Board of Trade of City of Chicago v. Securities and Exchange Commission

Dow Jones & Company created stock-market indexes, including the Dow Jones Transportation Average and the Dow Jones Utilities Average. The Transportation Average tracked the performance of 20 individual transportation stocks; the Utilities Average tracked the performance of 15 individual utility stocks. One issuer in the price-weighted Utilities Average accounted for more than 12 percent of the index weight. Pursuant to the Commodity Exchange Act, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) (defendant) had to approve any new futures contracts and only if (1) trading in the contract would not be readily susceptible to price manipulation or to causing price manipulation of the underlying index and (2) the underlying index reflected the market for all publicly traded debt or equity securities or a substantial segment thereof. The CFTC and the SEC issued a nonbinding, joint policy statement explaining their views about new futures contracts for trading. Per the policy statement, an underlying index (1) had to include at least 25 domestic issuers and (2) if price-weighted, could not have a single stock comprise more than 10 percent of the index weight. In 1997, Dow Jones decided to allow its indexes to be used in financial products. The SEC approved trading in options based on the Transportation and Utilities Averages, but the SEC balked at futures contracts based on the same averages. In the SEC’s view, futures contracts based on the Transportation or Utilities Averages would violate the policy statement because neither average included at least 25 issuers and the Utilities Average included an overweighted issuer. The SEC recognized that the policy statement was not legally binding, but it applied the statement’s criteria in assessing the totality of the circumstances. With respect to the act’s criteria, the SEC was concerned about potential price manipulation, but it did not deny approval on that basis. Rather, the SEC concluded that the Transportation and Utilities Averages were not broad based and thus did not reflect substantial segments of the market. The CFTC disagreed that an index had to be broad based. The Board of Trade of the City of Chicago (board) (plaintiff) petitioned for review of the SEC’s order.