ICI Amicus Brief Supporting the SEC's Order to Reform NMS Equity Data Plan Governance (pdf)

ORAL ARGUMENT NOT YET SCHEDULED No. 20-1181, Consolidated with Nos. 20-1192, 20-1231 IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT THE NASDAQ STOCK MARKET LLC; NASDAQ BX, INC.; NASDAQ PHLX LLC, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. On Petitions for Review of an Order of the United States Securities and Exchange Commission BRIEF OF INVESTMENT COMPANY INSTITUTE AS AMICUS CURIAE IN SUPPORT OF RESPONDENT Susan M. Olson Dorothy M. Donohue Nhan Nguyen INVESTMENT COMPANY INSTITUTE 1401 H Street, N.W. Washington, D.C. 20005 (202) 326-5800 Robert A. Skinner Amy D. Roy ROPES & GRAY LLP Prudential Tower 800 Boylston Street Boston, MA 02199 Tel: (617) 951-7000 robert.skinner@ropesgray.com amy.roy@ropesgray.com Douglas H. Hallward-Driemeier Jonathan R. Ference-Burke ROPES & GRAY LLP 2099 Pennsylvania Avenue NW Washington, DC 20006 (202) 508-4600 douglas.hallward-driemeier@ropesgray.com jonathan.ference-burke@ropesgray.com Counsel for Amicus Curiae Investment Company Institute USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 1 of 40 i CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES Pursuant to D.C. Circuit Rules 26.1 and 28(a)(1), amicus curiae Investment Company Institute certifies as follows: A. Parties and Amici Except for the following, all parties, intervenors, and amici appearing before this Court are listed in the Brief for Petitioners at page i: Amici in this Court: Investment Company Institute; Securities Industry and Financial Markets Association, Inc., the Council for Institutional Investors, Investors’ Exchange LLC, and MEMX LLC. Amicus Investment Company Institute (“ICI”) is the leading association representing regulated funds globally, including mutual funds, exchange-traded funds, closed-end funds, and unit investment trusts in the United States, and similar funds offered to investors in jurisdictions worldwide. ICI carries out its international work through ICI Global, with offices in London, Hong Kong, and Washington, D.C. ICI has no parent company, and no publicly held company owns ten percent or more of its stock. B. Rulings Under Review The ruling under review is identified in the Brief for Petitioners at page i. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 2 of 40 ii C. Related Cases This case has not previously been before this Court or any other court. This case has been consolidated with two other petitions seeking review of the same order, Nos. 20-1192 and 20-1231. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 3 of 40 iii TABLE OF CONTENTS TABLE OF AUTHORITIES ................................................................................... iv  GLOSSARY ............................................................................................................. vi  STATUTES AND REGULATIONS ...................................................................... vii  IDENTITY AND INTEREST OF AMICUS CURIAE AND SOURCE OF AUTHORITY TO FILE .................................................................................. 1  SUMMARY OF ARGUMENT ................................................................................. 5  ARGUMENT ........................................................................................................... 10  I.  The Existing Plans Are Plagued with Inherent Conflicts of Interest and Deny Members of the Investment Community Meaningful Input ................ 10  A.  Conflicts of Interest Undermine the Current Governance Structure .. 10  B.  Members of the Investment Community Have No Meaningful Input in Governance of the Existing Plans, and Recent Changes in Technology and Trading Make the Problem More Acute .................. 13  C.  The Misaligned Incentives of the SROs Led to Deleterious Effects on Members of the Investment Community ........................................ 17  II.  The NMS Governance Order Includes Significant Governance Enhancements that Give a Voice to Members of the Investment Community .................................................................................................... 19  A.  The Long-Overdue Governance Improvements in the Order ............. 20  B.  There Is No Merit to Petitioners’ Suggestion That Non-SROs Will Themselves Suffer from Conflicts of Interest ..................................... 24  III.  The SEC Had Authority to Implement the Governance Enhancements in the NMS Governance Order ...................................................................... 27  CONCLUSION ........................................................................................................ 29  USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 4 of 40 iv TABLE OF AUTHORITIES Page(s) Cases Basic Inc. v. Levinson, 485 U.S. 224 (1988) ............................................................................................ 14 City of Providence v. Bats Glob. Mkts. Inc., 878 F.3d 36 (2d Cir. 2017) ................................................................................. 11 Kurz v. Fidelity Mgmt. & Rsch. Co., 556 F.3d 639 (7th Cir. 2009) .......................................................................... 4, 14 Statutes and Rules Securities Exchange Act of 1934 *15 U.S.C. § 78k-1 ................................................................................... 9, 27, 29 15 U.S.C. § 78k-1(a)(3)(B) ................................................................................. 27 15 U.S.C. § 78k-1(c)(1)(B) ............................................................................. 9, 25 15 U.S.C. § 80b-6 ............................................................................................... 25 Regulation NMS Rules 17 C.F.R. § 242.603(b) ....................................................................................... 13 17 C.F.R. § 242.603(c)(1) ................................................................................... 14 17 C.F.R. § 242.608(a)(3) ................................................................................... 27 Administrative Materials Amendments to Form ADV, Advisers Act Release No. IA-3060, 75 Fed. Reg. 49,234 (July 28, 2010) ........................................................................................ 25 Regulation of Market Information Fees and Revenues, Exchange Act Release No. 42,208, 64 Fed. Reg. 70,613 (Dec. 17, 1999) ..................................................... 15 USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 5 of 40 v Conflict of Interest Approval Orders, Exchange Act Release Nos. 88,823, 88,824 (May 6, 2020)...................................................................................................... 26 Market Data Infrastructure, Exchange Act Release No. 90,610 (Dec. 9, 2020) ................................................................................... 