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Statement On Order Approving A Wireless Fee Schedule Setting Forth Available Wireless Bandwidth Connections And Wireless Market Data Connections, SEC Commissioner Hester M. Peirce, Oct. 16, 2020

The New York Stock Exchange and four affiliated exchanges applied for approval pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”)[1] and Rule 19b-4 thereunder[2] of fees that they charge for wireless bandwidth connections provided by ICE Data Services (“IDS”), which is an affiliate of the Exchanges. NYSE and three affiliated exchanges also applied for approval under the same provisions of fees for wireless market data connections, also provided by IDS. I concur with the Commission that, based on the filings and the record before us, these fees are consistent with the Exchange Act and that IDS should be able to continue providing these services.

I write separately, however, because I am not fully convinced that the services provided by IDS constitute a “facility” of an exchange under Section 3(a)(2) of the Exchange Act and am concerned that the Commission’s analysis in this order takes an overly broad view of what constitutes an “exchange” for purposes of Section 3(a)(1) of the Exchange Act. The order finds that the Wireless Connections are facilities, in part, because IDS is part of a group of persons who, together, maintain the market place that constitutes each exchange, including by providing “a system of communication for the purpose of effecting or reporting transactions on the Exchanges.”[3] Under this approach, affiliation with an exchange by a provider of this type of communications service appears to be sufficient to create a presumption that those services are a “facility” of the exchange and, consequently, are subject to the full panoply of exchange regulation under the Exchange Act.

I am uncertain that this is what the statute requires. Section 3(a)(1) of the Exchange Act does refer to “a group of persons . . . which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities,” but it is not clear to me that belonging to the same corporate group necessarily makes an affiliate of an exchange part of “a group of persons” in this sense.[4] Depending on corporate structure, it may be possible for an affiliated entity to provide, for example, wireless connectivity services in an arms-length relationship with the exchange, in which case it could be difficult to distinguish those services from similar services provided by unaffiliated providers (such as IDS’s competitors in the wireless connectivity space). Similarly, if an affiliate is providing a non-exclusive system of communication in a competitive market, it is unclear how significant a factor affiliation should be in determining whether a provider is treated differently from its competitors.

In applying the admittedly broad definitions of “exchange” and “facility” in Sections 3(a)(1) and (2), the Commission needs to ensure that the key functions that make an exchange an exchange are subject to the regulatory framework established by Congress. At the same time, we should do this in a way that does not deter innovation or reduce competition. I fear this may be the result of an approach that places too strong an emphasis on a service provider’s affiliation with an exchange.

The Commission historically has not provided much in the way of meaningful guidance about what the term “facility” means in practice and has never provided comprehensive guidance on the scope of this term. Instead, the Commission has taken an ad hoc approach.[5] The resulting ambiguity affords the Commission a great deal of power to draw the boundaries as it pleases. The temptation, of course, is to read the term broadly and thus to maximize the Commission’s authority because a facility of an exchange is subject to Commission rules, oversight, and examination. Indeed, this order notes that the Commission has read the term “facility of an exchange” “very broadly.”[6]

Often, determinations of whether something is a facility are made at the staff level without public analysis. Generally, when questions arise over whether something is a facility of an exchange, an exchange that disputes the staff’s view has few options but to concede. Here, for example, the Exchanges had to apply for approval because the staff deemed the Wireless Connections to be facilities of the Exchanges, creating significant risks for the Exchanges should IDS proceed with charging the fees without the Exchanges having filed a proposed rule change with the Commission. Once an exchange acquiesces and files a proposed rule change, even under protest, the Commission’s analysis of the underlying legal question is generally limited to the facts of that particular filing and is often ancillary to the usual Exchange Act analysis we normally bring to such filings. Accordingly, in the normal course of the Commission’s business there are few opportunities for careful, holistic consideration of the facility question.

Notwithstanding these limitations, I welcome the attempt to provide additional clarity in this order. I continue to believe, however, that market participants would benefit if the Commission provided a cohesive, consistent picture of what constitutes a facility of an exchange. Guidance would provide parameters within which a fact-specific analysis could be conducted. The Exchange Act is the place that any such guidance would have to start. Section 3(a)(2) provides:

The term “facility” when used with respect to an exchange[7] includes its premises, tangible or intangible property whether on the premises or not, any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service.[8]

The statutory definition is not easy to apply in practice. Complicating the application is the changing nature of the markets, market technology, and market participants.

