Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 1 of 11
`
`UNITED STATES DISTRICT COURT
`FOR THE WESTERN DISTRICT OF TEXAS
`WACO DIVISION
`
`
`
`
`
`
`ERIK DAVIDSON, et al.,
`
`
`
`
`Plaintiffs,
`
`
`
`
`
`
`
`
`
`
`
`
`Civil Action No. 6:24-cv-00197-ADA
`
`
`
`§
`§
`§
`§
`§
`§
`
`
`
`
`
`v.
`§
`
`
`
`
`
`
`GARY GENSLER, in his official capacity §
`As Chairman of the U.S. Securities and
`§
`Exchange Commission, et al.,
`
`§
`
`
`
`
`
`
`§
`
`Defendants.
`
`
`
`§
`
`
`UNOPPOSED MOTION FOR LEAVE TO FILE BRIEF OF AMICUS CURIAE
`ANDREW N. VOLLMER OF THE MERCATUS CENTER IN SUPPORT OF
`PLAINTIFFS’ PRELIMINARY INJUNCTION MOTION AND
`IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`
`Pursuant to Local Rule CV-7(b), proposed Amicus Curiae, Andrew N. Vollmer of the
`
`Mercatus Center at George Mason University (“Movant”), asks that the Court grant leave for the
`
`filing of his amicus brief, attached as Exhibit A. Movant requested and received consent from
`
`counsel to Plaintiffs and Defendants to the filing of the brief.
`
`As further detailed in his brief, the Movant was Deputy General Counsel of the Securities
`
`and Exchange Commission (“SEC”), taught securities regulation courses at the University of
`
`Virginia School of Law, and was a partner in the securities enforcement practice of Wilmer Cutler
`
`Pickering Hale and Dorr LLP. He is now a research scholar with the Mercatus Center at George
`
`Mason University.
`
`The purpose of the Amicus brief is to supplement the positions of the parties on the
`
`authority of the SEC to use the statute for the national market system (“NMS”) (15 U.S.C. § 78k-1)
`
`to order the creation of the Consolidated Audit Trail. The brief provides a broader perspective on
`
`4884-9701-2186.2
`
`1
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 2 of 11
`
`the context of the statutes discussed by the parties. Accordingly, the Amicus brief will be helpful
`
`to the Court as it considers the questions presented in this lawsuit.
`
`Movant therefore respectfully asks that the Court grant leave for the filing of the attached
`
`Amicus brief.
`
`August 22, 2024
`
`
`
`
`
`
`
`Respectfully submitted,
`
`GRAY REED
`
`
`
`
`
`
`
`By: Chris Davis
`Chris Davis
`Texas Bar No. 24050483
`Angela L. Brown
`Texas Bar No. 24034533
`1601 Elm Street, Suite 4600
`Dallas, Texas 75201
`Tel:
`(469) 320-6125
`
`(469) 320-6225
`Email: cdavis@grayreed.com
`abrown@grayreed.com
`
`
`Attorneys for Amicus Curiae
`Andrew N. Vollmer of the Mercatus Center at
`George Mason University
`
`
`
`
`
`
`4884-9701-2186.2
`
`2
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 3 of 11
`
`UNITED STATES DISTRICT COURT
`FOR THE WESTERN DISTRICT OF TEXAS
`WACO DIVISION
`
`
`
`
`
`
`ERIK DAVIDSON, et al.,
`
`
`
`
`Plaintiffs,
`
`
`
`
`
`
`
`
`
`
`
`
`Civil Action No. 6:24-cv-00197-ADA
`
`
`
`§
`§
`§
`§
`§
`§
`
`
`
`
`
`v.
`§
`
`
`
`
`
`
`GARY GENSLER, in his official capacity §
`As Chairman of the U.S. Securities and
`§
`Exchange Commission, et al.,
`
`§
`
`
`
`
`
`
`§
`
`Defendants.
`
`
`
`§
`
`
`BRIEF OF AMICUS CURIAE ANDREW N. VOLLMER OF THE MERCATUS CENTER
`IN SUPPORT OF PLAINTIFFS’ PRELIMINARY INJUNCTION MOTION AND IN
`OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`
`Amicus Curiae, Andrew Vollmer of the Mercatus Center at George Mason University
`
`
`
`(“Amicus”), supports Plaintiffs’ request for preliminary and final relief to set aside the creation of
`
`the Consolidated Audit Trail (the “CAT”) by the Securities and Exchange Commission (“SEC”)
`
`and opposes Defendants’ motion to dismiss. As this brief explains, Amicus agrees that the SEC
`
`used a statutory authority that did not permit it to order the CAT.