15, 16, 18, 19 Other Authorities ICI Comment Letter (Dec. 10, 2019) ....................................................................... 12 ICI Comment Letter (May 26, 2020) ................................................................. 16, 19 IEX Grp., Inc. Comment Letter (Sept. 24, 2019) .............................................. 12, 13 Members Exchange Comment Letter (Feb. 28, 2020) ............................................ 28 N.Y.S.E. Listed Company Manual § 303A.01 .......................................................... 8 Nasdaq Comment Letter (May 26, 2020) ................................................................ 19 Nasdaq Rulebook, Rule 5605(b)(1) ........................................................................... 8 Nasdaq Rulebook, Note IM-5605-1 ........................................................................... 8 Nasdaq Total Markets (Apr. 2019) .......................................................................... 17 T. Rowe Price Comment Letter (Feb. 24, 2020) ..................................................... 17 *Authorities upon which ICI chiefly relies are marked with asterisks. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 6 of 40 vi GLOSSARY Existing Plans The three National Market System plans that currently govern the dissemination of core market data for equity securities FINRA Financial Industry Regulatory Authority, Inc. ICI Investment Company Institute New Plan The consolidated National Market System plan contemplated by the Order that will replace the Existing Plans NMS National Market System Order Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data, Exchange Act Release No. 34-88827, 85 Fed. Reg. 28,702 (May 13, 2020) SEC Securities and Exchange Commission SIP data Securities information processor data SRO Self-regulatory organization USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 7 of 40 vii STATUTES AND REGULATIONS All applicable statutes and regulations are contained in an addendum to the Brief for Petitioners. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 8 of 40 1 IDENTITY AND INTEREST OF AMICUS CURIAE AND SOURCE OF AUTHORITY TO FILE The Investment Company Institute (“ICI”) is the leading association representing regulated funds globally, including mutual funds, exchange-traded funds, closed-end funds, and unit investment trusts in the United States, and similar funds offered to investors in jurisdictions worldwide. ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders directors, and advisers. ICI’s members manage total assets of $27.7 trillion in the United States, serving more than 100 million U.S. shareholders, and $8.3 trillion in assets in other jurisdictions. The regulated funds represented by ICI have a significant interest in equity market data as contributors to, and consumers of, market data. Funds rely on that data to maximize returns on behalf of investors, including by monitoring market conditions, informing investment decisions, conducting transaction cost analysis, and fulfilling regulatory obligations. ICI has long advocated to reform the governance system for disseminating real-time data about equity market transactions, and it participated, by submitting comments, in the rulemaking process for the Order. ICI believes that the Order meaningfully addresses conflicts of interest in the current governance system that harm the entire investment community—and thereby the public interest. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 9 of 40 2 All parties have consented to the filing of this brief. D.C. Cir. Rule 29(b). No counsel for a party authored this brief in whole or in part, and no person other than ICI contributed any money that was intended to fund preparing and submitting this brief. Fed. R. App. P. 29(a)(4)(E). BACKGROUND This case concerns an order issued by the Securities and Exchange Commission (“SEC” or the “Commission”) that modernizes and improves access to equity market trading data. The Order directed the national securities exchanges and the Financial Industry Regulatory Authority, Inc. (“FINRA”) to propose a joint plan governing the public dissemination of real-time, consolidated data about securities trading in the equity markets. The Order directs a new, consolidated National Market System (“NMS”) plan governing dissemination of data concerning equity transactions (the “New Plan”) to replace the three existing plans (the “Existing Plans”). The data dissemination covered by the Order is the lifeblood of the nation’s equity markets. More than ever, millions of Americans invest and save in these markets, whether through trading individual stocks or investing in collective vehicles, such as mutual funds, retirement plans, or pension funds. Simplified, those securities trade on the exchanges through a bid-and-ask structure: a potential buyer looking to acquire a stock offers a price (the “bid”) that the buyer is willing to pay, USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 10 of 40 3 and a potential seller sets the price (the “offer” or the “ask”) that the seller is willing to accept. When a seller’s offer and buyer’s bid match, the parties transact, transferring the security at the agreed-upon price. The information on the bids and offers for all equity securities traded on the various exchanges, along with data on the resulting trades, constitutes the securities information processor data (or “SIP data”) governed by the NMS plans. Maximizing access to this data, and enabling access by the greatest number of participants, is critical to leveling the playing field in the markets. Today, more data is available than ever because technology has advanced, markets have evolved, and trading volume has increased, making broad access to that data even more critical. Investors are thus both the suppliers of the SIP data (through their trading activities) and its primary consumers (as they consider further trades). Anyone intending to trade an equity security, whether an individual or an institutional investor, depends on trade and quote data from the different securities exchanges. By regulation, investors must be shown a consolidated display of SIP data when ordering a stock trade or deciding how and on which exchange to carry out the trade (a process called “order routing”). Investment professionals also use SIP data to obtain critical regulatory information and to confirm that they are complying with their fiduciary duty to obtain “best execution” for their clients—i.e., that they get USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 11 of 40 4 “the optimal combination of price, speed, and liquidity” for the trade. Kurz v. Fidelity Mgmt. & Rsch. Co., 556 F.3d 639, 640 (7th Cir. 2009). The SEC directed that the New Plan include governance structure improvements to address conflicts of interest inherent in control of the Existing Plans by the exchanges and FINRA (together, “self-regulatory organizations” or “SROs”). These conflicts of interest arose