77 F.4th 971
D.C. Cir.2023Background
- The SPIKES Index measures 30‑day expected volatility of the S&P 500 but is derived from options on the SPY ETF; VIX measures the same volatility using options on the S&P 500 itself.
- Futures on broad‑based indexes are regulated as futures (CFTC); contracts on a single security or narrow‑based index are “security futures” regulated under a joint SEC/CFTC regime with stricter rules and less favorable tax treatment.
- MGEX sought to list SPIKES futures, self‑certified with the CFTC, began trading in Nov. 2019, then halted trading at SEC staff’s request while regulators considered classification issues.
- In Dec. 2020 the SEC issued an Exemptive Order: it determined SPIKES contracts are security futures but exempted them under Section 36 so they could be traded as futures, citing a goal of fostering competition with incumbent VIX futures and imposing conditions (including a 3‑month wind‑down rule if conditions fail).
- Cboe Futures Exchange (CFE) petitioned for review; the D.C. Circuit reviewed the Exemptive Order under the APA and found the SEC’s explanation inadequate.
- The court vacated the Exemptive Order for being arbitrary and capricious but withheld its mandate for three calendar months to allow orderly unwinding of open SPIKES futures positions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the SEC adequately explained how exempting SPIKES from the security‑future regime was necessary to foster competition | CFE: Order fails to explain why treating SPIKES as a future (not a security future) is necessary to promote competition with VIX futures | SEC: Trading as a future, not a security future, offers competitive advantages (tax treatment, lower margin) that justify relief; relied on MGEX submissions | Court: Vacated — the Order lacks a reasoned explanation connecting exemptive relief to competition and did not critically adopt or independently analyze MGEX materials |
| Whether the SEC adequately considered investor‑protection harms from dispensing with the Security Futures Risk Disclosure Statement | CFE: SEC failed to address the statutory investor‑protection implications of removing the Disclosure Statement for a product it found to be a security future | SEC: Protections remain via preserved anti‑fraud/inspection rules and CFTC futures disclosure requirements | Court: Vacated — SEC failed to acknowledge and reasonedly justify changing course from prior Disclosure Statement policy and did not analyze resulting harms |
| Remedy: Vacatur vs. remand without vacatur | CFE: Order should be vacated because agency failed APA review | SEC/MGEX: Vacatur would be disruptive to markets; argue remand without vacatur | Court: Vacated the Order but withheld issuance of mandate for three calendar months to allow market participants to unwind positions |
Key Cases Cited
- Dunn v. Commodity Futures Trading Comm’n, 519 U.S. 465 (1997) (definition and nature of futures contracts)
- Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (arbitrary and capricious standard for agency action)
- Encino Motorcars, LLC v. Navarro, 579 U.S. 211 (2016) (agency must examine relevant data and supply a reasoned explanation)
- Butte County v. Hogen, 613 F.3d 190 (D.C. Cir. 2010) (informal adjudication still requires statement of reasoning)
- Susquehanna Int’l Grp., LLP v. SEC, 866 F.3d 442 (D.C. Cir. 2017) (agency cannot blindly adopt regulated‑entity submissions without independent analysis)
- In re NTE Conn., LLC, 26 F.4th 980 (D.C. Cir. 2022) (agency must explain why it found third‑party analyses persuasive)
- Am. Wild Horse Pres. Campaign v. Perdue, 873 F.3d 914 (D.C. Cir. 2017) (agency must acknowledge and explain changes from prior policy)
- Allina Health Servs. v. Sebelius, 746 F.3d 1102 (D.C. Cir. 2014) (vacatur is the normal remedy for unlawful agency action)
- Chamber of Commerce v. SEC, 443 F.3d 890 (D.C. Cir. 2006) (withholding mandate to allow orderly transition is appropriate)
- Gulf Restoration Network v. Haaland, 47 F.4th 795 (D.C. Cir. 2022) (court rejects post hoc litigation rationalizations for agency action)