The U.S. Court of Appeals for the Seventh Circuit (the "Seventh Circuit") upheld the SEC's determination that the agency did not have jurisdiction to adjudicate certain claims brought by securities firms (the "Market Makers") against several securities exchanges. The Court stated: "The precise question before the SEC was whether it had jurisdiction over a petition brought by private parties seeking damages for an alleged rule violation" (at p.8).
The Market Makers alleged that they had been charged in error by the Chicago Board Options Exchange ("CBOE") and Nasdaq (collectively, the "Exchanges") for fees under Payment for Order Flow programs. The Market Makers filed a petition with the SEC, requesting that the agency force the Exchanges to (i) "provide a full accounting" of all improperly charged fees and (ii) "award damages in that amount, or in the alternative, order disgorgement of the improperly charged fees." The SEC denied the petition on the basis that it lacked jurisdiction, stating that:
- the petition did not allege that the Exchanges had denied or limited access to any service, as required under Exchange Act Section 19(d);
- the SEC is not authorized to adjudicate claims against the Exchanges by private parties, such as the Market Makers, under Exchange Act Section 19(h)(1);
- although the SEC is permitted to impose civil penalties and seek disgorgement in certain actions, it is not authorized to award damages in private actions; and
- the fact that the dispute involved an SEC rule does not necessarily provide the SEC with jurisdiction.
The CBOE appealed the SEC's decision to the Seventh Circuit, seeking an order that the SEC could exercise jurisdiction over the Market Makers' claims. Although it recognized that the Exchanges had the standing to appeal because the SEC's decision resulted in an "adverse effect in fact" for the Exchanges, the Seventh Circuit affirmed the SEC's determination. The Seventh Circuit explained that the Exchange Act does not speak to whether the SEC can adjudicate a private party billing dispute seeking damages. According to the Seventh Circuit, the SEC's determination that the Exchange Act did not provide it with jurisdiction over such a dispute was reasonable and, therefore, entitled to deference.
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