from the exchanges’ sale of proprietary data products that compete with SIP data. Those products generate significant revenue for the exchanges. Unsurprisingly, the exchanges have focused their attention on enhancing their proprietary offerings, rather than the SIP data, by providing more data and delivering it faster—features of significant value to members of the investment community. Investors have no formal role in the Existing Plans’ oversight, and the exchanges routinely resisted recommendations investors made through advisory bodies for improvements to the SIP data available under the Existing Plans. While the exchanges enhanced their proprietary, competing data products by “deploy[ing] cutting edge technology to reduce latency” and including “greater content,” they resisted improving the Existing Plans’ SIP data in a similar way, making the Existing Plans’ slower and less useful SIP data “meaningfully lag behind.” JA_ [85.Fed.Reg.28704]. As a consequence, institutional investors have felt obligated USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 12 of 40 5 to purchase the exchanges’ proprietary data feeds. Meanwhile, investors have no effective avenue or voice to improve the situation. The Existing Plans are administered by Petitioners Nasdaq and NYSE, but the Order requires that the New Plan be administered by an entity that does not sell its own data products that compete with SIP data. The Order also directs changes to the governance of the New Plan’s operating committee, which has oversight and decision-making authority for the equity market data system. In particular, the Order directs inclusion of representatives of other types of market participants on the operating committee (called “non-SRO members”), such as representatives of individual and institutional investors, and gives those representatives minority voting rights. On behalf of the investor community, ICI participated in the rulemaking process for the Order. ICI explained that it supported expanding the operating committee, improving the voting structure, and hiring an independent administrator and that those changes would substantially improve governance of SIP data. SUMMARY OF ARGUMENT This case concerns how to remedy a governance system that harms the investing public because the entities charged with overseeing it have a pervasive conflict of interest. Congress intended the plan governing SIP data to operate “in the public interest” and “for the protection of investors.” To date, however, it has USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 13 of 40 6 been administered by for-profit stock exchanges that are motivated by self-interest in selling their own proprietary data products, which compete with the SIP data. In promulgating the Order, the SEC correctly recognized that the governance structure for equity market data needs improvement to address the exchanges’ inherent and demonstrated conflicts of interest and to provide more representation to the market participants who provide and consume the data. Currently, the SROs have complete control over the quality and cost of SIP data, even though they are for-profit entities that develop and offer proprietary data products in direct competition with the very SIP data feeds they are charged to operate in the public’s interest. This is a clear conflict that would be unacceptable in any context. The conflict has only increased over time, as these proprietary feeds became significant sources of revenue, and as consolidation of exchanges resulted in any two of the three large exchanges being able to control the operating committees under the Existing Plans. Nor is the conflict theoretical: other market participants have watched over time as the exchanges enhanced their own offerings, making them faster and offering more content, while offering inferior updates to the SIP data feeds. Further, as things stand, a key constituency of the equity market data system— participants in those markets such as the members of the investment community represented by ICI—has no meaningful voice in the system’s operations. Congress USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 14 of 40 7 intended SIP data to serve a public function for all market participants, and the market’s technological advances and increased volume of trades have heightened the importance of widespread availability of such data. Yet the investment community’s ability to provide input on the operation or administration of the Existing Plans is limited and ineffective. The Order addresses these problems head-on, including by introducing a meaningful, though not equal, role for other market participants, such as representatives of retail and institutional investors and broker-dealers, who would join the body that oversees the SIP data system. Importantly, those representatives will express the interests of investors who contribute and consume SIP data. They will bring a different perspective than the exchanges, not least because they do not sponsor products that compete directly with SIP data feeds. The SEC also revamped the operating committee’s voting structure, limiting to a two-vote maximum the power of any single affiliated group of exchanges. This enhancement should curb the trend of exchanges expanding voting power through acquiring competing exchanges, and it ensures that any single affiliated exchange group exercises a proportionate amount of voting power. The Order also directs that the New Plan’s administrator must be independent, which will further ameliorate the exchanges’ conflict of interest under the Existing Plans. The administrator is responsible for day-to-day management and operations USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 15 of 40 8 but also has access to sensitive customer information that can be used to benefit proprietary data products. NYSE and Nasdaq, which sell such products, are the Existing Plans’ administrators. These improvements are, by design, self-reinforcing: a New Plan, administered by an independent entity, in which a broader range of independent market participants have active representation, will be better able to make future adjustments to meet the needs of all constituents without regular SEC involvement. The principle of independent participants is fundamental in American corporate governance. Indeed, Petitioners require all listed companies to have a majority of independent directors. N.Y.S.E. Listed Company Manual § 303A.01, https://nyseguide.srorules.com/listed-company-manual; Nasdaq Rulebook, Rule 5605(b)(1), https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/. As Nasdaq has itself recognized, a primary benefit of having independent directors is to “guard against conflicts of interest.” Note, Nasdaq Rulebook, IM-5605-1. The involvement of independent voices in the New Plan’s operating committee will have a similarly salutary effect of ensuring the New Plan operates in the public