substantive change in existing law or policy”). Rules are not adopted in search of regulatory problems to solve; they are adopted to correct problems with existing regulatory requirements that an agency has delegated authority to address. That is not the situation that we see in this case.

One more point should be stressed regarding the Commission’s claim that it acted pursuant to delegated authority from Congress. As already noted, the Commission does not claim that it had express authority to adopt a “one-off” regulation of the sort at issue here. Instead, the Commission argues that it had implied authority under the Exchange Act to adopt the Pilot Program and, therefore, its decision is due deference under Chevron step two. See Br. for Respondent at 25. We find no merit in this claim.

As explained above, it is well understood that an agency action cannot be “permissible” under Chevron step two if the agency acts in excess of its authority under the applicable statute, see, e.g., Goldstein v. SEC, 451 F.3d 873, 878 (D.C. Cir. 2006), or if the agency’s interpretation of the statute is unreasonable, see, e.g., Michigan v. EPA, 135 S. Ct. at 2708, 2712. See generally EDWARDS & ELLIOTT, supra, at 223-24, 226-30. It does not matter that the statute is arguably ambiguous. See, 28 e.g., Michigan v. EPA, 268 F.3d at 1082 (“Mere ambiguity in a statute is not evidence of congressional delegation of authority.”); see also Glob. Tel*Link v. FCC, 866 F.3d 397, 418 (D.C. Cir. 2017) (Silberman, J., concurring) (pointing out that Chevon step two is “a meaningful limitation on the ability of administrative agencies to exploit statutory ambiguities, assert farfetched interpretations, and usurp undelegated policymaking discretion”). Nor does it matter that a disputed agency action is not expressly foreclosed by the statute. See Am. Bar Ass’n, 430 F.3d at 468 (rejecting agency suggestion “that Chevron step two is implicated any time a statute does not expressly negate the existence of a claimed administrative power” (quoting Ry. Labor Execs.’ Ass’n, 29 F.3d at 671 (en banc))); Motion Picture Ass’n of Am., 309 F.3d at 805 (same).

In advancing the claim that it had implied authority to adopt Rule 610T, the Commission confuses the issues by debating with Petitioners over its right to adopt rules implementing “experimental initiatives.” That is not the issue in this case, however. The problem in this case is that the Commission acted in excess of its authority under the exchange Act. It adopted the Pilot Program without any regulatory agenda. The Commission acted without explaining what problems with the existing regulatory requirements it meant to address. And the Commission proposed to impose significant, costly, and disparate regulatory requirements on only a subset of the securities market just to gather data. In other words, in adopting the Pilot Program, the Commission acted “on a bare desire to conduct an information-gathering experiment to justify the Rule’s restrictions.” Br. for Petitioners at 28. Nothing in the Exchange Act – either express or implied – authorizes this.

This conclusion is only reinforced by Petitioners’ observation that, unlike Rule 610T, the Commission’s “Tick 29 Size Pilot” – an experimental rule whose disputed effects bear on Petitioners’ arbitrary-and-capricious claim – “was the result of a statutory command from Congress, which directed the Commission to study the impact of the current tick size on the number of initial public offerings.” Br. for Petitioners at 18 n.5 (citing Jumpstart Our Business Startups Act, Pub. L. No. 112- 106, § 106(b), 126 Stat. 306, 312 (2012)); see 15 U.S.C. § 78k- 1(c)(6). There is no such congressional directive authorizing the Pilot Program.

In short, the Commission’s action exceeds its authority under the Exchange Act. Therefore, the Commission is due no deference under Chevron. As Justice Thomas noted in his concurring opinion in Michigan v. EPA, “[a]lthough we hold today that [the agency] exceeded even the extremely permissive limits on agency power set by our precedents, we should be alarmed that it felt sufficiently emboldened by those precedents to make the bid for deference that it did here.” 135 S. Ct. at 2713 (Thomas, J., concurring).

C. Petitioners’ Claim that the Commission’s Adoption of the Pilot Program Defied Reasoned Decision Making

The analysis of disputed agency action under Chevron step two and arbitrary and capricious review is often “the same, because under Chevron step two, [the court asks] whether an agency interpretation is ‘arbitrary or capricious in substance.’” Judulang v. Holder, 565 U.S. 42, 52 n.7 (2011) (quoting Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 53 (2011)). In some circumstances, agency action that is impermissible under Chevron step two is also unreasonable under the arbitrary and capricious standard articulated in State Farm. See 463 U.S. at 42-44. A good example of such a case is the Court’s decision in Michigan v. EPA, discussed above. In that case, the Court found that the EPA’s interpretation of 30 the statute was unreasonable and, thus, due no deference under Chevron step two. The Court also found that the agency’s regulatory action was not based on reasoned decision making, and therefore was arbitrary and capricious. 135 S. Ct. at 2706- 07.

