In March 2018, the Securities and Exchange Commission ("SEC") issued a proposed rule, Rule 610T of Regulation NMS (the "Proposal"), which would create a Transaction Fee Pilot for National Market System ("NMS") stocks (the "Pilot"). The Pilot recently received renewed attention as a result of an email sent by the New York Stock Exchange ("NYSE") to listed issuers expressing concerns the NYSE has regarding the Pilot.
As explained in the Proposal, the Pilot's purpose would be to study the effects that potential changes to transaction-based fees and rebates that are paid by exchanges to broker-dealers/market makers may have on order routing behavior, execution quality, and market quality more generally. The Pilot is designed to generate data to help inform the SEC, market participants, and the public about the effects, if any, of such fees, thereby facilitating an evaluation of the need for regulatory action in this area.
The Pilot would apply to equities exchanges, but not alternative trading systems or other non-exchange trading centers, and would last one year unless extended to two years by the SEC. As proposed, the Pilot would require the creation of three test groups of 1,000 listed stocks, each of which would be subject to different levels of allowable access fees and rebates. The listed stocks not selected for one of the three groups would comprise a control group, which would be subject only to the access fee cap imposed by existing rules.
By way of background, the predominant fee model in the U.S. equities markets is the "maker-taker" model, in which an exchange or other trading center pays its broker-dealer participants a per share rebate to provide (i.e., "make") liquidity in securities and assesses them a fee to remove (i.e., "take") liquidity. An alternative model is the "taker-maker" model (or inverted model), where the trading center charges a fee to the provider of liquidity and pays a rebate to the taker of liquidity. Market participants and others have expressed concern about the maker-taker model, arguing that it may pose a conflict of interest for broker-dealers, who must pursue the best execution of their customers' orders while facing potentially conflicting economic incentives to avoid fees or earn rebates. Others have expressed concern that access fees may undermine market transparency, introduce unnecessary market complexity, and increase market fragmentation. At the same time, others have contended that the maker-taker model has positive effects on the market, such as enabling exchanges to compete with non-exchange trading centers and narrowing the quoted spreads by subsidizing posted prices.
While studies have been conducted in the past to assess the impact of access fees and rebates, the Proposal articulates the SEC's belief that a large pilot program with a relatively long duration is needed to gather the data required to analyze the impact of fees and rebates on the markets.
Given the proposed parameters of the Pilot (and the future regulation that certain market participants anticipate will follow), it is not surprising that commenters on the Proposal disagree about whether the Pilot is appropriate and necessary. Both the NYSE and Nasdaq are firmly opposed to the Proposal, while the Council of Institutional Investors and several large institutional shareholders, such as Blackrock and Vanguard, voiced strong support for the Proposal during the comment period. Other institutional shareholders, such as State Street, expressed support for the concept of the Pilot generally, but suggested specific modifications to the Pilot's design in order to increase its usefulness and mitigate potential risks associated with it. In an email recently circulated to listed companies, the NYSE expressed the view that the Pilot "would impair market quality by widening spreads in stocks, adding costs for both investors and companies" and "may also disadvantage companies selected for one of the test groups." The NYSE encourages listed companies to voice any concerns about the Proposal through comment letters to the SEC (although the official comment period ended on May 25, 2018) or by specifically requesting exclusion from the Pilot (although, as the NYSE's email acknowledges, the Proposal does not provide a mechanism allowing listed companies to opt out of the Pilot).
The Proposal identifies certain costs that would be borne by exchanges, broker-dealers, investors, and issuers as a result of the Pilot; however, the SEC acknowledges that it is unable to quantify all of the economic effects the Pilot may have. Given that the equities exchanges are likely to feel the impact of the Pilot the hardest, it is not surprising that the comments submitted by the NYSE and Nasdaq contend the Proposal violates the Securities Exchange Act of 1934 and Administrative Procedure Act by failing to adequately consider the economic impact of the Proposal.
In its comment letter, the NYSE argues that the SEC substantially underestimated the burdens and costs of the Pilot on market participants. With respect to investors, the NYSE notes: "Although the [SEC] acknowledges that wider spreads directly impact investors' execution costs, it has failed to consider that the Proposal would cause broker-dealers to widen spreads in response to lower exchange rebates as access fees fall and, in doing so, would negatively impact investors' execution quality by increasing the costs to investors by at least $1 billion per year." With respect to issuers, the NYSE states: "Issuers of securities that are subject to the Proposal's price restrictions would face increased costs associated with raising capital due to wider spreads," which would result in transactions in those securities becoming "more expensive and less attractive to investors."
The Proposal and comment letters make clear that the impact access fees and rebates may be having on the markets is not fully understood. The Proposal suggests one way of studying those impacts; however, as pointed out by commenters, there may be other ways. Issuers evaluating the Proposal and determining whether to submit comments may want to carefully review not only the Proposal, but also the points raised by the exchanges, institutional investors, and broker-dealers, and discuss the matter with their significant investors and investment bankers. As noted above, the deadline for comments has officially passed, although the SEC typically considers comments submitted after the official comment period closes, and may welcome additional perspectives of investors and issuers on these complex issues.
 See Letter from Elizabeth King, NYSE, to Brent J. Fields, Secretary, SEC (May 31, 2018), available at
https://www.sec.gov/comments/s7-05-18/s70518-3755194-162578.pdf ("NYSE Letter"); Letter from Edward S. Knight, Nasdaq, to Brent J. Fields, Secretary, SEC (May 25, 2018), available at
 NYSE Letter at 3.