interest. Petitioners’ suggestion (Br. 39-40, 53-54) that non-SROs cannot provide effective oversight misses the mark. Especially in comparison to the SROs’ actual conflicts of interests, the purported shortcomings of non-SRO participants to which Petitioners point are either nonexistent or, at most, purely speculative. In reality, USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 16 of 40 9 non-SRO operating committee members will represent interests that are aligned with the public interest of having “prompt, accurate, reliable, and fair” public equity market data. 15 U.S.C. § 78k-1(c)(1)(B). In any event, the Order contains effective procedural safeguards, such as conflict-of-interest requirements and a public nomination process, to address any possible conflict of interest that might arise for a non-SRO participant. Finally, while the SEC’s brief sets forth in detail why the Order is a proper exercise of the SEC’s authority under Section 11A of the Exchange Act, it bears emphasis that Petitioners are mistaken in arguing (Br. 28-42) that the SROs can no longer “act jointly” in operating the NMS equity data plan, as Section 11A requires. Petitioners are wrong that non-SROs will have a “role equivalent to that of the SROs.” Id. at 31. The Order requires the vote of a majority of SROs for “all actions” and caps non-SRO participant voting power. The structure the SEC adopted respects the statutory requirement of allowing joint SRO action while giving those who actually generate and use the SIP data input in overseeing the SIP data feeds. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 17 of 40 10 ARGUMENT I. THE EXISTING PLANS ARE PLAGUED WITH INHERENT CONFLICTS OF INTEREST AND DENY MEMBERS OF THE INVESTMENT COMMUNITY MEANINGFUL INPUT A. Conflicts of Interest Undermine the Current Governance Structure The Existing Plans allow the SROs to exercise monopoly-like control over the SIP data and do not provide the suppliers and primary users of SIP data with any effective input in the plans’ administration or governance. Nasdaq and NYSE are the administrators of the Existing Plans, JA_ [85.Fed.Reg.28722], which provide only SROs with voting power on the operating committee. The exchanges dominate the system for disseminating SIP data under the Existing Plans even though they have an inherent conflict of interest that, in any other context, would be considered unacceptable: the exchanges, which operate as for-profit businesses, price and sell their own proprietary data products that are superior to, and compete directly with, the SIP data. In fact, these proprietary products provide subscribers with more granular market data delivered at faster speeds than SIP data. Put otherwise, the exchanges are supposed to be operating the Existing Plans to make SIP data available “in the public interest,” JA_ [85.Fed.Reg.28702], but they are simultaneously generating revenue from their own competing data products. This is a “substantial, inherent conflict of interest.” JA_ [85.Fed.Reg.28722]. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 18 of 40 11 As the SEC observed in the Order, “most of the exchanges also offer proprietary data products for sale.” JA_ [85.Fed.Reg.28704]. The proprietary data products “are significant sources of revenues for exchanges that offer them.” JA_ [85.Fed.Reg.28702]; see City of Providence v. Bats Glob. Mkts. Inc., 878 F.3d 36, 41 (2d Cir. 2017) (discussing the importance of “the sale of market data” to certain exchanges’ revenue). The SROs have an incentive to improve their own proprietary products and market them as superior because they “compete with one another to increase the trading volume on their particular exchanges.” Bats Glob., 876 F.3d at 41. And, in doing so, the SROs take advantage of their access “to confidential information of substantial commercial or competitive value, including, among other things, information about core data usage, the SIPs’ customer lists, financial information, and subscriber audit results.” JA_ [85.Fed.Reg.28723]. Indeed, as one commenter noted, “[s]ome exchanges even overtly market their own data as a better alternative to the SIPs.” JA_ [85.Fed.Reg.28702] (quoting IEX Grp., Inc. Comment Letter at 3 (Sept. 24, 2019) (“IEX Letter”), https://www.sec.gov/comments/4- 729/4729-6190352-192448.pdf). To achieve the best possible results for investors, funds must rely on brokers who can obtain as much information as quickly as possible to trade competitively. Therefore, brokers and other market participants have no choice but to pay the SROs USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 19 of 40 12 to access their seemingly superior proprietary data. See IEX Letter at 3. 1 Nevertheless, they still rely on SIP data for other purposes, including fulfilling regulatory obligations. Mergers among the exchanges, which are now for-profit entities, have exacerbated the structural conflict between the SROs’ administration of the “public interest” SIP data system and their ability to enhance profits through their own products. JA_ [85.Fed.Reg.28704] (discussing how the “demutualization of the exchanges” has “heightened the conflicts” the SROs face). Under the Existing Plans, exchanges hold one vote on the operating committees per exchange license, but consolidation has meant that four or five licenses—with the accompanying four or five votes—are under single control. In one recent example, NYSE’s parent, Intercontinental Exchange, Inc., acquired National Stock Exchange, Inc. in 2017 and Chicago Stock Exchange, Inc. in 2018, increasing NYSE’s voting power on the operating committees from three votes to five, or 18% to 29%. There are now just three main exchange groups, representing 14 of 17 votes, with any two able to command a nine-vote majority. JA_ [85.Fed.Reg.28712]. Those same three groups, NYSE, Nasdaq, and Cboe, have the largest interest in protecting their proprietary 1 Notably, the SROs also “charge hundreds of millions of dollars a year in fees” for the inferior SIP data, in addition to fees for their proprietary data. ICI Comment Letter at 2 (Dec. 10, 2019), https://www.sec.gov/comments/s7-15-19/s71519- 6522878-200390.pdf. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 20 of 40 13 data products and accompanying revenue streams.2 It is no coincidence that they have been the biggest opponents of the Order. B. Members of the Investment Community Have No Meaningful Input in Governance of the Existing Plans, and Recent Changes in Technology and Trading Make the Problem More Acute With control exclusively consolidated in the hands of the biggest exchanges, investment community members have no real say in how the Existing Plans operate, even though they are the primary contributors to and users of SIP data. Evolutions in technology and how equity securities are traded have further underscored the inequity of that lack of input. As discussed above, members of the investment community represented by ICI are the primary contributors of SIP data. The trades on the various exchanges are the SIP data governed by both the Existing Plans and New Plan. That trading data from various exchanges is consolidated and disseminated to the public as the SIP data feed, reflecting information like the national best bid and national best offer. 