WASHINGTON (Reuters) -A federal appeals court on Friday struck down 2023 regulations adopted by the U.S. Securities and Exchange Commission on funding a comprehensive market surveillance system, finding that Wall Street’s top regulator had not provided a sufficient basis for allowing stock exchanges to pass on its costs to their members, court papers showed.
The unanimous decision represented another blow to SEC regulations adopted under the Biden administration, which faced concerted opposition from industry and Republican lawmakers. It was also a setback for the Consolidated Audit Trail, a repository of investor and transaction data meant to give regulators overarching visibility into U.S. market operations that has faced delays and obstacles for more than a decade.
The American Securities Association and Citadel Securities, which brought the lawsuit, both hailed the outcome.
The ruling “prevents a tax hike on every American investor who buys or sells a share of stock,” ASA President Chris Iacovella said in a statement.
The SEC said it was considering its next steps.
“Before the court’s decision, Chairman Atkins directed SEC staff to undertake a comprehensive review of the CAT,” said a spokesperson, referring to commission chief Paul Atkins.
Over the objections of its Republican members, the SEC in 2023 split the operating costs among buyers, sellers, and exchanges. Officials said at the time this would divide costs evenly but also allow exchanges several years to recoup hundreds of millions already spent.
This drew stiff objections from the investment industry, which said it could be left paying an unfairly large share. The two Republicans are now part of the five-member commission’s controlling majority.
In an opinion for a three-judge panel of the U.S. Court of Appeals for 11th Circuit, Circuit Judge Andrew Brasher said that, because the SEC had not advanced a sufficient justification in deciding how the system’s cost would fall on different actors in the marketplace, “we conclude that the 2023 Funding Order is arbitrary and capricious” and therefore in violation of federal laws governing the crafting of regulations.
The appeals court sent the rule back to the SEC for further processing in line with the court’s decision.
The SEC mandated the CAT’s creation in 2012 as a response to the “flash crash” of 2010 when major Wall Street indexes temporarily erased nearly $1 trillion in market value in a matter of minutes. Officials say it can allow regulators to spot market manipulation and have cited its data in enforcement actions.
(Reporting by Douglas Gillison in WashingtonEditing by Rod Nickel and Diane Craft)
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