Eleventh Circuit Reinforces the APA Duty to Update Economic Analyses and Give Reasoned Explanations for Cost-Allocation Shifts
Commentary on American Securities Association & Citadel Securities LLC v. SEC, 11th Cir. (2025)

I. Introduction

In American Securities Association v. U.S. Securities and Exchange Commission, the United States Court of Appeals for the Eleventh Circuit vacated the SEC’s 2023 order that established how the massive “Consolidated Audit Trail” (CAT) would be financed. The petitioners—a broker-dealer (Citadel Securities, LLC) and an industry trade group (American Securities Association)—challenged the order as arbitrary and capricious under the Administrative Procedure Act (APA).

Although the petitioners also attacked the CAT’s legality generally, the court exercised “judicial minimalism,” sidestepping that broader issue and instead zeroing in on two narrower but potent APA faults:

1. the SEC’s unexplained reversal that now allows self-regulatory organizations (SROs) to pass 100 % of CAT costs to broker-dealers, contrary to earlier commitments to shared funding; and
2. the agency’s refusal to update a seven-year-old economic analysis despite an eight-fold escalation in build-out costs and four-fold rise in annual operating expenses.

The decision sharpens the APA’s requirement that agencies must (1) acknowledge and explain policy shifts that undercut earlier rules, and (2) refresh cost–benefit analyses when real-world data undercuts prior estimates. Vacatur was ordered, but its effect was stayed 60 days to give the SEC time to respond.

II. Summary of the Judgment

• Holding: The SEC’s 2023 Funding Order is arbitrary and capricious and therefore unlawful under 5 U.S.C. § 706(2)(A) because:
  • it permits SROs to pass through all CAT costs to broker-dealers without reasoned explanation, contradicting the original plan requiring shared costs; and
  • it relies on—and only superficially “supplements”—a 2016 economic analysis that is wildly outdated in light of exponentially higher actual CAT costs.
• Relief: The order is vacated and remanded. Implementation of the vacatur is stayed for 60 days after the court’s mandate to minimize market disruption and give the SEC an opportunity to revise the rule.
• Issues Expressly Not Decided: The court did not rule on:
  • whether the CAT itself is lawful;
  • whether challenges to the CAT are time-barred; or
  • Exchange Act issues independent of the APA faults.

III. Detailed Analysis

A. Precedents Cited and Their Influence

• Encino Motorcars, LLC v. Navarro, 579 U.S. 211 (2016) & FCC v. Fox Television Stations, 556 U.S. 502 (2009)
  Both cases require agencies to acknowledge policy reversals and provide “good reasons” for them. The court leaned heavily on this principle to label the SEC’s silent shift to 100 % pass-through “an unexplained inconsistency.”
• FCC v. Prometheus Radio Project, 592 U.S. 414 (2021)
  Quoted for the bedrock rule that APA review demands agency decisions be “reasonable and reasonably explained.”
• Michigan v. EPA, 576 U.S. 743 (2015) & SEC v. Chenery Corp., 318 U.S. 80 (1943)
  Reinforce that courts may uphold agency action only on the rationale actually given by the agency—not on post-hoc litigation theories.
• Portland Cement Ass’n v. EPA, 665 F.3d 177 (D.C. Cir. 2011)
  Emphasized an agency’s duty to account for “material changes in circumstances.” Used to condemn the SEC’s refusal to update its 2016 economic analysis.
• Black Warrior Riverkeeper, Inc. v. U.S. Army Corps of Engineers, 781 F.3d 1271 (11th Cir. 2015)
  Provides that vacatur is the “ordinary” remedy under the APA. The court used it to justify setting the funding order aside rather than merely remanding.

B. Legal Reasoning of the Court

1. Internal Inconsistency & Unexplained Policy Change
   • Earlier CAT rules (2012 Adoption Rule, 2015 Plan, 2016 Approval Order) promised a shared-funding model.
   • The 2023 Funding Order says the same in text, yet footnote 1135 concedes SROs may pass 100 % of their costs to members.
   • That hidden about-face was not accompanied by an acknowledgment or justification—falling afoul of Encino/Fox.
2. Failure to Consider Important Aspects—Misaligned Incentives
   • The court highlighted a “free-rider” concern: SROs set CAT’s budget yet might bear no costs if they can pass them through.
   • The SEC brushed off comments that raised this issue, simply stating that SROs had historically been “focused on cost management.”
   • This cursory response ignored the economic reality that incentives change once pass-through is permitted, violating the APA’s requirement to weigh critical factors.
3. Outdated Economic Analysis
   • 2016 estimates: build-out $37–65 m; annual ops $36–55 m.
   • Reality by 2023: build-out $518 m, annual ops ≈ $200 m.
   • SEC “declined” to update its analysis, calling the 2016 numbers “appropriate.”
   • The court deemed reliance on obsolete data irrational because cost magnitude directly bears on Exchange Act factors: efficiency, competition, and capital formation.
4. Remedy Analysis
   • Because errors were “serious”—going to the heart of cost allocation and economic justification—remand without vacatur was inadequate.
   • Yet to avoid short-term market disruption, the vacatur is stayed 60 days, mirroring remedial stays in Buckley, North Pipeline, and Chicago Board of Trade precedents.

C. Likely Impact

• APA Jurisprudence Strengthened – Agencies within the Eleventh Circuit must now be particularly vigilant in revisiting cost-benefit analyses when empirical realities diverge sharply from prior forecasts.
• Cost-Allocation Rulemakings – Any rule that effectively shifts statutory cost burdens must include an explicit rationale and fresh economic evidence; otherwise, expect similar vacaturs.
• CAT Funding Re-Do – The SEC must craft—in about two months—a defensible funding formula, probably restoring some non-pass-through share for SROs and supplying an updated, data-driven analysis.
• SRO Fee Filings Subject to Scrutiny – Although individual fee-filing approvals are insulated from judicial review, the underlying allocation methodology now demands a holistic, transparent justification.
• Strategic Leverage for Regulated Parties – Broker-dealers and trade groups gain a road-map for APA challenges whenever agencies rely on stale analyses or tacitly permit complete cost transfers.

IV. Complex Concepts Simplified

• Administrative Procedure Act (APA) – Federal statute requiring agencies to act “reasonably” and to explain their rules; courts set aside rules that are “arbitrary” or “capricious.”
• Self-Regulatory Organization (SRO) – A private entity (e.g., NYSE, Nasdaq, FINRA) that performs regulatory functions under SEC oversight.
• Consolidated Audit Trail (CAT) – A massive database intended to capture every equity and options order, quote, and trade—allowing regulators to reconstruct market activity.
• Pass-Through Costs – Expenses initially incurred by one entity (here, SROs) but legally permitted to be billed onward to another (broker-dealers), often through fee filings.
• Vacatur – Judicial remedy that nullifies an agency rule; contrasted with remand without vacatur, which sends a rule back for further explanation but leaves it temporarily in force.
• Stay of Mandate – A pause in the effective date of a court’s judgment, used here to give the SEC 60 days to craft an interim or revised funding mechanism.

V. Conclusion

The Eleventh Circuit’s decision in American Securities Association v. SEC sets an unmistakable precedent: When real-world costs explode and an agency silently rewrites who pays the bill, the APA demands more than cursory nods to past analyses. Agencies must candidly acknowledge policy reversals, confront changed circumstances with updated data, and articulate a rational connection between facts found and choices made.

For the SEC, the ruling means an imminent rewrite of CAT funding. For regulated entities, it offers a robust template for future challenges. And for administrative law, it underscores a central tenet: regulatory legitimacy rests on transparent, data-driven, and well-explained decision-making.