17 C.F.R. § 242.603(b). Additionally, investors are the primary consumers of SIP data. Anyone intending to trade an equity security, whether an individual or an institutional investor, looks to and depends on trading and quote data from the various securities 2 One smaller exchange, IEX, is the only exchange that currently does not charge for access to its proprietary data. IEX Letter at 3. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 21 of 40 14 exchanges. In fact, the SEC’s regulations require display to investors of a consolidated set of stock market data when investors are making trading or order routing decisions. 17 C.F.R. § 242.603(c)(1). Additionally, because SIP data includes information on the best prices and available liquidity in the equity market at any moment, see Pet. Br. 11, investment professionals use SIP data to confirm that they are complying with their fiduciary duty to obtain “best execution” for their investors, by carrying out the trade in a way that gets “the optimal combination of price, speed, and liquidity.” Kurz, 556 F.3d at 640. Indeed, in adopting the Order, the SEC recognized the importance of SIP data to investment professionals’ efforts to ensure “best execution.” JA_ [85.Fed.Reg.28703]. Congress and the SEC have both recognized that accessible market data is essential for the equity markets to work as intended. “[I]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to ensure the availability of information with respect to quotations for and transactions in securities.” JA_ [85.Fed.Reg.28702] (citing 15 U.S.C. § 78k- 1(a)(1)(C)). As the Supreme Court recognized in Basic Inc. v. Levinson, the “market” acts “as the unpaid agent of the investor,” processing available information and “informing him that given all the information available to it, the value of the stock is worth the market price.” 485 U.S. 224, 244 (1988). USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 22 of 40 15 The NMS equity data plans, which govern SIP data, serve a critical public function to the investment community by conveying that “market” information. The very purpose behind the Existing Plans was to “facilitate the required collection and dissemination of core data so that the public has ready access to a ‘comprehensive, accurate, and reliable source of information for the prices and volume of any NMS stock at any time during the day.’” JA_ [85.Fed.Reg.28702] (quoting Concept Release on Equity Market Structure, Exchange Act Release No. 61358, 75 Fed. Reg. 3594, 3600 (Jan. 21, 2010)). The availability of this data “is the principal tool for enhancing the transparency of the buying and selling interest in a security, for addressing the fragmentation of buying and selling interest among different market centers, and for facilitating the best execution of customers’ orders by their broker- dealers.” Regulation of Market Information Fees and Revenues, Exchange Act Release No. 42,208, 64 Fed. Reg. 70,613, 70,614 (Dec. 17, 1999). Given technological advances, changes in trading of equity securities, and increased trade volumes, however, better and more readily available market data is more important than ever to investors. “[T]he current market is vastly different from when the national market system was established in the 1970s,” including because “technology has fundamentally altered market operations.” Market Data Infrastructure, Exchange Act Release No. 90,610 (“Market Data Infrastructure Final Rule”), at 43-44 (Dec. 9, 2020), https://www.sec.gov/rules/ final/2020/34-90610.pdf. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 23 of 40 16 “Today, markets rely on highly sophisticated electronic trading systems that can consume many points of data at speeds measured in sub-second increments.” Id. at 29. Market participants themselves have “incorporated sophisticated, latency- sensitive, and data dependent electronic trading technologies for their trading needs.” Id. at 17. Additionally, trading takes place in new and different ways that were unanticipated even in 2005, the last time the SEC reformed the equity market data system. As one example highlighting the importance of granular data, trading now occurs at the penny level instead of fractions. Market Data Infrastructure Final Rule at 44. As another example, a significant amount of equity trading now takes place at closing auctions, but data on closing auctions is not included in SIP data under the Existing Plans. See ICI Comment Letter (“May 26 ICI Comment Letter”) at 9-10 (May 26, 2020), https://www.ici.org/pdf/32486a.pdf. Market participants therefore need the SIP data for their trading to keep pace. Simply put, more and better data that truly reflects how equity trading occurs today is essential to maintain “fair and efficient markets.” JA_ [85.Fed.Reg.28703]. Despite Congress’s recognition of the importance of SIP data to the public, the investment community’s limited ability to provide input in the governance of the Existing Plans has impeded the evolution of SIP data. Since 2005, non-SRO market participants’ only pathway for influence has been to join advisory committees that, USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 24 of 40 17 theoretically, could be platforms to share views with, and provide feedback to, the SROs. 3 Unsurprisingly, the system under the Existing Plans is ineffective at ensuring that the needs of the investment community are actually represented in the operations of the NMS plans; the exchanges, whose revenues are derived from their proprietary products, can and do prioritize enhancements to their proprietary data products over the SIP data or, at worst, simply ignore input they receive about possible improvements. As market participant T. Rowe Price explained, input from the advisory committees under the Existing Plans has not “ultimately influenced exchanges’ decisions on market data issues.” T. Rowe Price Comment Letter at 2 (Feb. 24, 2020), https://www.sec.gov/comments/4-757/4757-6862130-210610.pdf. C. The Misaligned Incentives of the SROs Led to Deleterious Effects on Members of the Investment Community The SROs’ misaligned incentives, coupled with the lack of independent representatives in NMS equity data plan governance, led to tangible negative effects on the SIP data available to the investment community. As the administrators under the Existing Plans, and with their control of the operating committees, the SROs have dictated the scope of SIP data content, the 3 To their credit, at times, some exchanges have supported tentative efforts to give non-SROs an expanded role. Nasdaq Total Markets 22 (Apr. 2019), https://www.nasdaq.com/docs/Nasdaq_TotalMarkets_2019_2.pdf. The fact that these efforts never even gained serious momentum proves that SEC action was needed. