Will Wall Street Earn Windfall For US CUSIP ID Codes?

Data management, trading, post-trade operations and compliance managers at buy-side and sell-side firms might one day no longer have to worry about their organizations being forced to pay for US identification codes and could even celebrate their winning over US$1 billion in compensation from CGS and others.

Judge Katherine Polk Failla of the Southern District of New York has allowed a class-action lawsuit against the American Bankers Association, S&P Global and FactSet Research filed by Dinosaur Financial Group, Swiss Investment Management and Hildene Capital to proceed on the grounds that they violated Section 2 of the Sherman Antitrust Act as well as New York and Connecticut laws. She dismissed the plaintiffs’ allegations that the defendants violated Section 1 of the Sherman Act and denied their request for a declaratory judgement saying that although the CUSIP system was created by the ABA in 1968, it does not have a copywright and CUSIPs are not copyrightable. Of all the plaintiffs’ claims, the ones about restraining competition are far more serious, because the defendants and other financial firms could have to fork over lots of money if a New York jury agrees with the plaintiffs.

In 2022, Dinosaur Financial Group, and Swiss Investment Management jointly filed a class action lawsuit against the ABA, S&P Global and FactSet first followed by Hildene Capital Management a few days later. Judge Failla subsequently agreed to consolidate both cases, as Hildene Capital and the defendants requested. All of the plaintiffs want a jury trial so and other financial firms can recoup what they claim were “excessive” fees they paid CGS over a four year period before they filed the lawsuit. They also want CGS’ to stop its anti-competitive behavior, which includes requiring financial firms to sign agreements with CGS if they access CUSIPs through third party data vendors and even if they acquire datafeeds containing CUSIPs directly from CGS. The plaintiffs believe that only issuers of securities receiving CUSIPs should pay fees.

If Dinosaur Financial Group, Swiss Investment Management and Hildene Capital win their lawsuit, they and other financial firms designated as part of the class of injured parties could even receive additional payment—representing damages– to be determined by the jury. The plaintiffs alleged that financial firms paid CGS US$100 million a year in inflated fees due to the lack of competition. Over a four-year period, those fees would total US$400 million, and the jury could triple that figure to US$1.2 billion, if they were to determine that the defendants violated the Sherman Act.

CUSIPs are nine-digit identification numbers issued by CGS for US securities, such as stocks and bonds. Financial firms need the codes so they can keep track of US securities for trading. post-trade transaction processing and reporting. CGS, which also issues 12-digit alphanumeric international securities identification codes for US securities, was operated by S&P Global under contract to the ABA until 2021 when FactSet Research purchased CGS for almost US$2 billion. That deal made FactSet Research the successor operator. The X9 standards-setting committee, established by the ABA in 1974, endorsed CUSIPs as the US standard for securities identification in 1976. Although the X9 committee officially split from the ABA in 2001, the plaintiffs insisted that it does not behave as an “independent” body, because the ABA and S&P still exert far too much influence. (The X9 committee reendorsed CUSIPs as the US standard for securities ID codes in December 2020).

The US class-action lawsuit isn’t the first time CGS has been in legal hot water. However, if successful it would be the first time that clients of CGS would receive financial compensation for being harmed. In 2011, the European Commission accused CGS of abusing its “dominant” position as the only agency assigned to issue International securities identification codes for US securities. Without acknowledging wrongdoing, CGS agreed to offer its clients in the European Economic Zone Area a downsized version of its ISIN database on a cost-recovery basis. Over the past decade a number of US trade organizations have repeatedly asked the US Securities and Exchange Commission to investigate CGS’ business policy, but so far, the regulatory agency has not taken any action. Therefore, it is likely that the only recourse financial firms had was to sue for violations of US anti-trust and other regulations.

No one denies that CGS operates a monopoly on the distribution of identification codes for US securities. The Sherman Act does not prohibit a company from becoming a monopoly as long as it is because of its superior products and services. However, the legislation does not allow monopolies to be created to prevent competition based on illegal conduct. Section 1 of the legislation forbids firms from becoming monopolies by conspiring with others, while Section 2 prohibits firms from taking “unilateral” illegal actions to become monopolies.

At the crux of the case against the ABA, S&P Global and FactSet is the requirement, beginning during the 1980s, that financial firms sign agreements with CGS to receive datafeeds containing CUSIPs from third-party data vendors. If firms didn’t sign those agreements, the vendors had the right to deny access to CUSIPs. Those agreements also dictated how financial firms can use and distribute CUSIPs. In their lawsuit Dinosaur Financial Group, Swiss Investment Management, and Hildene Capital provided scathing examples of how they were strongarmed to sign the agreements which have stifled potential competition and allowed CGS to charge inflated fees. (As the developer of the CUSIP system, the ABA retains 30 percent of those fees, according to the plaintiffs).

The plaintiffs also claimed that the ABA and S&P conspired to pressure the X9 committee to ensure that X9 would not select FIGIs as an alternative ID code to CUSIPs. Twelve-digit alphanumeric FIGIs are issued by Bloomberg, which does not charge firms for their distribution. In its lawsuit, Hildene Capital cited Bloomberg’s FIGIs as a viable equivalent or potentially superior alternative to CUSIPs, which it called useless other than for the fact they are the “industry standard” ID codes for US securities. (The X9 committee gave FIGIs its blessing as another US standard securities identifier in 2021).

