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Chicago Board Options Exchange Inc. v. Securities and Exchange Commission

United States Court of Appeals, Seventh Circuit

May 7, 2018

Chicago Board Options Exchange, Inc. Petitioner,
Securities and Exchange Commission, Respondent, and Nasdaq OMX PHLX, LLC, Intervening Petitioner, and Citadel Securities, LLC, et al. Intervening Respondents.

          Argued March 29, 2018

          Petition for Review of an Order of the Securities and Exchange Commission. No. 3-17189

          Before Bauer, Flaum, and Manion, Circuit Judges.


         In Citadel Securities, LLC v. Chicago Board Options Exchange, Inc., we held that "the district court did not abuse its discretion in dismissing [the] case [of certain securities firms] for failure to exhaust administrative remedies." 808 F.3d 694, 701 (7th Cir. 2015) [hereinafter Citadel I]. Following that decision, the securities firms filed a petition before the Securities and Exchange Commission ("SEC" or "Commission") seeking damages from various securities exchanges for improper fees. The SEC dismissed that petition for lack of jurisdiction. The securities exchanges now appeal that order. We affirm.

         I. Background

         Following our decision in Citadel I, [1] certain securities firms (the "Market Makers")[2] filed a petition with the SEC. The petition alleged that over a ten-year period the Chicago Board Options Exchange and Nasdaq (the "Exchanges")[3] "mis-charged the Market Makers potentially millions of dollars." Specifically, the Market Makers claimed that the Exchanges improperly imposed fees under Payment for Order Flow ("PFOF") programs.[4] The petition requested that the Commission compel the Exchanges to (1) "provide a full accounting" of the fees wrongly charged; and (2) award damages in that amount, or in the alternative, order disgorgement of the improperly charged fees.

         On April 1, 2016, the SEC ordered briefing as to whether it had jurisdiction to review the Market Makers' petition. The Market Makers argued the "the Commission ha[d] no statutory authority to exercise jurisdiction over this matter." The Exchanges, citing our decision in Citadel I, maintained the SEC had jurisdiction under Section 19(h)(1) of the Securities Exchange Act (the "Exchange Act") and the SEC's Rules of Practice because the petition sought a determination that the Exchanges had violated their own rules. The SEC acknowledged our conclusion in Citadel I that "the plain language of the Exchange Act calls for SEC review of plaintiffs' allegations of improper PFOF Fees, " see 808 F.3d at 699, but nevertheless held that it lacked jurisdiction over the Market Makers' petition.

         First, the SEC explained that Section 19(d) of the Exchange Act, which authorizes it to review allegations that a national exchange has unduly "prohibit[ed] or limit[ed] … access to services, " see 15 U.S.C. § 78s(d)(1), did not apply to the Market Makers' petition. It determined that the petition did not allege that the Exchanges had denied or limited access to any service. It also stated that even if it had alleged such a claim, the petition sought damages, which was "incongruous with" the SEC's remedial authority under Section 19(d).

         Second, the SEC declined to exercise jurisdiction over the petition under Section 19(h)(1). That provision permits the SEC to take regulatory action against an exchange when "in its opinion such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of [the Exchange Act]." Id. § 78s(h)(1). The SEC reasoned that this text "exclusively authorizes … the Commission, in its discretion, to commence an administrative disciplinary action against an [exchange], " but "does not authorize claims by private parties." The SEC also determined that the provision only authorizes it "to suspend and/or impose limitations upon [an exchange] …, not to award damages." Because the Market Makers are private parties seeking damages, the SEC held that it lacked jurisdiction under Section 19(h)(1).[5]

         Next, in response to our statement in Citadel I that "sections of the Exchange Act explicitly provide for monetary penalties, " see 800 F.3d at 701, the SEC concluded that the Exchange Act said nothing about its power to award damages in private actions. It noted that it was permitted to impose civil penalties and seek disgorgement under certain sections of the Act, but clarified that "civil money penalties … are not damages." Because it determined that the Market Makers' petition did not initiate a proceeding under any Exchange Act provision that permitted money penalties, it held it could not "provide 'monetary compensation' to the Market Makers."

         Finally, the SEC noted that the mere fact that the dispute involved a rule overseen by the Commission did not provide it jurisdiction. As it explained, "[t]hat the fees at issue were imposed pursuant to rules subject to Commission review does not make the Commission the arbiter of any and all disputes about such fees or rules."

         The CBOE appealed the SEC's order to this Court, and the Market Makers and Nasdaq intervened pursuant to Federal Rule of Appellate Procedure 15.[6]

         II. ...

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