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 25 of 40 18 means by which that data is delivered, and the prices market participants must pay for it. While doing so, they also designed and marketed the competing infrastructure for their proprietary data products, giving them every incentive to focus efforts on enhancing their own offerings instead of the SIP data. As commenters made clear, for “proprietary data products . . . , exchanges have deployed cutting edge technology to reduce latency and made other enhancements to improve content.” JA_ [85.Fed.Reg.28704]. Meanwhile, the SROs did not enhance SIP data despite non-SRO representatives on the advisory committees advocating for improvements. Instead, they enhanced their own proprietary data products. As a result, “the SIPs have continued to meaningfully lag behind the proprietary data products and their related infrastructure with respect to content and speed.” JA_ [85.Fed.Reg.28704]. The difference is evident with a proprietary exchange product called a depth- of-book offering that “provide[s] greater content at lower latencies.” JA_ [85.Fed.Reg.28704]. As the SEC explained, “a diverse array of market participants” confirmed that “the differentials between SIP data and [depth-of-book products] ha[ve] reduced the usefulness of the form and content of SIP data.” JA_ [85.Fed.Reg.28704]. The primary exchange groups publicly resisted the SEC’s efforts to expand SIP data content, “question[ing] the need to add new information elements.” See Market Data Infrastructure Final Rule at 46 n.115. Similarly, although a significant volume of equity trading now takes place at closing auctions USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 26 of 40 19 and is thus critical to the investment community, the exchanges have resisted efforts to include auction data in SIP data under the Existing Plans. See May 26 ICI Comment Letter at 9-10. Nasdaq, in particular, expressly opposed adding auction data to the SIP data, saying that doing so was “anti-competitive.” Nasdaq Comment Letter at 31 (May 26, 2020), https://www.sec.gov/comments/s7-03-20/s70320- 7235187-217094.pdf. Under the Existing Plans, opposition by one major exchange group is enough to veto this type of proposal, so SEC action became necessary. Indeed, the SEC’s Final Market Data Infrastructure Rule requires the exchanges to add more types of data to the SIP data, including closing auction data. See Market Data Infrastructure Final Rule at 23-36. II. THE NMS GOVERNANCE ORDER INCLUDES SIGNIFICANT GOVERNANCE ENHANCEMENTS THAT GIVE A VOICE TO MEMBERS OF THE INVESTMENT COMMUNITY The Order greatly improves on the existing system, in which the SROs administer a key aspect of equity market structure while operating under a conflict of interest and without being required to incorporate meaningful input from key market participants. Under the New Plan, the investment community will be able to offer its perspectives, serving as a check on the conflicts of interest that infect the current system and have led to an inferior market data product. Because more constituencies will have input in governance, the system will be more likely to self- improve, making enhancements to keep pace with changing technology and trading USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 27 of 40 20 practices, without requiring repeated SEC intervention to compel changes. Additionally, the exchanges are incorrect in asserting that other market participants should be denied a role because of their own purported conflicts of interest; unlike the exchanges’ extensive and actual conflicts, discussed at length above, the supposed conflicts to which the exchanges point are at best theoretical and, in any event, adequately counterbalanced by provisions of the New Plan. A. The Long-Overdue Governance Improvements in the Order The Order does much to modernize the management of the NMS plan for equity market data, responding to the evolution in how equity securities are traded and developments in how the exchanges are structured. We focus on the governance enhancements that seek to remediate the conflicts of interests of the SROs as exclusive administrators of the Existing Plans. Remediating these conflicts is a critical step to enhancing the utility of SIP data for all market participants. To that end, including non-SRO representatives on the New Plan’s operating committee, giving them voting power, and rebalancing the operating committee’s voting structure will improve meaningfully the governance of the NMS equity data system and will create a check on the SROs’ conflicts of interest. The committee will now include “individuals representing each of the following categories: An institutional investor, a broker-dealer with a predominantly retail investor customer base, a broker-dealer with a predominantly institutional investor customer base, a USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 28 of 40 21 securities market data vendor, an issuer of NMS stock, and a person who represents the interests of retail investors.” JA_ [85.Fed.Reg.28730]. The Order ensures that these non-SRO representatives will be well-informed and offer useful, practical perspectives. They are to be selected initially from members of the advisory committees for the Existing Plans. JA_ [85.Fed.Reg.28730]. The Order also provides, for example, that “[t]he retail representative shall have experience working with or on behalf of retail investors and have the requisite background and professional experience to understand the interests of retail investors, the work of the operating committee of [the New Plan], and the role of market data in the U.S. equity market.” JA_ [85.Fed.Reg.28730]. Including the views of the suppliers and users of the very data in question makes eminent sense. As the SEC explained, non- SROs’ representation on the operating committee will “ensur[e] that a broader range of relevant opinions and perspectives have voting representation on the operating committee, which the Commission believes will help to facilitate enhanced decision- making and innovation in the provision of equity market data.” JA_ [85.Fed.Reg.28707]. Moreover, through their inclusion on the operating committee, the non-SRO representatives will have oversight of the precise areas in which the existing system falls short, which should reduce the need for Commission intervention in the future. The operating committee is charged with proposing amendments, policies, or USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 29 of 40 22 procedures “to ensure prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to quotations for and transactions in NMS stocks and the fairness and usefulness of the form and content of that