Petition — Gordon v. New York Stock Exchange, Inc.

Supreme Comt, 2S. |

— FILED

Supreme Court of the Ruited States’? |

‘ October Term, 1974 MICHAEL ROGAK, JR. CLERK

No. 4 394 ‘

RICHARD A. GORDON, individually and as President of

INDEPENDENT INVESTOR PROTECTIVE LEAGUE, an un-

incorporated association, and in behalf of the membership

thereof and in behalf of all persons similarly circumstanced,

Petitioners,

against

NEW YORK STOCK EXCHANGE, INC., AMERICAN STOCK

EXCHANGE, INC., and MERRILL, LYNCH, PIERCE,

FENNER & SMITH, INC. and BACHE & COMPANY,.INC.,

individually and as representatives of all member firms of the

New York Stock Exchange and American Stock Exchange,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

MAXIMILIAN BADER

|. WALTON BADER

Attorneys for Petitioners

274 Madison Avenue

New York, N.Y. 10016

Telephone: (212) 532-6860

A AE: Es a

Dick Bailey Printers *P.C. Box X, Staten ‘tiand, N.Y. 10302 * Tel.: (212) 447-6368

Re OR RR RET PEI mm

2

TABLE OF CONTENTS

Page

et aR coe SARS On, Hea AC 2

MN es est édddnntoddcdsebetedccetéstibobiasictes 2

Reasons Why This Petition Should Be Granted ....... 2

RE rs) ek Bea AAS ein . 3

POINT ONE—The Extent Of Anti-Trust Immunity On

The Part Of The Investment Community By

Reason To The Securities Acts Is A Question Of

Great Public Importance Which Should Be

Reviewed By This Court ............cccceesees 7

POINT TWO—Certiorari Should Be Granted In This

Case To Determine The Conflict Between Circuits

Of The Present Case And The Thill Case With

Respect To The Nature Of Anti-Trust. Immunity

With Respect To Stock Exchange Rules. ........ 8

POINT THREE—There Are Grave Constitutional

Questions Involved In This Appeal. ............. 9

POINT FOUR—The Determination Of The Court Of

Appeals Is In Conflict With The Determination In

The Silver Case Decided By This Court. ......... 11

POINT FIVE—This Court Should Reverse The

Determination Of The Court Of Appeals And, At

The Very Least, Remand This Case For Trial. ....13

Ce . .. . cidnencddecensuekecns eos eeneenes

Appendix A—Opinion of Hon. Morris E. Lasker and

Order Granting Defendants’ Motion For Summary

Judgment .........cccccceecceceeccesscceees 21

Appendix B—Opinion Of United States District Court

For The Southern District Of New York Granting

Defendants’ Motion For Summary Judgment ..... 35

Cases Cited

Albrecht v. Herald Co., 390 US 145... 6... ee eee eee 14

Engel v. Vitale, 370 US 421 .......-- cece eeeeeeees 7

FTC v. Flotill Products, Inc., 389US 179 ........... 9

FCC v. RCA, 346 US 86 .. wc ccc cece eee cc eens 7

International Brotherhood of Teamsters v. Vogt, 354

OI Be nnn tcc coms opoasenars 40.¢0s0000 pagqeees 7

J.I. Case Co. v. Borak, 377 US 426 ......... 5s cece 7

NLRB vy. Lion Oil Co., 352 US 282 .......-.eeeeeee 7

sae ee

iii

Northern Pacific RR Co. v. United States, 356 US 1 .. .14

Otis & Co.'v. SEC, 323 US 624 ...........ccccccees 8

Premier Electric Construction Co. v. Miller Davis Co..,

422 Fed. (2nd) 1132, certiorari denied 400 US 828 .14

Schwegman Bros. v. Calvert Distillers Corp., 341 US

PE CRNA ps Vecdiove esa voreeeesdveccdduaans 14

SEC v. National Securities Inc., 393 US 453 ......... 9

SEC v. Variable Annuity Life Insurance Co. of

FTIR OO ovis 664 008668 thcdee dcikts 7

Silver v. New York Stock Exchange, 373 US 341 ...... 3

Sperry v. State of Florida, 373 US 379 .............. 7

Textile Workers Union of America v. Lincoln Mills of

SE PED <0 vv scccesceiubeoucaeens 7

Theard v. United States, 354 US 278 ............... 7

Thill Securities Corp. v. New York Stock Exchange,

433 Fed. (2nd) 264 certiorari denied, 401 US 994 .. 8

United States v. Donruss Co., 393 US 297 ........... 9

United States v. General Motors Corp., 384 US 127 ...14

iv

United States v. McKesson & Robbins, Inc., 351 US

| I 14

United States v. National Association of Real Estate

Boards. 339 US 485 .......50 cece eee e eee eeeees 14

Willingham v. Morgan, 389 US 179 ......+-+++5505 9

Other Authorities

Section 2 of the Sherman Act .......---- esse eeeees 14

Section 19(b) of the Securities and Exchange Act of

BOOS . noc ccccccdeesdsees0enseneennnEEEE 9

WB USC 1DSA1) 2. cccccccvcccccsccccescsssssses 2

IN THE

SUPREME COURT OF THE UNITED STATES

RICHARD A. GORDON, individually and as President of

INDEPENDENT INVESTOR PROTECTIVE LEAGUE,

an unincorporated association, and in behalf of the

membership thereof and in behalf of all persons similarly

circumstanced,

Petitioners,

-against-

NEW YORK STOCK EXCHANGE, INC., AMERICAN

STOCK EXCHANGE, INC., and MERRILL, LYNCH,

PIERCE, FENNER & SMITH, INC. and BACHE &

COMPANY, INC., individually and as representatives of

all member firms of the New York Stock Exchange and

American Stock Exchange,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Petitioners herein pray that a Writ of Certiorari be

granted by this Court to review a determination of the

United States Court of Appeals for the Second Circuit,

made June 28th, 1974, which affirmed a determination of

the United States District Court for the Southern District

of New York, made December 3rd, 1973 which granted the

2

defendants’ Motion for Summary Judgment upon the

ground that the Securities and Exchange Commission had

primary jurisdiction over the fixing of Commission Rates

for Stock Trades. The Petitioners contend that the

determination of the Court is not well taken and should be

reversed.

JURISDICTION

Jurisdiction of this Court to review the determination of

the United States Court of Appeals for the Second Circuit

is given by 28 USC 1254(1). This petition is being made by

the plaintiffs in the cause below, parties to said action.

TIME

The determination of the United States Court of Appeals

for the Second Circuit was made on June 28th, 1974. This

petition is being filed within ninety (90) days from the date

of said determination.