`
`STATEMENT OF INTEREST OF AMICUS CURIAE1
`
`Amicus was Deputy General Counsel at the SEC from 2006 to 2009 and taught securities
`
`regulation as Professor of Law, General Faculty, at the University of Virginia School of Law
`
`from 2014 to 2019. Amicus for many years was a partner in the securities enforcement practice
`
`
`All parties consent to the filing of this brief. No party’s counsel authored this brief in whole or
`1
`part, and no party or party’s counsel made a monetary contribution to fund preparation or submission of
`this brief.
`
`4884-9701-2186.2
`
`3
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 4 of 11
`
`of Wilmer Cutler Pickering Hale and Dorr LLP. He is currently a research scholar with the
`
`Mercatus Center at George Mason University.2
`
`Amicus has spent decades interpreting, enforcing, teaching, and writing about the federal
`
`securities laws. He has an interest in the SEC regulating capital markets efficiently and
`
`remaining within its statutory authority to administer the securities laws.
`
`ARGUMENT
`
`The SEC ordered the creation of the CAT based on the agency’s authority to facilitate
`
`the establishment of a national market system for securities (“NMS”). That was an error because
`
`the SEC’s purposes in creating the CAT did not conform with the findings and objectives for an
`
`NMS that Congress included in the statute. As with earlier audit trails, the SEC created the CAT
`
`for regulatory and enforcement purposes and not to meet the NMS objectives of helping
`
`securities traders find the best prices and executions.
`
`In addition, Defendants’ brief in support of the motion to dismiss was not faithful to the
`
`record of the CAT when it argued that the SEC used authority under Section 17 of the Securities
`
`Exchange Act of 1934 (“Exchange Act”) as a basis for the CAT. The rulemaking power in
`
`Section 17 on document retention and examination was not the source of the analysis or
`
`reasoning for adopting the CAT, even though the SEC included Section 17 in a list of
`
`authorizing statutes.
`
`I.
`
`The SEC’s basis and purpose for ordering the CAT
`
`The SEC predicated the CAT on its authority to develop an NMS, which is in Section
`
`11A of the Exchange Act and is described in the next section of this brief. The SEC adopted the
`
`CAT as “an NMS plan filed pursuant to Rule 608 of Regulation NMS.” Consolidated Audit
`
`
`Amicus submits this brief in his capacity as a scholar at the Mercatus Center, but the views in the
`2
`brief are his only and not necessarily of any of the institutions mentioned above.
`4
`
`4884-9701-2186.2
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 5 of 11
`
`Trail, 77 Fed. Reg. 45722, 45741 (Aug. 1, 2012) (Adopting Release). The SEC adopted
`
`Regulation NMS in 2005 in furtherance of its statutory obligation under Section 11A.
`
`Regulation NMS, 70 Fed. Reg. 37496, 37497 (Jun. 29, 2005). Rule 608 was an NMS rule3
`
`When ordering the creation of the CAT, the SEC said the purpose was to facilitate regulatory
`
`oversight and enforcement functions of the SEC and the self-regulatory organizations (“SROs”).
`
`See id 77 Fed. Reg. at 45722-23, 45726. The CAT was to “improve the ability of the SROs and
`
`the Commission to perform their regulatory functions” and address limitations on their ability to
`
`conduct “market surveillance, investigation and enforcement activities, and market
`
`reconstruction and analysis.”4
`
`As this brief will now explain those stated purposes of the CAT are not part of the
`
`objectives of the NMS. The SEC therefore could not use Section 11A as authority for the CAT.
`
`II.
`
`national market system
`
`Exchange Act Section 11A governs the establishment of an NMS. 15 U.S.C. § 78k-1. It
`
`grants the SEC authority to act on specific congressional findings and carry out specific statutory
`
`objectives to facilitate that goal. Id. § 78k-1(a)(2). Congress added Section 11A as part of many
`
`reforms in the Securities Acts Amendments of 1975 to eliminate fixed brokerage commissions
`
`and improve the performance of the SEC, stock exchanges, and the securities markets.5
`
`
`Regulation NMS renumbered Exchange Act Rule 11Aa3-2 to be Rule 608. Adopting Release 37570. The
`3
`SEC said Rule 11Aa3-2 was promulgated under section 11A. Order Pursuant to Section 11A of the Securities
`Exchange Act of 1934 and Rule 11Aa3-2(f) Thereunder Extending a de minimis Exemption for Transactions in
`Certain Exchange-Traded Funds from the Trade-Through Provisions of the Intermarket Trading System, 69 Fed.
`Reg. 71445, 71445 n.2 (Dec. 9, 2004).
`77 Fed. Reg. at 45726-27; see also id. at 45730-33; 88 Fed. Reg. 62628, 62673 (Sept. 12, 2023) (Order
`4
`Approving an Amendment to the NMS Plan Governing the Consolidated Audit Trail (attempting to justify the CAT
`as part of the national market system because an improved enforcement capability contributes to investor
`protection).
