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Court Affirms SEC’s Rejection of Case That Court Previously Insisted Plaintiffs Bring to SEC: CBOE v. SEC
Posted on Categories Court Decisions, Securities/Commodities RegulationTags , ,

By James L. Komie

The SEC’s decision that it does not have jurisdiction to hear a claim for damages filed by market makers against the CBOE and NASDAQ is not unreasonable and must be affirmed under the Chevron Deference Doctrine.

Chicago Board Options Exchange, Inc. vs. SEC, No. 16-3423 (7th Cir., 5/7/18).

The Road to the SEC

This case relates to a long-running dispute between market makers and the Chicago Board of Options Exchange and NASDAQ (the “Exchanges”) regarding so-called Payment for Order Flow fees (“PFOF fees”) the Exchanges collect from the market makers on trades made for the market makers’ own accounts, instead of only on trades submitted for their customers. After the Seventh Circuit in Citadel Securities LLC v. CBOE (Citadel I) (see above) affirmed the dismissal of a suit filed by the market makers for failure to exhaust administrative remedies, the market makers filed a petition with the SEC regarding the PFOF fees. The petition sought an accounting and damages for the PFOF fees allegedly improperly charged by the Exchanges.

Back from the SEC

The SEC determined that it did not have jurisdiction over the market makers’ petition as a claim for damages by a private party. Such a claim, it explained, did not allege that the Exchanges had denied or limited access to any service, nor did it constitute a disciplinary action by the SEC. Although they had been the putative respondents in the claim filed by the market makers, the Exchanges appeal the SEC determination of lack of jurisdiction.

The Seventh Circuit affirms. Under the so-called Chevron deference doctrine, courts must defer to an administrative agency’s construction of the statute it administers unless the statute is itself unambiguous. This includes questions of the agency’s jurisdiction. Here, the Securities Exchange Act does not clearly speak to whether the SEC has jurisdiction to hear a “private party billing dispute seeking damages.” As such, the Court must defer to the SEC’s decision that it does not have jurisdiction over such disputes, unless the SEC’s interpretation of the Exchange Act is unreasonable. As the SEC’s interpretation of the applicable statutory provisions is not unreasonable, the SEC’s order is affirmed.

(J. Komie: The fact that the respondents in the proceeding filed with the SEC are the ones challenging the SEC’s determination that it lacked jurisdiction over the dispute is a good indication that we are in unusual territory here. Also, the market makers – who go to the SEC after being told by the Court that they failed to exhaust administrative remedies, only to be told the SEC lacks jurisdiction – might justifiably feel hard used here.)

(SOLA Ref. No. 2018-28-06)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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