Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Monday, August 9, 2010

D.C. Circuit Faults SEC Rulemaking Process Once Again

The D.C. Circuit continues its practice of carefully reviewing the SEC rulemaking process and remanding rules when it finds the process deficient, particularly when the SEC has not, in its view, adequately considered the Rules's effect on competition.  Recently, the D.C. Circuit vacated the SEC's rule on fixed indexed annuities, Rule 151A, for its failure to consider the rule's effect on efficiency, competition and capital formation.  The vacatur came one year after the Court had remanded the Rule to the SEC for reconsideration of these issues.  American Equity Investment Life Insurance Co. v. SEC.(Download American EquityInvestment_2010).  On August 6, 2010, the D.C. Circuit remanded to the SEC its order approving the NYSE Arca ArcaBook fees rule, because the agency did not adequately explain the basis of its approval and did not support its conclusion with substantial evidence.  NetCoalition v. SEC (Download NYSEArcaMarketOrderOpinion)

First, the D.C. Circuit found that the SEC's "market-based" approach to evaluating the fairness and reasonableness of the ArcaBook fees did not contravene the Exchange Act and that the SEC did not arbitrarily reject its prior cost-based approach.  However, a cost analysis is not irrelevant under a market-based approach.  The SEC based its determination that consideration of cost was unnecessary because NYSE Arca is subject to two types of competitive forces: its need to attract order flow and the availability of alternatives to ArcaBook.  However, the SEC failed to provide sufficient evidence that NYSE Arca is indeed subject to significant competitive forces in pricing ArcaBook.  Accordingly, the Court remanded the Rule to the agency for further proceedings.

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