|
2004
CASE ANALYSIS
In
the Matter of BLOOMBERG L.P. For Review of Action Taken by the
NEW YORK STOCK Exchange, INC.
Securities Exchange Act of 1934 Release No. 49076, January 14, 2004
http://sec.gov/litigation/opinions/34-49076.htm
A
Little Background
A contract between Bloomberg L.P., a vendor of quotation information, and
the New York Stock Exchange, Inc. ("NYSE") governs Bloomberg's
receipt and dissemination of NYSE market data. The NYSE amended this
contract to impose restrictions on Bloomberg's dissemination of
"Liquidity Quote" data. Based on these restrictions, the NYSE
rejected certain computer "screen shots" proposed by Bloomberg
to display Liquidity Quote and other quotation data from the NYSE and
other market centers. Essentially, NYSE denied Bloomberg the right to
transmit Liquidity Quote data to its customers in these formats. Bloomberg
appeals that decision and contends it constitutes a denial of access to
services under Sections 19(d) and 19(f) of the Securities NYSE Act of
1934.
On April 2, 2003, the SEC issued an order (the "April Order") that
approved NYSE rules to permit the display and use of quotations in stocks
traded on the NYSE to show additional depth in the market for those
stocks, i.e., Liquidity Quotes. For selected securities, the NYSE's
Liquidity Quote Service disseminates a "liquidity bid" and a
"liquidity offer," reflecting aggregated NYSE trading interest
at a specific price interval below the best bid (in the case of a
liquidity bid) or at a specific price interval above the best offer (in
the case of a liquidity offer). The Liquidity Quote Service is part of
the NYSE's "OpenBook" service. Notably, the April Order conditioned approval of the proposed rule change on the NYSE's
agreement to remove from agreements it had with its data vendors (the
"Vendor Agreements") any prohibition against data feed
recipients integrating Liquidity Quote data with data from other markets.
We stated, however, that the NYSE could require that vendors (i)
"provide the NYSE attribution in any display that includes Liquidity
Quote" and (ii) "make Liquidity Quote available to their
customers as a separate branded package." Moreover, the NYSE could not implement the Liquidity Quote Service
until the prohibition against integrating Liquidity Quote data was removed
from the Vendor Agreements.
Although on April 9, 2003, the NYSE informed the SEC that it agreed to the
conditions in the April Order; also subsequently the NYSE revised Exhibit
C to the Vendor Agreements by, among other things, adding various restrictions relating to the dissemination by vendors of Liquidity Quote
data (the "April Restrictions"). Bloomberg asked the SEC
to set aside those restrictions on that basis that they deny access to
NYSE services.
Denial
of Access
Where action of a self-regulatory organization ("SRO"), such as
the NYSE, constitutes a denial of access to services, the action is
subject to review under Securities Exchange Act Section 19(f).
Section 19 -- Registration, Responsibilities, and Oversight of
Self-Regulatory Organizations
(f) Dismissal of review proceeding
In any proceeding to review the denial of membership or
participation in a self-regulatory organization to any applicant,
the barring of any person from becoming associated with a member of
a self-regulatory organization, or the prohibition or limitation by
a self-regulatory organization of any person with respect to access
to services offered by the self-regulatory organization or any
member thereof, if the appropriate regulatory agency for such
applicant or person, after notice and opportunity for hearing (which
hearing may consist solely of consideration of the record before the
self-regulatory organization and opportunity for the presentation of
supporting reasons to dismiss the proceeding or set aside the action
of the self-regulatory organization) finds that the specific grounds
on which such denial, bar, or prohibition or limitation is based
exist in fact, that such denial, bar, or prohibition or limitation
is in accordance with the rules of the self-regulatory organization,
and that such rules are, and were applied in a manner, consistent
with the purposes of this title, such appropriate regulatory agency,
by order, shall dismiss the proceeding. If such appropriate
regulatory agency does not make any such finding or if it finds that
such denial, bar, or prohibition or limitation imposes any burden on
competition not necessary or appropriate in furtherance of the
purposes of this title, such appropriate regulatory agency, by
order, shall set aside the action of the self-regulatory
organization and require it to admit such applicant to membership or
participation, permit such person to become associated with a
member, or grant such person access to services offered by the
self-regulatory organization or member thereof.
|
What SRO Has
to Show Under 19(f)
(i) the specific grounds on which the
challenged action is based exist in fact;
(ii) such action was properly
undertaken in accordance with the SRO's rules; and
(iii) such rules are and
were applied in a consistent manner.
|
The SEC determined that the April Restrictions constitute NYSE "rules,"
which generally include "stated policies, practices, and
interpretations." Consequently, as rules, the April Restrictions can provide the basis for NYSE action
only if they
(i) have been approved pursuant to
Exchange Act Section 19(b) or
(ii) come within one of the two exceptions to the rule filing requirement
contained in NYSE Act Rule 19b-4(c).