information.” JA_ [85.Fed.Reg.28730]. It is also empowered to “assess[] the marketplace for equity market data products and ensur[e] that SIP data offerings are priced in a manner that is fair and reasonable, and designed to ensure the widespread availability of SIP data to investors and market participants.” JA_ [85.Fed.Reg.28730]. In response to the dramatic consolidation of the exchanges, the Order restructures the operating committee’s votes, allocating votes by affiliated exchange group rather than by individual exchange licenses, with exchange groups representing above a certain percentage of market share having at most two votes. JA__ [85.Fed.Reg.28729-30]. The Order pegs the non-SROs’ votes at one-half of the SRO member votes and requires that all actions by the committee be approved “by an augmented majority vote, i.e., a supermajority vote of [the New Plan’s] operating committee, along with a majority vote of the SRO members of the operating committee.” JA_ [85.Fed.Reg.28730]. This approach reasonably reduces the disproportionate influence of the large exchange groups (just two of which can control decisions under the Existing Plans) while still ensuring that the SROs have fair representation and remain able to “act jointly,” without non-SRO involvement. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 30 of 40 23 Petitioners challenge the Order’s exchange group vote allocation concept (e.g., Br. 47-48), but limiting the votes of consolidated exchanges to a maximum of two is essential to the new framework. First, without it, the three primary exchanges would themselves control a majority of the operating committee votes. Second, the new approach also could mitigate the effects of any further consolidation of equity exchanges (or creation of a new exchange solely to gain a vote), thereby preserving representative balance among affiliated and non-affiliated exchanges. In turn, that balance is likely to benefit all market participants in the form of better products and pricing. Another provision of the Order further reduces conflicts of interest by providing for an independent administrator of the New Plan that “will not be owned or controlled by a corporate entity that, either directly or via another subsidiary, offers for sale its own proprietary market data product for NMS stocks.” JA_ [85.Fed.Reg.28730]. The two current administrators are NYSE and Nasdaq, which sell competing proprietary data products; transitioning those roles to entities that do not earn a profit by selling products that compete with SIP data will eliminate what the Commission correctly termed “a substantial, inherent conflict of interest.” JA_ [85.Fed.Reg.28722]. The record reflects the strong belief of a range of market participants that these governance improvements will lead directly to tangible enhancements in the SIP USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 31 of 40 24 data system, thus fulfilling the public purpose of making valuable market data available in the national market system. JA_ [85.Fed.Reg.28706] (collecting comments). The commenters believe, as does ICI, that minimizing structural conflicts of interest will incentivize further innovation in SIP data, closing the gaps between the SIP data and the exchanges’ proprietary data products in areas like content and latency. JA_ [85.Fed.Reg.28706]. Additionally, these improvements will help the system run itself, limiting the structural obstacles that hampered progress in the past. As one commenter noted, the changes “will establish a solid, new foundation through which future enhancements to the SIPs, as necessary, can be more efficiently and fairly made.” JA_ [85.Fed.Reg.28706]. B. There Is No Merit to Petitioners’ Suggestion That Non-SROs Will Themselves Suffer from Conflicts of Interest Petitioners (Br. 40) make the ironic and misguided assertion that the non- SROs are likely to provide ineffective oversight because they “face few, if any, of the same statutory duties and regulatory restrictions as SROs.” According to Petitioners, “expand[ing] operating-committee voting power to include individuals representing non-SROs could have serious consequences for the functioning of the national market system, the well-being of investors, and the broader public interest.” Id. at 39. Petitioners’ warning is based on pure conjecture and is ironic when evaluated in light of the SROs’ actual conflict of interest in administering the Existing Plans USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 32 of 40 25 while simultaneously developing and marketing their own proprietary data products. The outcome of wearing these two hats has been entirely predictable—Petitioners devoted relatively insufficient attention and resources to the SIP data they were charged with administering. It is the height of insincerity for the SROs to claim that other market participants cannot have input in governance of the New Plan because, unlike the SROs, they “have no obligation to further the public-interest objectives of the Exchange Act.” Pet. Br. 40. Investment advisers—persons or companies who are paid to manage investments for others, including the companies that sponsor mutual funds—are bound by fiduciary duties to the funds they advise and clients whose money they manage. See, e.g., 15 U.S.C. § 80b-6. “Under the Advisers Act, an adviser is a fiduciary whose duty is to serve the best interests of its clients, which includes an obligation not to subrogate clients’ interests to its own.” Amendments to Form ADV, Advisers Act Release No. IA-3060, 75 Fed. Reg. 49,234, 49,234 (July 28, 2010). And, to the extent some non-SRO members of the operating committee are not technically fiduciaries, they will be subject to other constraints described below, and their interests—as members of constituencies that will gain representation on the operating committees under the New Plan—will be aligned with the public interest in SIP data as set forth in the statute: equity market data that is “prompt, accurate, reliable, and fair.” 15 U.S.C. § 78k-1(c)(1)(B). USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 33 of 40 26 Indeed, Petitioners cannot even credibly hypothesize what self-interest the non-SRO members of the operating committee, especially institutional investors, would have that would be contrary to the public interest. Improved SIP data would allow these new members to be make more informed investment decisions to the benefit of their clients. Thus, while Petitioners face actual inherent conflicts of interest under the current regime, they offer nothing beyond mere supposition to support their assertion (Pet. Br. 39) that the non-SRO committee members will “act[] entirely out of self-interest, and in disregard of the public interest, when casting votes.” In any event, the SEC implemented a number of guardrails to address Petitioners’ ostensible concerns. The New Plan is to “include provisions designed to address the