REASONS WHY THIS PETITION

SHOULD BE GRANTED

This case involves almost every Rule of this Court

warranting the grant of a Petition for a Writ of Certiorari.

This case is:

1—Of great public importance. Both the US

Department of Justice and the SEC submitted briefs on

opposite sides of the question.

3

2—There is a conflict between circuits in the application

of the legal principles involved.

3—There are grave constitutional questions involved in

this appeal.

4—There is a conflict between the determination of the

Court of Appeals for the Second Circuit and prior

determinations of this Court including Silver v. New York

Stock Exchange, 373 US 341.

FACTS

This case involves the legality of the “fixed commission

rates”’ charged by the New York Stock Exchange and the

American Stock Exchange.

Since the inauguration of stock trading on the defendant

Stock Exchanges the exchanges have had various rules

providing for the fixation of commission rates to a certain

minimum amount. The Rules further provide that any

members of the said Exchanges who violate the Rules and

charge Commission Rates lower than the fixed amount will

be expelled from the Exchanges.

The Exchanges also have “Anti-Rebate” rules which

prevent division of commissions with non-members of the

said Exchanges, also under penalties of expulsion from the

exchanges.

The defendant Stock Exchanges are the primary market

4

for the sale of securities to the general public. While there

is some trading ‘off the board” where the facilities of the

defendant Stock Exchanges are not used for “‘listed

securities’ and there is also an active “over the counter”’

market for unlisted securities the primary securities

markets are the defendant exchanges.

In order to properly survive in the Securities Business,

therefore, it is necessary to be a member of the defendant

Exchanges or at least one of them.

Use of the facilities of the defendant Exchanges are

limited to “members” thereof. The ““memberships”’ in the

defendant exchanges are limited and a “seat” (or

membership) can be purchased only by buying some other

party's “seat”. The price paid for such a “‘seat”’ is generally

determined by the trading volume at the particular time

that the seat is sold.

The plaintiff Gordon is an investor in Securities traded

on the defendant Exchanges. The plaintiff Independent

Investor Protective League is an organization of investors

who invest in securities listed on the defendant Exchanges.

The members of the Independent Investor Protective

League and the plaintiff Gordon are vitally affected by the

fixation of Commission Rates by the defendant Exchanges.

The Securities and Exchange Commission (organized in

1933) until about the time of the commencement of this

action, took no action with respect to the fixation of

Commission Rates. Indeed, even after making a “‘letter

- ere ere en ar

EB ete

wre

determination” that it would “not object” to certain

practices with respect to (1) instituting a “surcharge” on

transaction of less than 1000 shares, (2) instituting a

“volume discount” on large transactions and (3) instituting

a negotiated commission schedule on transactions in excess

of $500,000 (now $300,000), the Commission, in two cases

where judicial review was sought on that issue, represented

to the Court that it, in fact, had no jurisdiction to fix

Commission Rates. In the Commission’s brief filed in

connection with the dismissal of the Petition for Review in

the United States Court of Appeals for the Second Circuit

taken by the plaintiffs against the “‘letter opinion” stating

that the practices suggested by the New York Stock

Exchange would not be objected to by the Commission

stared as follows:

‘“*** The Commission's letter of comment to the

Exchange did not order the Exchange, petitioners,

or any other person to do or to refrain from doing

anything. Nor did the letter “approve” or

“disapprove” the Exchange’s proposals.***”’

This brief resulted in a dismissal, without opinion, of the

plaintiff's Petition to Review the determination of the

Securities and Exchange Commission. (Docket 1984-71).

Petitioners then sued the Commission in the United

States District Court for the District of Columbia. Again

the Commission, in its brief seeking dismissal of the

Complaint, stated as follows:

6

‘“*** However, the question of the type and extent

of immunity that may flow from Commission

determinations regarding exchange rules and

practices need not be decided in this case. The

appropriate foruin for resolution of that question is

in an antitrust action against a self-regulatory

organization challenging its rules or the

administration of such rules.***”

This brief also resulted in a dismissal of the plaintiffs’

complaint.

The last determination of the Commission, made after

hearings with respect to Commission Rates, and which

permitted fixed commission rates to remain in effect was

again challenged in a Petition for Review to the United

States Court of Appeals for the Second Circuit. The

plaintiffs again attempted to challenge this determination

and again was met with a Motion to Dismiss on the ground

that the Commission had not issued a reviewable order.

This motion was again granted by the Court of Appeals

without opinion.

Despite the recited prior history the District Court and

the Court of Appeals, determined that the Securities and

Exchange Commission had full jurisdiction over the fixing

of Commission Rates, that, as a result, the defendants had

full anti-trust immunity, and, as a result, the petitioners

had no cause for Complaint.

7

POINT ONE.

THE EXTENT OF ANTI-TRUST IMMUNITY

ON THE PART OF THE INVESTMENT

COMMUNITY BY REASON TO THE

SECURITIES ACTS IS A QUESTION OF

GREAT PUBLIC IMPORTANCE WHICH

SHOULD BE REVIEWED BY THIS COURT.

The Court of Appeals, in affirming the determination of

the District Court, in its opinion, stated that:

“*#* Whether the minimum rate structure

presently employed by the nation’s stock exchanges

enjoys immunity from attack under the antitrust

laws is a question of such importance that we need

not belabor its significance.***”

Where a question of great public importance is

presented, which has not been previously decided, this

Court will, in general, grant certiorari to consider the

question. See for example, Engel v. Vitale, 370 US 421

(prayer in schools), International Brotherhood of

Teamsters v. Vogt, 354 US 284 (power of a state to enjoin

picketing), FCC v. RCA, 346 US 86, Textile Workers

Union of America v. Lincoln Mills of Alabama, 353 US

448, NLRB v. Lion Oil Co., 352 US 282, Sperry v. State of

Florida, 373 US 379 (question of State Bar’s power to

exclude a non-member of State Bar from practicing before

Federal Agency), Theard vs. US, 354 US 278, J.I. Case Co.

v. Borak, 377 US 426, SEC v. Variable Annuity Life

8

Insurance Co. of America, 359 US 65 (power of SEC over

variable annuity contracts) and Otis & Co. v. SEC, 323 US

624 (extent of SEC regulatory power).

In this case, it is submitted, that a determination by this

Court as to the nature and extent, if any, of the anti-trust

immunity enjoyed by the defendant stock exchanges and

brokerage community must be made by this court.

POINT TWO

CERTIORARI SHOULD BE GRANTED IN

THIS CASE TO DETERMINE THE CONFLICT

BETWEEN CIRCUITS OF THE PRESENT

CASE AND THE THILL CASE WITH RESPECT

TO THE NATURE OF ANTI-TRUST

IMMUNITY WITH RESPECT TO STOCK

EXCHANGE RULES.