Rule 19b-4 -- Filings with Respect to Proposed Rule Changes by
Self-Regulatory Organizations
- Filings with respect to proposed rule changes by a
self-regulatory organization, except filings with respect to
proposed rule changes by self-regulatory organizations submitted
pursuant to Section 19(b)(7) of the Act, shall be made on Form
19b-4 (§ 249.819 of this chapter).
- The term "stated policy, practice, or
interpretation" means:
- Any material aspect of the operation of the facilities of
the self-regulatory organization; or
- any statement made generally available to the
membership of, to all participants in, or to persons having
or seeking access (including, in the case of national
securities exchanges or registered securities associations,
through a member) to facilities of, the self-regulatory
organization ("specified persons"), or to a group
or category of specified persons, that establishes or
changes any standard, limit, or guideline with respect to:
- the rights, obligations, or privileges of
specified persons or, in the case of national securities
exchanges or registered securities associations, persons
associated with specified persons; or
- the meaning, administration, or enforcement
of an existing rule.
- A stated policy, practice, or interpretation of the
self-regulatory organization shall be deemed to be a proposed
rule change unless
- it is reasonably and fairly implied by an existing rule of
the self-regulatory organization or
- it is concerned solely with the administration of the
self-regulatory organization and is not a stated policy,
practice, or interpretation with respect to the meaning,
administration, or enforcement of an existing rule of the
self-regulatory organization.
. . . |
The SEC concluded that because it is undisputed that the
April Restrictions were never filed by the NYSE as proposed rule changes
under Section 19(b), they must come within one of the two filing
exceptions to provide a basis for NYSE action. Pursuant to Rule 19b-4(c), a stated policy, practice, or interpretation is
a proposed rule change that must be filed pursuant to NYSE Act Section
19(b) unless it "(i) is 'reasonably and fairly implied' by an
existing SRO rule, or (ii) is 'concerned solely with the administration'
of the SRO and 'is not a stated policy, practice, or interpretation with
respect to the meaning, administration, or enforcement of an existing
[SRO] rule.'" Interactive Brokers LLC, 53 S.E.C. at 470 n.9 (citing NYSE Act Rule
19b-4(c)). The SEC admonished that "a stated policy, practice,
or interpretation that prescribes extensive and specific limitations on
particular types of transactions or conduct that are not apparent from the
face of the existing rule is not 'reasonably and fairly implied' by the
rule." Filings by Self-Regulatory Organizations of Proposed Rule Changes, NYSE
Act Rel. No. 17258 (Oct. 30, 1980), 21 SEC Docket 347, 359-60. See also
Higgins, 48 S.E.C. at 724 ("stated policy imposing a broad
prohibition on [NYSE] members access" to NYSE services would
"have to be apparent from the face of the existing NYSE rules to fall
within the reasonably and fairly implied category."). The SEC
found no exceptions applied to the NYSE's action.
THE
DECISION
The SEC concluded that the NYSE imposed contractual restrictions
on Bloomberg L.P.'s' use of market quotation data disseminated by the NYSE,
and rejected certain of vendor's proposed displays of such data based on
restrictions, without a valid rule permitting it to do so.
Accordingly, the April Restrictions constitute NYSE rules
that were required to be filed and approved pursuant Section 19(b), and
because they were not so filed and approved, and do not fall within
either of the two exceptions contained in Rule 19b-4(c), they cannot
provide a basis for the NYSE's denial of access to Liquidity Quote data.
Therefore, the SEC set aside the
NYSE's action in denying Bloomberg access to that data.
COMMENT
Okay, so what makes this
somewhat esoteric case so interesting. Frankly, it's not so much the
issue of the displays or even the nature of the restrictions. What's
of interest here is a very subtle point. SROs have a tendency to be
overly paternalistic --- sometimes even going beyond fatherly prerogatives
and attempting to run things by fiat. That's not how Congress or the
SEC contemplated a self-regulatory organization would
operate. As messy and frustrating as the rulemaking process is,
there's still some aspect of democracy involved and the requirements are
that you propose a rule, the members comment on it, you make appropriate
revisions (or not), you put the proposal to a vote, and then you submit
the entire issue to the SEC for approval. At times, as shown in this
case, SROs think they are SRBs --- self-regulatory bureaucracies . .
. which they have tended to act like far too often in recent years.
They want to right to issue orders and interpretations and marginalize the
entire rulemaking system that should serve as a check and balance to
runaway meddling. As Otto Von Bismarck is believed to have said:
If you like laws and
sausages, you should never watch either one being made.
|