conflicts of interest of . . . Non-SRO Members” as well as SRO members, JA_ [85.Fed.Reg.28730], as incorporated from separate approved orders of the SEC, see Conflict of Interest Approval Orders, Exchange Act Release Nos. 88,823, 88,824 (May 6, 2020). Thus, all operating committee members will need to disclose potential conflicts of interest and follow recusal procedures. JA_ [85.Fed.Reg.28726]. Further, as noted above, the initial non-SRO representatives will be selected from existing advisory committees; thereafter, non-SRO representations will be nominated through a “fair, transparent, and public” process that will include a public comment period. JA_ [85.Fed.Reg.28730]. And, as a final USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 34 of 40 27 backstop, the SEC will retain plenary authority over the new governance structure. These measures are more than reasonable to guard against Petitioners’ alleged fears about “the absence of regulatory constraints on non-SRO voting representatives.” Pet. Br. 39. III. THE SEC HAD AUTHORITY TO IMPLEMENT THE GOVERNANCE ENHANCEMENTS IN THE NMS GOVERNANCE ORDER For the reasons the SEC sets forth, (Br. 21-40), ICI submits that the Order was a proper exercise of the SEC’s statutory authority under Section 11A of the Exchange Act, 15 U.S.C. § 78k-1. Consistent with the broad authority Congress gave the Commission under Section 11A to operate the national market system for the benefit of all market participants, the Order reasonably strikes a careful balance between ensuring that the SROs may act jointly while giving the primary suppliers and users of the SIP data a meaningful voice for the first time. ICI highlights here briefly why Petitioners are wrong to assert that, under the Order, SROs will no longer be able to “act jointly with respect to . . . planning, developing, operating, or regulating a national market system.” 15 U.S.C. § 78k-1(a)(3)(B), see also 17 C.F.R. § 242.608(a)(3).4 4 Petitioners present their arguments about Section 11A and Rule 608(a)(3) as separate points, compare Pet. Br. 29-40 with id. at 40-42, but the key phrase they claim the Order violates—“act jointly”—is identical in both authorities. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 35 of 40 28 Petitioners variously describe the governance structure under the Order as authorizing non-SROs to “take joint action” with SROs (Pet. Br. 30), giving non- SROs “a role equivalent to that of the SROs, id. at 31, and letting non-SROs “exercis[e] direct control over NMS plans,” id. None of these characterizations is accurate, and Petitioners’ assertion that SROs are being deprived of their statutory authority is belied by the fact that other SROs support the Order. E.g., Members Exchange Comment Letter (Feb. 28, 2020), https://www.sec.gov/comments/4- 757/4757-6891479-210924.pdf. The SEC calibrated the New Plan operating committee’s composition and voting provisions to ensure that the SROs may still, with respect to any decision, “act jointly.” Preserving the SROs’ primary role is precisely why “the aggregate number of votes provided to Non-SRO Members will, at all times, be one half of the aggregate number of SRO Member votes,” with non- SRO member votes “increas[ing] or decreas[ing] as necessary” to maintain the ratio. JA_ [85.Fed.Reg.28730]. Further protecting the SROs, the Order requires an augmented majority vote and “a majority vote of the SRO members” for “all actions under the terms of the [New Plan].” JA_ [85.Fed.Reg.28730] (emphasis added). The difference is that, due to the number of licenses under common control, under the Existing Plans, two of the largest exchanges could band together to command a majority vote without the support of any other SRO. JA_ [85.Fed.Reg.28712]. Now, those largest exchanges must work with the other exchanges to form a majority of USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 36 of 40 29 the SRO votes to take action. That is true joint action, entirely consistent with Section 11A. As the SEC explains (Br. 32-34), the “act jointly” language does not convey exclusive authority to any subset of exchanges; rather, it enables the SROs to collaborate in administering the consolidated market data system without raising antitrust concerns. Petitioners’ argument boils down to nothing more than a self- interested complaint that they can no longer control the votes by themselves. At the very least, the administrative record makes plain that the Commission made a reasonable determination, supported by the evidence, that “permitting non- SRO views to be more directly heard regarding Plan matters (while preserving joint SRO control of the New Consolidated Data Plan provided for by the plan voting structure . . .) would neither impede the SROs’ ability to act jointly nor interfere with their ability to operate the national market system.” JA_ [85.Fed.Reg.28715] (footnote call omitted). CONCLUSION For the foregoing reasons, the Court should deny the petitions for review. USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 37 of 40 30 Susan M. Olson Dorothy M. Donohue Nhan Nguyen INVESTMENT COMPANY INSTITUTE 1401 H Street, N.W. Washington, D.C. 20005 (202) 326-5800 Robert A. Skinner Amy D. Roy ROPES & GRAY LLP Prudential Tower 800 Boylston Street Boston, MA 02199 Tel: (617) 951-7000 robert.skinner@ropesgray.com amy.roy@ropesgray.com January 15, 2021 Respectfully submitted, /s/ Douglas H. Hallward-Driemeier Douglas H. Hallward-Driemeier Jonathan R. Ference-Burke ROPES & GRAY LLP 2099 Pennsylvania Avenue NW Washington, DC 20006 (202) 508-4600 douglas.hallward-driemeier@ropesgray.com jonathan.ference-burke@ropesgray.com Counsel for Amicus Curiae Investment Company Institute USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 38 of 40 31 CERTIFICATE OF COMPLIANCE This document complies with the type-volume limit of Fed. R. App. P. 32(a)(7)(B) and Fed. R. App. P. 29(a)(5) because, excluding the parts of the document exempted by Fed. R. App. P. 32(f) and D.C. Circuit Rule 32(e)(1), this document contains 6460 words. This document complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type-style requirements of Fed. R. App. P. 32(a)(6) because this document has been prepared in a proportionally spaced typeface using Microsoft Word 2016 in 14 point proportionally spaced with serifs, Times New Roman. /s/ Douglas H. Hallward-Driemeier Douglas H. Hallward-Driemeier Counsel for Amicus Curiae USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 39 of 40 32 CERTIFICATE OF SERVICE I hereby certify that on January 15, 2021, I electronically filed the foregoing with the Clerk of this Court by using the appellate CM/ECF system. The participants in the case are registered CM/ECF users, and service will be accomplished by the appellate CM/ECF system. /s/ Douglas H. Hallward-Driemeier Douglas H. Hallward-Driemeier Counsel for Amicus Curiae USCA Case #20-1181 Document #1880492 Filed: 01/15/2021 Page 40 of 40