On Feb. 8, the American Securities Association and Citadel Securities filed a brief in the 11th Circuit Court of Appeals in Atlanta challenging the CAT's new fee structure.
Previously, in order to fund the CAT, exchanges and alternative trading systems had to pay fees based on their market share, and industry members like broker-dealers paid fees according to their message traffic.
But in September, the SEC adopted an order crafted by CAT LLC — the group formed by U.S. exchanges to establish a plan to implement and manage the CAT. That order, which was originally filed with the SEC in March 2023, makes it so the fees participants pay to fund the CAT will be determined by executed shares. The fees will be divided evenly into thirds across three parties: the exchanges and alternative trading systems, the executing brokers representing buyers and the executing brokers representing sellers, SEC Chairman Gary Gensler said in September when the order was approved. Previously, allocation was not specified between venues and broker-dealers.
Industry groups oppose the new model because they say most of the costs will be absorbed by broker-dealers.
ASA and Citadel in their lawsuit argue that the order is unlawful because establishing the CAT in the first place exceeds the SEC's authority; the funding model violates the Exchange Act, which requires "the equitable allocation of reasonable dues, fees, and other charges" among an exchange's members; and the economic analysis backstopping the plan runs afoul of the Exchange Act and the Administrative Procedure Act.
On Feb. 15, 23 Republican attorneys general, led by Arkansas Attorney General Tim Griffin, filed an amicus brief in support of the ASA and Citadel lawsuit.
The same day, the Securities Industry and Financial Markets Association, the Alternative Management Association, the Committee on Capital Markets Regulation, the Investment Company Institute, the Managed Funds Association, and Virtu Financial filed a brief of their own backing the challenge.
The groups claim that the SEC's order is invalid because it inequitably and unjustifiably imposes massive costs on broker-dealers and investors while affording them no genuine role in establishing the CAT's budget. Also, they say the SEC failed to address the effect of the CAT's structure on CAT costs and to adequately consider alternative cost-control mechanisms.
"The SEC's approval of a blank check funding model will continue to encourage mismanagement of the program by passing the enormous and unchecked costs onto broker-dealers who lack a vote on the CAT's operating committee," MFA President and CEO Bryan Corbett said in a statement. "The SEC failed to consider alternative funding models and did not adequately address the serious issues raised by stakeholders. Unless this rule is vacated, costs will continue to rise for investors, harming US capital markets. MFA is joining with other industry groups in calling on the court to vacate the SEC's arbitrary and capricious approval of an unlawful funding model."