`Pub. L. No. 94-29, 89 Stat. 97 (Jun. 4, 1975). Chapter 12 of Joel Seligman’s magisterial history of the SEC
`5
`provides extensive background on the 1975 amendments. See, e.g., Joel Seligman, THE TRANSFORMATION OF WALL
`STREET 496 (3d ed. 2003) (“In enacting the 1975 amendments, Congress was most concerned about preventing the
`type of error losses associated with the 1967-1970 back-office crisis and narrowing price spreads by enhancing
`market-maker competition.”).
`
`4884-9701-2186.2
`
`5
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 6 of 11
`
`The introduction to Section 11A expressed Congress’s findings and objectives for
`
`establishing an NMS. The goals were more efficient and effective market operations,
`
`economically efficient execution of securities transactions, fair competition among securities
`
`trading markets, the ability for trades to be executed in the best markets, and wide availability of
`
`information on quotations and transactions. Congress wanted to link all markets with
`
`communication and data processing methods to contribute to the best execution of investor
`
`orders. Id. § 78k-1(a)(1).
`
`The legislative history of Section 11A confirms that the objective was better prices and
`
`execution of trades for investors. A conference committee largely adopted the findings and
`
`objectives in a Senate bill and stated the conferees’ intent that a “national market system evolve
`
`through the interplay of competitive forces as unnecessary regulatory restrictions are removed.”
`
`H.R. Rep. No. 94-229, at 92 (1975). The Senate report for the relevant Senate bill said a key
`
`goal of developing an NMS was best execution of investor trades. One of the paramount
`
`objectives was “the centralization of all buying and selling interest so that each investor will
`
`have the opportunity for the best possible execution of his order, regardless of where in the
`
`system it originates.” S. Rep. No. 94-75, at 7 (1975).
`
`The SEC properly construed Congress’s aims for an NMS when taking actions other than
`
`ordering the CAT. When adopting Regulation NMS, the SEC stated, in relevant part:
`
`The NMS is premised on promoting fair competition among individual markets,
`while at the same time assuring that all of these markets are linked together,
`through facilities and rules, in a unified system that promotes interaction among
`the orders of buyers and sellers in a particular NMS stock. The NMS thereby
`incorporates two distinct types of competition—competition among individual
`markets and competition among individual orders—that together contribute to
`efficient markets. Vigorous competition among markets promotes more efficient
`and innovative trading services, while integrated competition among orders
`promotes more efficient pricing of individual stocks for all types of orders, large
`
`4884-9701-2186.2
`
`6
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 7 of 11
`
`and small. Together, they produce markets that offer the greatest benefits for
`investors and listed companies.
`
`70 Fed. Reg. 37496, 37498-99 (Jun. 29, 2005).
`
`The Congressional findings and objectives for an NMS did not include facilitating the
`
`oversight or enforcement functions of the SEC or the SROs. Rather, the purpose of the NMS
`
`was to lower the costs of securities trading, increase the ability of investors and market-makers to
`
`discover prices, and make trading among the markets easier. It was not to make the job of the
`
`SEC and SROs easier. Section 11A certainly afforded no ground for the SEC to order
`
`government access to personal identifying information for investor trades. The CAT therefore
`
`did not fall within the SEC’s authority to write rules for an NMS.
`
`III.
`
`
`Section 17 on document retention and examination as a basis for the CAT
`
`In its brief, Defendants concoct a revisionist history of the CAT. The SEC argues that the
`
`CAT was based on the books and records and examination provisions in Exchange Act Section
`
`17(a)-(b) (15 U.S.C. § 78q(a)-(b)). (See Doc. 39 at 27-28). The SEC also claims that in the
`
`1975 legislation Congress “made landmark amendments” to reaffirm Section 17, (Id. at 6). It
`
`further claims that earlier audit trails were based on Section 17. (Id. at 26-27). These statements
`
`are not correct. In fact, Defendants’ brief is rife with misinterpretations and misdirection about
`
`the securities laws.
`
`In 1975, Congress did not set out to reaffirm Section 17. Instead, it amended Section 17
`
`to add new types of regulated parties—such as transfer agents, clearing agencies, and municipal
`
`securities dealers—to the list of entities that needed to keep records and could be subject to
`
`examinations. The 1975 amendments did not alter the substance of the existing document
`
`retention and examination obligations of exchanges or broker-dealers. Instead, because of the
`
`expansion of the list of regulated persons required to keep records, it added provisions on the
`
`4884-9701-2186.2
`
`7
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 8 of 11
`
`coordination of exams by the SEC and banking authorities. See S. Rep. No. 94-75, at 119, 219-
`
`20 (1975). The amendment of Section 17 is separate from the addition of Section 11A.