The ABA and S&P denied influencing the X9 committee and said that they have the right to require financial firms to sign agreements with CGS even when accessing CUSIPs through third-party data vendors vendors based on the principle of “refusing to deal” indirectly. The defendants interpreted that principle to mean that just as CGS is not required to deal directly with potential competitors, it is also not required to deal “indirectly” with potential competitors that intend to “free ride” on the ABA, S&P and CGS’ investment in developing the CUSIP system.

Judge Failla ruled that Dinosaur Financial, Swiss Investment Management, and Hildene Capital could not sufficiently prove the ABA and S&P exerted any pressure on the X9 committee. Simply inferring such an influence based on the act that the X9 committee has members representing the defendants isn’t enough to prove wrongdoing.

Judge Failla also disagreed with the plaintiffs’ assertion that the defendants had violated Section 1 of the Sherman Act by creating a “group boycott” because they require financial firms to sign agreements with CGS if they accessed CUSIPs through third-party data vendors. Such a “group boycott” constitutes a “conspiracy” to prevent competition, which is prohibited under Section 1 of the anti-trust legislation.

The plaintiffs, according to Judge Failla, failed to prove a conspiracy through a “group boycott” because they could not show that “horizontal collusion” occurred. Dinosaur Financial, Swiss Investment Management and Hildene Capital asserted that the “horizontal collusion” did exist, because of the vertical agreements between the defendants and each third-party vendor. Each vendor knew that other third-party vendors had signed similar agreements with the defendants. However, Judge Failla said that such knowledge wasn’t sufficient evidence. “Plaintiffs do not suggest that any third party vendor’s decision to execute the agreement was contingent on another vendor’s execution of the same agreement; instead the most logical conclusion is that third party data vendors simply wanted to distribute CGS data,” she wrote in her opinion.

Judge Failla also disputed the assertion of Dinosaur Financial, Swiss Investment Management and Hildene Capital that it didn’t matter whether any of the plaintiffs– namely S&P and the ABA– held a copyright for CUSIPs individually or the CUSIP database. The plaintiffs felt that that the mere fact they and other financial firms have to sign an agreement with CGS if they wanted to access CUSIPs through third party vendors is enough to show that the defendants made financial firms believe they had a copyright; S&P could file a copyright infringement lawsuit against any financial firm which receives CUSIPs through third party vendors without signing an agreement with CGS.

Such a belief is based on a “conclusory” assertion and not direct evidence, countered Judge Failla. “Plaintiffs point to no instance of defendants in fact threatening such litigation [of copywright infringement] even if defendants conduct could be seen as anti-competitive,” she wrote in her opinion. Therefore, Dinosaur Financial, Swiss Investment Management and Hildene Capital had no standing to file a claim of declaratory relief concerning the copyrightability of CUSIPs.

However, Judge Failla threw the book at the defendants when it came to the plaintiffs’ claim the defendants violated Section 2 of the Sherman Act. She called the defendants’ rationale for requiring financial firms to sign subscription agreements with CGS to access CUSIPs through third-party vendors “preposterous.” Judge Failla disagreed with their reasoning that the requirement represented a “indirect refusal to deal.” That reasoning went as follows: if CGS was not compelled to deal with potential rivals directly on terms that allow “free riding” they should not be required to deal with them “indirectly” through financial firms.

Judge Failla ruled that the defendants’ actions did not represent a unilateral scheme. “The defendants have organized a multilateral arrangement in requiring that third party data vendors enforce the terms of subscription agreements containing suspect terms,” she wrote in her opinion. The required subscription agreements allow defendants to exert vast control over the use of CUSIP numbers, not just the copyrighted CUSIP_DB [database]. ” Therefore, CGS and the other defendants created a system designed to prevent any competition. Because the defendants did not find any other reason to dismiss the allegation of violating Section 2 of the Sherman Act other than their right to an “indirect refusal to deal,” wrote Judge Failla in her opinion, she would allow the allegation to stand. “At this stage in the litigation, [the plaintiffs] allegations are sufficient to distinguish this case from the no-duty-to-aid competitors’ line of caselaw, and to state a claim under Section 2 of the Sherman Act,” she reasoned.

Judge Failla’s decision to allow a claim under Section 2 of the Sherman Act to proceed prompted her to permit the plaintiffs’ claim of a violation of Connecticut’s Unfair Protection Act to remain. That state regulation is similar to Section 2 of the Sherman Act. The judge also decided to allow a claim of violating New York’s General Business Law to proceed by agreeing with the plaintiffs that S&P had a “cagey” explanation of its proprietary interest in CUSIPs and reason for why the defendants and others had to sign an agreement with CGS to access CUSIPs through third-party data vendors. Although S&P said that its conduct was never false or deceptive, the judge suggested that it could meet the criteria.

Dinosaur Financial, Hildene Capital, Swiss Investment Management, and their attorneys declined to comment for this article. In a statement to FinOps Report, CGS insisted the claims made by the three firms were without merit and that CGS’ policies are “lawful and fully consistent with longstanding principles of commercial and competition law.” CGS said it was fully prepared to defend the two remaining charges Judge Failla allowed to stand.