The present action stands for the proposition that the

defendant Stock Exchanges, and the brokerage

community, are immune from the anti-trust laws so long as

the SEC has regulatory power over such rules (even if the

power has not been exercised). In the Seventh Circuit case

of Thill Securities Corp. v. New York Stock Exchange, 433

Fed. (2nd) 264, certiorari denied, 401 US 994, the Court

there held that the “‘anti-rebate” rule (which impliedly

permitted fixation of commission rates) was not immune

from the antitrust laws. The Second Circuit, in

distinguishing Thill also stated as follows:

9

“*** And it would be difficult to maintain that the

effect of the anti-rebate rule on investor protection,

fair dealing in securities or fair administration of

an exchange is in any respect different from the

practice of commission rate fixing. *** Thus, to

the extent our decision today is inconsistent with

Thill, we find ourselves constrained to disagree

with the holding there announced.***”’

Where an important question has been differently

decided by two different circuits this Court will, in general,

grant certiorari to resolve the conflict. See, for example,

FTC v. Flotill Products, Inc., 389 US 179, Willingham v.

Morgan, 389 US 179, US v. Donruss Co., 393 US 297, and

SEC v. National Securities, Inc., 393 US 453. The last-

cited case involved the grant of a Petition for a Writ of

Certiorari to determine questions with respect to the

administration of the Securities Laws.

POINT THREE

THERE ARE GRAVE CONSTITUTIONAL

QUESTIONS INVOLVED IN THIS APPEAL.

The determination of the Court of Appeals heavily relied

upon Section 19 of the Securities and Exchange Act of 1934

where Section 19%b) provides that

“*e* The Commission is further authorized, if

after making appropriate request in writing to a

national securities exchange that such exchange

10

effect on its own behalf specified changes in its

rules and practices, and after appropriate notice

and opportunity for hearing the Commission

determines that such exchange has not made the

changes so requested, and that such changes are

necessary or appropriate for the protection of

investors or to insure fair dealing in securities

traded in upon such exchange, by rules or

regulations or by order to alter or supplement the

rules of such exchange |insofar as necessary or

appropriate to effect such changes] in respect of

such matters as |9] the fixing of reasonable rates of

commission . . ."’ (emphasis supplied).

However this is not the manner in which the Commission

proceeded. The Commission considered a mere “letter”

from the Exchanges with respect to this matter, gave no

notice to the Exchanges to change their rules, and

conducted no adversary-type hearing with respect to such

changes. Indeed, after the rates involved were “not

objected to” the Commission represented to the Courts that

it had no power to fix commission rates and that its

‘suggestions amounted to non-reviewable

determinations.

Such a construction of the law would involve an

unconstitutional application of the Statute in violation of

the Fifth Amendment to the Constitution of the United

States. This, of course, was not the intention of Congress in

enacting the Securities Acts. The Commission would have

the appropriate power, to determine that Commission

Rates, in selected cases, were ‘unreasonable’. However it

was not given the power to permit a horizontal conspiracy

with respect to fixed commission rates or to merely give the

stock exchanges “letter opinions” that certain practices

were to be tolerated by the Commission and, by that device

preclude Judicial Review of such determinations. ;

POINT FOUR

THE DETERMINATION OF THE COURT OF

APPEALS IS IN CONFLICT WITH THE

DETERMINATION IN THE SILVER CASE

DECIDED BY THIS COURT.

This Court, in the landmark case of Silver vs.

Stock Exchange, 373 US 341, rejected the pico vee

New York Stock Exchange that it enjoyed a “blanket

exemption” from the antitrust laws because it was a

“regulated industry” subject to control by the Securities

and Exchange Commission. The Court in Silver held that

there was no such general exemption from the anti-trust

laws given to the Securities industry. Indeed, this Court

held on pages 359-60 of the opinion as follows:

“* * * Since the antitrust laws serve, among other

things, to protect competitive freedom, i.e., the

freedom of individual business units to compete

unhindered by the group action of others, it follows

that the antitrust laws are peculiarly appropriate as

a check upon anticompetitive acts of exchanges

which conflict with their duty to keep their

12

operations and those of their members honest and

viable... .”

In the present case, it must be conceded, based upon the

SEC's own position before two different courts, that it did

not ‘fix’ the commission rates involved. The removal of

fixed commission rates and the permitting of such

commission rates to be set by normal competitive forces is

not necessary to “make the securities acts work”’.

It is interesting to note the subsequent history of the

fixed commission rate battle since the determination of the

Court of Appeals in this case. The Securities and Exchange

Commission (apparently mindful of the issues in this suit)

has determined. tentatively, that fixed commission rates

would be phased out in April 1975 and that rates would be

permitted to be set competitively after that time. In the

meantime, however, the New York Stock Exchange now

joined by the American Stock Exchange, has petitioned the

Commission to permit a further increase in the

Commission Rates to ‘‘small investors’. The petition is

based upon the admitted premise that the brokerage

community needs more income and must be shielded from

competitive forces. The Exchanges also admit that they

attempted to raise commission rates to large customers and

were rebuffed. Therefore they seek to raise rates to the

group of the population not able to protect themselves.

The defendant exchanges have further publicly stated

that they will do all that is necessary to prevent the

institution of competitive commission rates in 1975 and will

egese-sr ~= =

. ee mee

Se REE SI ee

13

petition the Securities and Exchange Commission for such

relief.

POINT FIVE

THIS COURT SHOULD REVERSE THE

DETERMINATION OF THE COURT OF

APPEALS AND, AT THE VERY LEAST,

REMAND THIS CASE FOR TRIAL.

The function of a Petition for a Writ of Certiorari is to

demonstrate to the Court, the reasons why such review

should be granted. The Petition generally does not include

an extensive study of the law involved. However, for the

information of the Court, a capsule exposition of the

applicable law will be set forth.

There is no question that, if the SEC did not exist, the

fixation of commission rates by the defendant Stock

Exchanges coupled with the penalties imposed for violation

of the fixed minimum commissions to be charged, would be

per se violations of the anti-trust laws, Section 1 of the

Sherman Act (15 USC 1) prohibits:

‘Every contract, combination in the form of trust

or otherwise, or conspiracy, in restraint of trade or

commerce among the several States, or with

foreign nations, is declared to be illegal.* * *”

That the fixation of minimum commission rates, with

penalties for non-compliance thereof, is a per se violation

i4

of the anti-trust laws is clear. See, for example, Premier

Electric Construction Company vs. Miller Davis Co., 422

Fed. (2nd) 1132, certiorari denied 400 US 828, Albrecht vs.