This case presents a situation that is similar to what the Court faced in Michigan v. EPA. Petitioners argue that:

[W]hen the Commission adopts a rule imposing new regulatory standards for the national market system— regardless of whether it labels the rule an experimental “pilot” measure—it must satisfy the requirements that apply to all such rulemakings, which include demonstrating that its regulatory action is “necessary or appropriate in the public interest,” for the protection of investors, and for the maintenance of fair and orderly markets. 15 U.S.C. § 78c(f); see also id. § 78k-1(a)(2). The Commission did not make any of those findings with respect to the new fee cap and rebate restrictions imposed by the Rule. . . .

The Commission also failed to make a determination about the Rule’s effects on efficiency, competition, and capital formation, see 15 U.S.C. § 78c(f), which the Commission declared itself “unable to determine ex ante,” JA98. The Commission’s claim that it was unable to make this statutorily mandated determination flouts its obligation under the Exchange Act “to determine as best it can the economic implications of the rule it has proposed.” Chamber of Commerce of the United States v. SEC, 412 F.3d 133, 143 (D.C. Cir. 2005).

Br. for Petitioners at 20-22. 31

Likewise, Amicus points out that:

[N]umerous commenters came forward with arguments and evidence demonstrating that the Transaction Fee Pilot would harm efficiency, competition, and capital formation. Others came forward with arguments and evidence to the contrary. Faced with this evidence, the Commission cannot just throw up its hands and say that it is “unable to determine ex ante” how the Pilot will impact the market.

This shortcoming matters because there is no way the Commission could have conducted a proper cost- benefit analysis without actually making a judgment call as to the degree of harm the Pilot would inflict.

Br. for Amicus in Support of Petitioners at 19-20 (footnotes and citation omitted).

These claims focus on the Commission’s alleged failure to satisfy the requirements of reasoned decision making when it adopted the Pilot Program. The Commission claims that it was unable to complete a thorough analysis of the possible effects of the Pilot Program “because it lack[ed] the information necessary to provide reasonable estimates” of the “economic effects” of its Rule. J.A. 64. Petitioners argue that the Commission’s response defies the commands of State Farm, 463 U.S. at 43, and, therefore, the Commission’s promulgation of the disputed Rule was arbitrary and capricious.

As the Court said in State Farm, “[r]ecognizing that policymaking in a complex society must account for uncertainty . . . does not imply that it is sufficient for an agency 32 to merely recite the terms ‘substantial uncertainty’ as a justification for its actions.” 463 U.S. at 52; see also Allentown Mack Sales & Serv., Inc. v. NLRB, 522 U.S. 359, 374 (1998) (discussing the requirements of reasoned decision making); Chamber of Commerce of U.S. v. SEC, 412 F.3d at 143 (holding that, even when the SEC has difficulty in determining the cost of compliance of a proposed rule, and it can determine only the range within which the cost of compliance will fall, this “does not excuse the Commission from its statutory obligation to determine as best it can the economic implications of the rule it has proposed”); Bus. Roundtable, 647 F.3d at 1150 (holding that “[b]ecause the [SEC] failed to ‘make tough choices about which of the competing estimates is most plausible, [or] to hazard a guess as to which is correct,’ . . . it neglected its statutory obligation to assess the economic consequences of its rule” (third alteration in original) (citation omitted) (quoting Pub. Citizen v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209, 1221 (D.C. Cir. 2004))).

According to Petitioners, the Commission failed reasoned decision making because it never explained its regulatory agenda (if it had one), and it failed to assess whether the perceived benefits of the Pilot Program justified the substantial costs imposed by the new regulatory requirements. In other words, Petitioners contend that reasoned decision making would have required the Commission to have some goals in mind – apart from the mere collection of data – and to show, not that the perceived benefits of the Pilot Program’s new regulatory requirements exceeded the costs, but that the new regulatory requirements were reasonable and justified under the standards enunciated in the Exchange Act.

Because we hold that the Commission lacked delegated authority to adopt the Pilot Program, it is unnecessary for us to determine whether the Commission’s adoption of the Rule 33 violated the commands of Michigan v. EPA and State Farm regarding the requirements of reasoned decision making. See Pub. Citizen v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209, 1216 (D.C. Cir. 2004) (holding that because the court was vacating and remanding the matter on another ground, there was no reason to address other objections to the contested rule).

III. CONCLUSION

We grant the petitions for review and vacate Rule 610T and the Pilot Program. The case will be remanded to the Commission for further proceedings consistent with this opinion.