WASHINGTON, July 25 (Reuters) - A federal appeals court

on Friday struck down 2023 regulations adopted by the U.S.

Securities and Exchange Commission on funding a comprehensive

market surveillance system, finding that Wall Street's top

regulator had not provided a sufficient basis for allowing stock

exchanges to pass on its costs to their members, court papers

showed.

The unanimous decision represented another blow to SEC

regulations adopted under the previous Biden administration,

which faced concerted opposition from industry and Republican

lawmakers. It was also a setback for the Consolidated Audit

Trail, a repository of investor and transaction data meant to

give regulators overarching visibility into U.S. market

operations, but which has faced delays and obstacles for more

than a decade.

The American Securities Association and Citadel Securities,

which brought the lawsuit, both hailed the outcome.

The ruling "prevents a tax hike on every American investor

who buys or sells a share of stock," ASA President Chris

Iacovella said in a statement.

The SEC did not immediately respond to requests for comment.

Over the objections of its Republican members, the SEC in

2023 split the operating costs among buyers, sellers, and

exchanges. Officials said at the time this would divide costs

evenly but also allow exchanges several years to recoup hundreds

of millions already spent.

This drew stiff objections from the investment industry,

which said it could be left paying an unfairly large share. The

two Republicans are now part of the five-member commission's

controlling majority.

In an opinion for a three-judge panel of the U.S. Court of

Appeals for 11th Circuit, Circuit Judge Andrew Brasher said

that, because the SEC had not advanced a sufficient

justification in deciding how the system's cost would fall on

different actors in the marketplace, "we conclude that the 2023

Funding Order is arbitrary and capricious" and therefore in

violation of federal laws governing the crafting of regulations.

The appeals court sent the rule back to the SEC for further

processing in line with the court's decision.

The SEC mandated the CAT's creation in 2012 as a response to

the "flash crash" of 2010 when major Wall Street indexes

temporarily erased nearly $1 trillion in market value in a

matter of minutes. Officials say it can allow regulators to spot

market manipulation and have cited its data in enforcement

actions.