Herald Co., 390 US 145, US vs. General Motors Corp., 384

US 127, Northern Pacific RR Co. vs. US, 356 US 1, U.S.

vs. McKesson & Robbins, Inc., 351 US 30S, and

Schwegmann Bros. vs. Calvert Distillers Corp., 341 US

384. Schwegmann is of importance for the proposition that

a State statute cannot override the anti-trust laws.

The Securities Acts expressly permitted parties to have

all rights that they previously had under other statutes and

clearly there was no intention to repeal the anti-trust laws.

The challenged fixed commission rates are also a

violation of Section 2 of the Sherman Act (1S USC 2) which

reads in part as follows:

“Every person who shall monopolize, or attempt

to monopolize, or combine and conspire with any

other person or persons, to monopolize any part of

the trade or commerce among the several States or

with foreign nations, shall be guilty of a

misdemeanor. * * *”’

Various stock exchange rules provide for limited access to

the facilities of the exchanges, prevent sharing of

commissions with non-members of the exchanges, etc.

Such action has been held to be a violation of Section 2 of

the Sherman Act (US vs. National Association of Real

Oe ERR ee

Estate Boards, 339 US 485). This case is of interest in that

it involved the fixation of commission rates by a trade

association almost precisely what is involved in the present

case.

Thus, the sole justification for anti-trust immunity on

the part of the defendants lies within the ambit of the

Securities Acts. However, such immunity must be given

strictly in accordance with the Silver and Thill rationale to

the effect that any rule of an exchange is immune from the

anti-trust laws only is necessary to make the Securities

Exchange Act work and even then only to the minimum

extent necessary, even if the challenged rule has been

submitted to the SEC pursuant to the Commission's rule

17a-8 or is subject to Commission action under the

Securities Exchange Act. (See the 1972 “Securities

Industry Study” of the Subcommittee on Commerce and

Finance of the House of Representatives Committee on

Interstate and Foreign Commerce.)

The above report also heid as follows:

“* * * The Subcommittee does not believe that the

Congress intended in 1934 nor does it intend today

that the limited review power granted to the

Commission in the Securities Exchange Act should

insulate the rules of national securities exchanges

from antitrust scrutiny.* * *”

The 1973 Securities Industry Study of the Subcommittee

on Securities of the Senate Committee on Banking, House

16

and Urban Affairs held as follows:

‘“* ** Anti-competitive conduct of self-

regulatory bodies is immune from antitrust attack

only if the conduct is necessary to make the

statutory scheme of regulation work and then only

to the minimum extent necessary. This immunity is

not increased or broadened in the event that the

action in question is subject to SEC review or even

if it is in fact approved by the SEC. The SEC has

no power to immunize anti-competitive self-

regulatory conduct from the operations of the anti-

trust laws (See page 227 of said report) (emphasis

supplied).

The report of a committee of Congress, of course, is

highly significant in the determination of “legislative

intent’’ with respect to a statutory enactment.

The Congress, at the present time, is considering various

legislation with respect to the Securities Industry. However,

any such legislation, which has not been passed as yet,

could not, of course, relate to conduct which has previously

taken place since that would constitute an “ex post facto”

law in violation of the United States Constitution.

———————————————

17

CONCLUSION

THIS COURT SHOULD GRANT CERTIORARI

TO REVIEW THE QUESTIONS PRESENTED

IN THIS PETITION.

Respectfully submitted,

MAXIMILIAN BADER

I. WALTON BADER

Attorneys for Petitioners

274 Madison Avenue

New York, N.Y. 10016

Telephone (212| 532-6860

Appendix

21

OPINION OF U.S. DISTRICT COURT FOR

THE SOUTHERN DISTRICT OF NEW YORK

GRANTING DEFENDANTS’ MOTION FOR

SUMMARY JUDGMENT

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

71 Civ. 1496 — Memorandum No. 40086

RICHARD A. GORDON, individually and 2s President

of INDEPENDENT INVESTORS PRUTECTIVE

LEAGUE, an unincoprorated association, and in behalf of

the membership thereof and in behalf of all persons

similarly circumstanced,

Plaintiff.

-against-

NEW YORK STOCK EXCHANGE, INC., and MERRILL

LYNCH PIERCE FENNER & SMITH, INC. and BACHE

& COMPANY, INC., individually and as representatives of

all member firms of the NEW YORK STOCK

EXCHANGE AND AMERICAN STOCK EXCHANGE,

Defendants.

LASKER, D.J.

In this action, brought by Richard A. Gordon,

individually and as President of Independent Investors

22

Proiective League, against the New York Stock Exchange,

the American Stock Exchange (“the Exchanges’’) and their

member firms, plaintiff alleges several violations of the

Robinson-Patman Act and the Sherman Act, to the

detriment of “small investors” (those ineligible for either

“volume discounts’ on trades of over 1,000 shares, or

negotiated rates on trades above the $500,000 (now

$300,000) ‘‘breakpoint”’).

Specifically, plaintiff attacks the Exchanges’ practices of

making their facilities available only to members and of

limiting the number of memberships; he also alleges that

members have conspired with the Exchanges to fix rates for

small investors at an unreasonably high level in view of the

actual cost of executing a trade; that negotiated rates and

volume discounts are set at unreasonably low levels in view

of the actual costs of execution; and that this scheme

unlawfully discriminates against small investors. In short,

plaintiff makes a number of related claims, the essence of

which is a broadside attack on the present commission

structure of the Exchanges.

Defendants have moved for an order dismissing the

action and granting summary judgment on the grounds

that the practices complained of are within the exclusive

jurisdiction of the Securities and Exchange Commission,

that the SEC, acting pursuant to §19%(b) of the Exchange

Act of 1934, 15 U.S.C. §78s(b), has been actively

regulating these practices, and that, consequently, the

practices are exempt from the provisions of the antitrust

law so that the court is without subject matter jurisdiction.

23

I,

We deal first with plaintiff's related claims regarding the

Exchanges’ practices of limiting the number of

memberships, and denying the use of their facilities to non-

members unless they pay the same rate of commission

charged the general public (Complaint, Paragraph 17).

As to the first claim, plaintiff lacks standing to sue since

he has not met the threshold requirement of §4 of the

Clayton Act: “Any person who shall be injured in his

business or property by reason of any thing forbidden in the

anti-trust laws may sue therefor..." (15 U.S.C. §15).

Since it is undisputed that plaintiff has never made

application for membership in either defendant Exchange,

he cannot be heard to complain that memberships are

arbitrarily limited. See Billy Baxter, Inc. v. Coca-Cola

Company, 431 F.2d 183, 187 (2d Cir. 1970), cert. denied.

401 U.S. 923 (1971); Data Digests, Inc. v. Standard &

Poor's Corporation, 43 F.R.D. 386, 387-8 (S.D.N.Y.