The Commission should develop, and publish for public comment, guidance about what the terms “exchange” and “facility” of an exchange mean. Commission guidance would make it easier for exchanges and other market participants to identify facilities and thus understand their regulatory status. Because the term is used throughout the Exchange Act and rules thereunder, any analysis should include thinking about the implications of the guidance for these regulatory provisions.[9] The Commission’s guidance should answer a number of questions, including what role the exchange affiliate status of an operator of a potential facility will play in the determination of whether it is a facility, whether an exchange affiliate can be sufficiently walled off to avoid a facility designation, when a third-party entity that uses the premises or property of the exchange to effect or report transactions will be deemed a facility of the exchange, whether the mere fact that something occurs on exchange premises pulls it into the facility definition, when services operated by a third-party constitute a facility of the exchange, what criteria make something the property of an exchange, what it means for a system of communication to occupy a “special position” with respect to the exchange, such that it is “uniquely linked to and endorsed by” that exchange to provide such function,[10] and whether competition in providing the function served by a potential facility is relevant.

Clearer lines around whether or not something is a facility of an exchange would help market participants and the Commission. For too long, the Commission and staff have made lightly-elaborated assertions that the facility definition applies. It is time for the Commission to more carefully analyze the term, propose guidance about how it will apply the term in practice, and allow the public to weigh in.


[1] 15 U.S.C. 78s(b)(1).

[2] 17 CFR 240.19b-4.

[3] Self-Regulatory Organizations; New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc.; Notice of Filings of Partial Amendment No. 3 and Order Granting Accelerated Approval to Proposed Rule Changes, each as Modified by Partial Amendment No. 3, to Establish a Wireless Fee Schedule Setting Forth Available Wireless Bandwidth Connections and Wireless Market Data Connections 17 (Oct. 15, 2020).

[4] Some commenters on the filing also seemed to suggest a that more holistic approach to analyzing this question could be appropriate. Seee.g., Letter from Stephen John Berger, Managing Director, Global Head of Government & Regulatory Policy, Citadel Securities to Vanessa Countryman, Secretary, Commission, dated June 12, 2020 (stating that “[i]f [NYSE] did ensure fair access (i.e., provide equivalent space on the pole to any qualified user on equal terms), we would agree that any wireless transmissions anchored to that terminus would not be facilities of the exchange (whether operated by the exchange, by affiliates of the exchange, or completely independent third parties), because the boundary of the facility (as defined by fair access to those points) ends at the terminus”); Letter from McKay Brothers, LLC to Vanessa Countryman, Secretary, Commission, dated June 12, 2020 (stating that “[i]f, for example, IDS were to move its equipment located at one of the third party exchange data centers from one public pole to another or alter part of its route half-way between Mahwah and another exchange data center, it does not seem necessary that such aspects of the Wireless Services should be subject to a rule filing absent other circumstances (e.g., some advantaged arrangement with the third party exchange)”).

[5] Securities Exchange Act Release No. 76127 (October 9, 2015), 80 FR 62584 (October 16, 2015) (SR-NYSE-2015-36), at note 9 (order approving proposed rule change amending Section 907.00 of the Listed Company Manual) (determining whether a service or other product is a facility of an exchange “requires an analysis of the particular facts and circumstances.”). See also https://www.govinfo.gov/content/pkg/FR-2001-11-01/pdf/01-27417.pdf

[6] Approval Order at note 59 and accompanying text (citing Securities Exchange Act Release No. 44201 (April 18, 2001), 66 FR 21025, 21029 (April 26, 2001) (File No. 79-9) (Order Granting Application for a Conditional Exemption by the National Association of Securities Dealers, Inc. Relating to the Acquisition and Operation of a Software Development Company by the Nasdaq Stock Market, Inc.).

[7] An “exchange” is any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.” Section 3(a)(1) of the Exchange Act. 15 U.S.C. 78c(a)(1).

[8] 15 U.S.C. 78c(a)(2).

[9] See Hogan Lovells, Potential Ramifications of the Exchange Regulatory Improvement Act (H.R. 3555) 4 (listing appearances of facility of exchange in the Exchange Act and rules), https://www.hoganlovells.com/~/media/hogan-lovells/pdf/2017-general-pdfs/hr-3555.pdf?la=en.

[10] Seee.g., Securities Exchange Act Release Nos. 44983 (October 25, 2001), 66 FR 55225, 55233-34 (November 1, 2001) (SR-PCX-00-25).

 

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