`
`In the Adopting Release, the SEC did not discuss its rulemaking authority under Section
`
`17(a) as a justification for the CAT. It stated unequivocally that the CAT was “an NMS plan filed
`
`pursuant to Rule 608 of Regulation NMS.” 77 Fed. Reg. at 45741. The SEC never examined or
`
`analyzed the rulemaking text in Section 17(a) to determine whether it applied to permit the CAT.
`
`In fact, not until many pages into the CAT Adopting Release does the SEC refer to the
`
`obligations of regulated parties under Section 17. See, e.g., id. at 45784. And even then, the
`
`SEC does not connect its order of the CAT to the rulemaking authority in Section 17. Id. In fact,
`
`the SEC expressly distinguishes its authority under Regulation NMS for the CAT from books and
`
`records obligations under Section 17. See id. at 45758, 45772. It did so even though the
`
`Adopting Release included Section 17 in the list of many provisions given as authority for the
`
`final CAT rule. Id. at 45808.
`
`The SEC’s claim that the approval of earlier audit trails was based on Section 17 is also
`
`inaccurate. In the CAT Adopting Release, the SEC discussed the origins of earlier audit trails—
`
`especially those for FINRA (then the NASD) and the New York Stock Exchange. 77 Fed. Reg.
`
`at45728. The legal basis was not the SEC’s authority over an NMS or the Section 17 duty of
`
`SROs to keep records and make them available for SEC examinations.
`
`The NASD and NYSE instituted the audit trails to resolve SEC enforcement actions
`
`asserting that the SROs were not able to reconstruct market activity because they could not
`
`locate or retrieve important trading records. The legal basis for the audit trail requirement was
`
`the Section 15A duties of the SROs to enforce their own rules (15 U.S.C. § 78o-3(b)(2)) and to
`
`prevent, detect, and punish fraudulent and manipulative acts and practices (15 U.S.C. § 78o-
`
`4884-9701-2186.2
`
`8
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 9 of 11
`
`3(b)(6)). See, e.g., Order Relating to the Creation of an Order Audit Trail System, 63 Fed. Reg.
`
`12559, 12560, 12566-67 (Mar. 13, 1998) (NASD). And the audit trails did not have personal
`
`information about customers. Id. at 12562.
`
`The establishment of audit trails is different from quotation and transaction reports under
`
`Regulation NMS and therefore different from the communications systems linking markets that
`
`Congress wanted securities information processors to provide for an NMS. See H.R. Rep. No.
`
`94-229 (1975) (conference report); 77 Fed. Reg. at 45735, 45761 n.418. The SEC did not
`
`describe the CAT as an NMS method to communicate quotations and transactions for the
`
`efficient execution of investor trading. See 77 Fed. Reg. at 45722-23.
`
`CONCLUSION
`
`In creating the CAT, the SEC exceeded the NMS authority granted by Congress. The SEC
`
`has taken a statute aimed at making the securities trading systems better and cheaper for
`
`investors and co-opted it to make the SEC’s and SROs’ jobs of regulation and enforcement
`
`easier. A statute for investors has been turned into a statute for the comfort of regulators. If the
`
`desire for improved enforcement capabilities have merit, the SEC should find that authority in a
`
`provision other than Section 11A or request authority from Congress rather than use a statute
`
`with a different purpose to find a power that does not exist there.
`
`Fort these reasons, Amicus asks the Court to grant Plaintiffs’ motion for a preliminary
`
`injunction and deny Defendants’ motion to dismiss.
`
`4884-9701-2186.2
`
`9
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 10 of 11
`
`August 22, 2024
`
`
`
`
`
`
`
`Respectfully submitted,
`
`GRAY REED
`
`
`
`
`
`
`
`By: Chris Davis
`Chris Davis
`Texas Bar No. 24050483
`Angela L. Brown
`Texas Bar No. 24034533
`1601 Elm Street, Suite 4600
`Dallas, Texas 75201
`Tel:
`(469) 320-6125
`
`(469) 320-6225
`Email: cdavis@grayreed.com
`abrown@grayreed.com
`
`
`Attorneys for Amicus Curiae
`Andrew N. Vollmer of the Mercatus Center
`at George Mason University
`
`
`
`
`
`
`4884-9701-2186.2
`
`10
`
`

`

`Case 6:24-cv-00197-ADA Document 50 Filed 08/22/24 Page 11 of 11
`
`CERTIFICATE OF SERVICE
`
`I hereby certify that on August 22, 2024, I electronically filed the above Unopposed Motion
`
`for Leave to File Amicus Brief together with the proposed brief by using the District Court’s
`
`PACER system. I further certify that service will be accomplished by the PACER system.
`
`
`Dated: August 22, 2024
`
`
`
`
`
`
`
`
`
`
`
`
`/s/ Chris Davis
`Chris Davis
`
`
`
`
`
`
`
`
`
`
`
`4884-9701-2186.2
`
`11
`
`