1967).

Plaintiff's second claim must also fail in view of the clear

language of the Exchange Act of 1934 to the effect that

non-members’ .access to Exchange facilities is limited.

Section 3(a)(3) states:

‘The term ‘member’ when used with respect to

an exchange means any person who is permitted

either to effect transactions on the exchange

without the services of another person acting as

24

broker, or to make use of the facilities of an

exchange for transactions thereon without

payment of a fee or with the payment of c

commission or fee which is less than that charged

the general public, and includes any firm

transacting a business as broker or dealer of which

a member is a partner, and any partner of such

firm.’ (emphasis added)

The fact that the limited membership characteristic of

the Exchanges inheres in their very nature has been

recognized by the Supreme Court, Silver v. New York

Stock Exchange, 373 U.S. 341, 350-51 (1963) and this

Circuit, Robert W. Stark, Jr.. Inc. v. New York Stock

Exchange, Inc., 346 F. Supp. 217, 228 (S.D.N.Y. 1972),

aff'd per curiam, Dkt. No. 72-1810, Slip Op. 928 (2d Cir.

Aug. 28, 1972) CCH Sec. L. Rep. 493,607.

Il.

Plaintiff's claims of price discrimination predicated

upon the Robinson-Patman Act, 15 U.S.C. §13(a), are

without merit. The Act requires that the alleged price

discrimination be in connection with “commodities of like

grade and quality’. The authorities are clear that services

and intangibles (such as stock trade executions) are not

“commodities”’ within the meaning of the Act. Columbia

Broadcasting System v. Amana Refrigeration, 295 F.2d

37S (7th Cir. 1961); Baum v. Investors Diversified Services,

Inc., 409 F.2d 872, 87S (7th Cir. 1969), and cases cited

therein.

25

Iil.

Plaintiff's remaining claims relating to the commission

rate structure of the Exchanges pose the question whether

the Exchanges, sulject to SEC supervision, can fix

commission rates without incurring Sherman Act liability.

It is, of course, conceded by defendants that any such

immunity must be provided, if at all, by the Securities &

Exchange Act of 1934.

The question of the extent to which the 1934 Act exempts

the Exchanges from the anti-trust laws has not been

considered in this Circuit since Silver v. New York Stock

Exchange, 373 U.S. 341 (1963). That case involved a non-

member broker who had secured private wire connections

with certain New York Stock Exchange firms. The

Exchange had approved Silver’s connections on a

temporary basis, but subsequently ordered them

disconnected without notice or hearing. After observing

that the Exchange’s actions, absent. justification from the

Exchange Act, would have constituted a per se violation of

the Sherman Act, the Silver court sought to reconcile the

“antitrust aim of eliminating restraints on competition

with the effective operation of a public policy

contemplating that securities exchanges will engage in self-

regulation which may well have anti-competitive effects in

general and in specific applications.”’ (Silver at 349.)

Noting that the Exchange Act does not give the

commission jurisdiction to review particular instances of

enforcement of Exchange rules, the Court stated that

26

consequently the question of antitrust exemption did “not

involve any problem of conflict or co-extensiveness of

coverage with the agency’s regulatory power,” and that

court review of the circumstances there presented “‘is

therefore not at all incompatible with the fulfillment of the

aims of the [Act]"’. (Silver at 359.) The court concluded

that the severance of the private wires occurred under

“totally unjustifiable circumstances” (Silver at 361) and

that no policy of the Exchange Act was served by denial of

notice and opportunity for hearing.

In so holding, however, Silver did not specify the

circumstances in which a federal district court must decline

jurisdiction to avoid a possible conflict with the

commission, and specifically reserved decision on the

possible anti-trust immunity of exchanges where “review of

exchange self-regulation [is] provided through a vehicle

other than the antitrust laws... .”” (p. 360).

We hold that this court lacks jurisdiction to entertain an

anti-trust attack on the commission structure of the

Exchanges, since the fixing of commissions falls squarely

within the congressional! policy of exchange self-regulation

embodied in the 1934 Act. Since the Act expressly directs

the SEC to supervise the “fixirig of reasonable rates of

commission” (§19(b)(9)), we believe this is the “different

case,” on which Silver reserved decision, where review of

exchange self-regulation is available “through a vehicle

other than the antitrust laws’’ (Silver, p. 360).

In so holding, we are in disagreement with the Seventh

Circuit, See Thill Securities Corp. v. New York Stock

27

Exchange, 433 F.2d 264 (7th Cir. 1970), cert. denied, 401

U.S. 994 (1971), a decision to which we return later on.

We believe that while Silver quite properly punctured the

umbrella of anti-trust immunity claimed by the Exchange,

it did not intend Congress’ unique self-regulatory scheme

to be totally dampened by the continuous interference of an

anti-trust court. We read Silver as holding that certain

limited areas of Exchange regulation—such as potentially

anti-competitive and arbitrary conduct directed at non-

members—are properly interfered with by a reviewing

court since the Act purports to regulate only the conduct of

registered exchanges (and their members) with regard to

the public, rather than the entire securities business. But

_ Silver also contemplates a certain zone of anti-trust

immunity in the regulatory process where there is little

threat of such arbitrary and discriminatory activity.

Without venturing to describe the full contours of this

immunity, we believe that the Exchange Act, as construed

by Silver, left the power to fix commission rates within the

exclusive jurisdiction of the Exchange, subject to

commission supervision.

This construction finds ample support in the language of

Silver. The court describes the Exchanges as “‘by their

nature bodies with a limited number of members” (p. 350)

with a “federally mandated duty of self-policing” (p. 352).

“The pattern of governmental entry . . . was by

no means one of total displacement of the

exchanges’ traditional process of self-

28

regulation . . . Thus the Senate Committee Report

stressed that the ‘initiative and responsibility for

promulgating regulations pertaining to the

administration of their ordinary affairs remain

with the exchanges themselves. It is only where

they fail adequately to provide protection to

investors that the Commission is authorized to step

in and compel them to do so.” S. Rep. No. 792

[73d Cong., 2d Session (1934)] at 13.

The court continues at (360-61) that:

“The entire public policy of self-regulation,

beginning with the idea that the Exchange may set

up barriers to membership, contemplates that the

Exchange will engage in restraints of trade which

might well be unreasonable absent sanction by the

Securities Exchange Act. Without the oversight of

the Commission to elaborate from time to time on

the propriety of various acts of self-regulation, the

Exchange is left without guidance and without

warning as to what regulative action would be

viewed as excessive by an antitrust court. . . . But,

under the aegis of the rule of reason, traditional

antitrust concepts are flexible enough to permit the

Exchange sufficient breathing space within which

to carry out the mandate of the Securities

Exchange Act.”

The clear import of this language is that the Exchange

Act sanctions certain “anti-competitive” features of the

-- — ~- ie LD

29

Exchanges so long as they further the policy of self-

regulation and are subject to Commission supervision,

guided by the “rule of reason”. Indeed, we note that Silver

sets out at some length (p. 354-6, n. 9) the welter of

Exchange rules restricting members’ relations with non-

members, which were there in issue.

In holding that the manner of enforcing these rules was

illegal, Silver never intimates that the rules themselves are

subject to anti-trust attack, and indeed recognizes the

necessity for them (p. 354-6).

The facial language of the Exchange Act gives the

Exchange and the Commission the power to “fix”

commission rates. Section 6(d) of the Act requires that

registered exchange adopt rules “just and adequate to

insure fair dealing and to protect investors;”’ that is, §6(d)

mandates self-regulation. As Silver observes ‘‘[t]he general

dimensions of the duty of self-regulation are suggested by

§1%b) of the Act, 15 U.S.C. §78s(b), which gives the

Commission power to order changes in exchange rules

respecting a number of subjects...” (p. 352). §19(b)

recites:

“Sec. 19. *** The Commission is further

authorized, if after making appropriate request in

writing to a national securities exchange that such

exchange effect on i( own behalf specified changes

in its rules and practices, and after appropriate

notice and opportunity for hearing, the

Commission determines that such exchange has

30

not made the changes so requested, and that such

changes are necessary or appropriate for the

protection of investors or to insure fair dealing in

securities traded in upon such exchange, by rules

or tions or by order to alter or supplement

the rules of such exchange (insofar as necessary or

appropriate to effect such changes) in respect of

such matters as *** (9) the fixing of reasonable

rates of commission, interest, listing, and other

charges; (10) minimum units of trading . . . ; and

(13) similar matters.”’ (emphasis added)

We recognize that the legislative history of the 1934 Act

is, perhaps typically, ambiguous as to Congress’ intent

regarding the Exchanges’ long-standing practice of fixing

commission rates. As Professor Baxter of Stanford Law

School has noted:

“(t]he attention of Congress in 1934 was focused on

problems of dishonesty, manipulation, and

solvency, and...no coherent congressional

purpose was articulated concerning the problems

of intra-industry competitive structure.” Baxter,

New York Stock Exchange Fixed Commission

Rates: A Private Cartel Goes Public, 22 Stan. L.

Rev. 675, 685 (1970).

However, Congress clearly was aware of the Exchanges’

rate-fixing practices, since both House and Senate debates

on the Act specifically refer to the fixing of commissions.

See, e.g., 78 Cong. Rec. 8087, 8092, 8490, 8493-94

(1934).

31

Nevertheless, however unclear the Congressional debate

in 1834 may be as to the permissibility of fixing

commissions, we believe the history of Exchange rate-

reguiation since the passage of the Act is entitled to

substantial weight. As to the proper construction of the

Act, we cannot overlook the fact that Exchange regulation

of fixed commissions has existed virtually unchallenged for

nearly 40 years since the passage of the Act.

In the case most in point, Kaplan v. Lehman Brothers,

250 F. Supp. 562 (N.D. Ill. 1966), aff'd 371 F.2d 409 (7th

Cir. 1967), shareholders of five mutual funds brought a

treble damage action against the New York Stock

Exchange and several stock brokerage firms claiming that

the fixing of minimum commissions was a per se violation

of the Sherman Act. The Court of Appeals affirmed an

award of summary judgment for the defendants since, as

the trial court noted, plaintiff's per se allegation was

defective in light of the weighing process required under

Silver. Though Kaplan is distinguishable on its facts, the

court there recognized the possibility of a conflict of

jurisdiction with the Commission. Its comments are

applicable here since the gist of the complaint in both cases

is that plaintiff paid higher rates than would have obtained

in the absence of Exchange rate-fixing.

“The plaintiffs have complained of the rates

because they are fixed. If they had complained

instead that the rates were toc high, they would

find no support in the antitrust laws. The remedy

for a level of rates which is unreasonably high rests

with the SEC. Ratemaking is a matter for which

32

the courts are ill-equipped and accordingly a

matter traditionally committed to an

administrative agency. [citation omitted]. The SEC

since its establishment has exercised this power of

review over Exchange rates of commission, and it

has inaugurated a regular system of reporting from

Exchange members to furnish the necessary

information.

...To leave the determination of

reasonableness to the prospective decisions of the

agency which is especially qualified and

responsible for the general supervision of the

industry will assure the intention of Congress as

well as the interests of the public.” (250 F. Supp.

at 566).

We note that, beginning with the 1963 Special Study of

The Securities Markets, the SEC and the Exchanges have

undertaken intensive examination of Exchange

commission structures and related matters. In 1968, the

SEC initiated public hearings on the commission rate

structure.

Certain rate adjustments, such as the volume discount,

and the interim charge, and experiments with negotiated

commissions have resulted from these activities. Most

significant, the SEC recently announced, in its Release

10383 (September 11, 1973), its intention to terminate the

Exchange practice of fixing minimum commissions on all

securities transactions after April 30, 1975, unless the

Exchange in the meantime alters its rules to the same

effect. It is fair to infer that the SEC is continuing to

33

exercise its jurisdiction actively over rate-setting, pursuant

to §19(b)(9) of the Act.

Moreover, recent developments in Congress regarding

the commission structure support the holding here. The

Senate recently rejected amendments to the 1934 Act which

would have mandated the elimination of fixed commissions

within two years. See 119 Cong. Record, $11385-6, June

18, 1973. It is reasonable to infer from the proposal of these

amendments that Congress did not believe fixed

commissions were already illegal under the anti-trust laws,

and, of course, the rejection of the amendments suggests

that Congress does not now regard fixed rates as offensive

to the Exchange Act or the anti-trust laws.

Finally, we come to the recent decision in Thill Securities

Corp. v. New York Stock Exchange, 433 F.2d 264 (7th Cir.

1970), cert. denied, 401 U.S. 994 (1971).

In Thill, a non-member broker-dealer attacked the anti-

rebate rule of the New York Stock Exchange as violative of

the Sherman Act. The Seventh Circuit reversed the grant of

summary judgment in favor of the New York Stock

Exchange predicated on a claim of immunity, and

remanded the case to the trial court for further evidence on

the effects of the anti-competitive acts complained of, the

extent to which the rule was subject to actual review by the

SEC, and the extent to which the anti-rebate rule was

“necessary to make the Securities Exchange Act work.”

(Thill, at 270).

We believe that Thill is distinguishable from our case.

First, the Act contains no specific directive to the SEC to

supervise member-non-member relations; second, there

34

was before the court no record of active SEC supervision in

the area; third, the court thought the power to refuse to —

share commissions with non-members was a ‘weapon t*iat

can be used to injure a particular competitor” (p. 270) and

the plaintiff had alleged that the anti-rebate rule had in

fact been unevenly applied.

Indeed, in distinguishing Kaplan, supra—another

Seventh Circuit case—the Thill court placed considerable

weight on the distinction it perceived between the non-

discriminatory application of fixed commission rates (at

issue in Kaplan) uniformly charged to the public, and the

application of rules governing rebates with non-member

broker-dealers (p. 270).

We must add, if it is not already clear, that if Thill is to

be read as holding that an anti-trust court has concurrent

jurisdiction with the SEC over all potentially anti-

competitive practices and rules, we disagree.

For the foregoing reasons, defendants’ motion for

summary judgment is granted.

In view of our decision here, we do not consider

plaintiff's motion for a class action determination.

It is so ordered.

Dated: New York, New York

December 3rd, 1973.

MORRIS E. LASKER

U.S.D.J.

FOOTNOTE

In Thill Securities Corp., v. New York Stock Exchange, Civ. 63-C-264

(E.D. Wisc. 1973), the post-trial brief of the United States, as intervenor,

arguing the Mlegality of fixed commission, and the anti-rebate rule

concedes that “it cannot be said that Congress intended to outlaw fixed

minimum commissions in passing the 1934 Act.” (Post-trial brief at pp.

8-9).

OPINiON OF UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

AFFIRMING OPINION OF DISTRICT COURT

UNITED STATES COURT OF APPEALS

For tHe Seconp Circuit

No. 1045—September Term, 1973.

(Argued June 5, 1974 Decided June 28, 1974.)

Docket No. 74-1043

Ricuarp A, Gorpon, individually and as President of In-

dependent Investors Protective League, an unincor-

porated association, and in behalf of the membership

thereof and in behalf of all persons similarly cir-

cumstanced,

Plaintiff-Appellant,

v.

New Yorx Stock Excuanegz, Inc., American Stock Ex-

CHANGE, Inc. and Merrit, Lynon, Pierce, Fenner &

Samira, Inc. and Bacuse & Company, Inc., individually

and as representatives of all member firms of the New

York Stock Exchange and American Stock Exchange,

Defendants-A ppellees.

Before:

Kavurman, Chief Judge,

MansFiELp and Mutuican, Circuit Judges.

Appeal from an order entered in the United States Dis-

trict Court for the Southern District of New York, Morris

E. Lasker, Judge, granting summary judgment and dis-

missing complaint principally alleging that the fixing of

stock exchange commission rates violates the antitrust laws.

Affirmed.

36

I. Watton Baper, New York, New York (Bader

and Bader, New York, New York, on the

brief), for Appellant.

Wittmum E. Jackson, New York, New York

(Milbank, Tweed, Hadley & McCloy, Lord,

Day & Lord, Brown, Wood, Fuller, Cald-

well & Ivey, New York, New York, on the

brief; Isaac Shapiro, Mark L. Davidson,

John J. Loflin, James B. May, New York,

New York, of counsel), for Appellees.

Seymour H. Dussman, Attorney, Department of

Justice, Washington, D.C. (Thomas E. Kanu-

per, Assistant Attorney General, on the

brief), as Amicus Curiae urging reversal.

Lawrence E. Nernerm, General Counsel, Secu-

rities Exchange Commission, Washington,

D.C. (Walter P. North, Associate General

Counsel, Frederic T. Spindel, Special Coun-

sel, Theodore L. Freedman, Attorney, on

the brief), as Amicus Curiae urging afirm-

ance.

oe

Kaurman, Chief Judge:

Whether the n.inimum rate structure presently employed

by the nation’s stock exchanges enjoys immunity from

attack under the antitrust laws is a question of such impor-

tance that we need not belabor its significance. The Supreme

Court in Silver v. New York Stock Exchange, 373 U.S. 341

(1963), although subjecting the application of an exchange

rule to antitrust scrutiny, acknowledged that if there were

Securities Exchange Commission [SEC] jurisdiction to

review a challenged rule, a different case would arise con-

‘

‘

37

cerning antitrust exemption. We are here presented with

that different case.

The complaint itself provides all the facts necessary for

our disposition. Richard A. Gordon brought this private

antitrust action on April 2, 1971, on his own behalf and for

a purported class of small investors, against the New York

Stock Exchange, Inc. [NYSE], the American Stock Ex-

change, Ine. [Amex], and two representative member firms

of the exchanges, alleging that the exchanges’ fixed mini-

mum commission system violated the Sherman Act, 15

U.S.C. §§1 and 2 (1970), and the Robinson-Patman Act,

15 U.S.C. §13(a) (1970). More specifically, we read Gor-

don’s complaint to have alleged: (1) that the exchange rules

providing for a volume discount from the minimum com-

mission rate in the case of large transactions, together

with negotiated rates only on portions of orders in excess

of $500,000, and the interim surcharge on transactions

involving less than 1000 shares,’ amounted to a system of

price discrimination in violation of the Robinson-Patman

Act, 15 U.S.C. §13(a) (1970),‘ and the Sherman Act, 15

U.S.C. §§1, 2 (1970); and (2) that the fixed commissions

charged those unable to avail themselves of negotiated rates

constituted a scheme of price-fixing, contrary to the provi-

sions of the Sherman Act, 15 U.S.C. §¢1, 2 (1970).°

1 Merrill, Lynch, Pierce, Fenner & Smith, and Bache & Co., Inc.

2 NYSE Const. Art. XV, §2 (1971); subsequently amended; Amex.

Const., Art. VI, §2 (1971), subsequently amended.

3 ##$NYSE Rule 383 (1971), repealed April 1, 1974; Amex Rule 396

1971), amended April 1, 1972.

4 Gordon also claimed that the volume discounts were “unreasonably

low prices for the purpose of destroying competition or eliminating a

competitor,” in violation of 15 U.8.C. §18a (1970). Although the

district court made no finding in this regard, plaintiff does not press

the point on appeal.

5 The complaint also challenged rules which limited exchange member-

ship, and which denied discounted commission rates to nonmember

38

Without reaching the merits of Gordon’s principal claims,

the district court found the challenged practice of fixing

commission rates not within the jurisdiction of an anti-

trust court since judicial oversight of this particular aspect

of exchange self-regulation had been displaced by the

review power vested in the SEC under $19(b) of the

Securities Exchange Act of 1934 [1934 Act], 15 U.S.C.

§ 78s(b) (1970). Accordingly, the district court granted

the defendants’ motion for summary judgment, and dis-

missed the complaint.* For the reasons set forth below, we

agree. r

Since Gordon’s other claims are essentially frivolous."

we turn directly to his principal allegation that the ex-

change practice of fixing commission rates violated the

Sherman Act. Any analysis of the interrelation of the

antitrust laws and the system of supervised exchange self-

regulation embodied in the 1934 Act must begin with Silver

v. New York Stock Exchange, 373 U.S. 341 (1963). The

Court was there asked to decide whether the NYSE’s

brokers who used exchange facilities. The district court concluded

that these claims were frivolous. We agree, since §3(a)(3) of the

Securities Exchange Act of 1934, 15 U.8.C. § 78¢(a)(3) (1970), clearly

contemplate. limitations on both exchange membership and non-

member access to exchange facilities.

6 Because the district court considered affidavits and exhibits annexed

as well as the pleadings, it properly concluded that the motion to

dismiss should be treated as one for summary judgment. Rule 12(b),

F.R. Civ. P.

7 We agree with the district court that there is no precedent for the

assertion that brokerage services are “commodities” within the mean-

iag of the Robinson-Patman Act, 15 U.S.C. $18(a) (1970).

Gordon raises on appeal for the first time the claim that the

combination of surcharges, volume discounts, and negotiated rates .

violates 15 U.S.C. §13(¢) (1970), as am allowance or commission

not granted for services rendered. Although we decline to entertain

the claim because it was not raised in the district court, we note

that §13(¢) proscribes such practices only “in connection with the sale

or purchase ef goods, wares, or merchandise... .”

39

enforcement of an exchange rule without notice or hear-

ing, resulting in the removal of a nonmember’s private

telegraph wires from member offices—concededly a ‘group

boycott—was subject to antitrust scrutiny. Seeking to

achieve the requisite accommodation between the anti-

trust laws and the 1934 Act’s policy of exchange self-

regulation, Mr. Justice Goldberg, speaking for a majority

of the Court, formulated the following test:

Repeal [of the antitrust laws] is to be regarded as

implied only if necessary to make the Securities Ex-

change Act work, and even then only to the minimum

extent necessary.

373 U.S. at 357.

In Silver, the Court concluded that exercise of its anti-

trust jurisdiction was proper for two reasons. Because

there was no possibility of SEC review of the challenged

act—disconnection of Silver’s wires to member offices—as-

sertion of judicial oversight would have resulted in no

conflict, between agency and court, rendering cumbersome

and inconsistent the system of administrative regulation.

373 U.S. at 358. Moreover, denial of antitrust jurisdiction

on the facts presented in Silver would have left no gov-

ernmental body to perform the antitrust function of pre-

venting an injury to competition which could not be justi-

fied as furthering legitimate self-regulatory ends. Id. at

358-61. Though the Court hinted that some breathing space

should be left the exchange for unsupervised self-regula-

tion, if found inexcusable the failure to provide the pro-

cedural safeguards of notice and hearing. Id. at 361-67.

The instant case, of course, is toto caelo different from

Silver, for there is here governmental oversight of the fix-

ing of commission rates, vested expressly in the SEC pur-

suant to §19(b)(9) of the 1934 Act, 15 U.S.C. § 78s(b) (9)

40

(1970). And, as we have indicated, the Silver Court reeog-

nized that a “different case” would be posed if the exchange

practice allegedly violative of the antitrust laws were sub-

ject to control by the SEC. Although the Silver rationale

might well authorize us to ground our holding here on the

existence of SEC review power, we do not rely upon that

authority alone to support a finding of antitrust immunity.

Rather, we are of the view that both the language and the

history of the 1934 Act, together with the sound policy

behind supervised exchange self-regulation, mandate the

conclusion that Congress intended to exempt from the anti-

trust laws the exchange practice of fixing commission

rates.

Section 19(b) of the 1934 Act states, in pertinent part:

The Commission is further authorized, if after

making appropriate request in writing to a national

securities exchange that such exchange effect on its own

behalf specified changes in its rules and practices, and

after appropriate notice and opportunity for hearing,

the Commission determines that such exchange has

not made the changes so requested, and that such

changes are necessary or appropriate for the protec-

tion of investors or to insure fair dealing in securities

traded in upon such exchange or to insure fair ad-

ministration of such exchange, by rules or regulations

or by order to alter or supplement the rules of such.

exchange (insofar as necessary or appropriate to effect

such changes) in respect of such matters as... (9) the

fixing of reasonable rates of commission, interest, list-

ing, and other charges .. .

It is clear from this language that the “congressional

aim in supervised self-regulation is te insure fair dealing

and to protect investors from harmful or unfair trade

41

practices,” Merrill Lynch, Pierce, Fenner € Smith, Inc.

v. Ware, 414 U.S. 117, 130 (1973). It is equally plain that

Congress considered the “fixing of reasonable rates of

commission” to be essential to meeting these goals, for it

listed this factor explicitly among the twelve items so de-

nominated. Finally, and most importantly for this juris-

dictional dispute between an antitrust court and the SEC,

Congress vested in the Commission the power to deter-

mine whether changes are “necessary” in the exchanges’

rate-fixing practices to assure fulfillment of the goals of

the Act. Accordingly, Congress defined in §19(b) those

matters fundamental to achieving “the aims of the Secur-

ities Exchange Act,” Silver v. New York Stock Exchange,

373 U.S. at 361, and accorded the SEC the authority to

make whatever changes respecting those matters are “nec-

essary or appropriate” (§19(b)) to effectuate those aims

—i.e., in the terms of the Silver test, “necessary to make

the Securities Exchange Act work.” 373 U.S. at 357.

If the discussion in Silver of a core of exchange self-

regulation necessary to make the 1934 Act work, and thus

immune from application of the antitrust laws, is to be

given any meaningful application, we are of the view

that it must have reference to the practices enumerated in

§19(b), and in this instance to the fixing of reasonable

rates of commission. The Supreme Court also recognized

in Silver that the exercise of antitrust jurisdiction, where

it conflicted with a power of review expressly delegated

to the SEC, could render ineffective the supervised self-

regulatory scheme designed to accomplish the aims of the

1934 Act. 373 U.S. at 358-61. Frustration of those aims

would be the inevitable consequence of duplicative or in-

consistent standards announced contemporaneously by

courts and Commission.

That Congress intended Commission-supervised ex-

change self-regulation to be of central importance in the

42

scheme of the 1934 Act is emphasized by the legislative

history of the Act. Both House and Senate reports stress

the broad responsibility left with the exchanges to ad-

minister their own affairs. H.R. Rep. No. 1383, 73d Cong.,

2d Sess. 15 (1934); S. Rep. No. 792, 73d Cong., 2d Sess. 13

(1934). The grant of this unique self-regulatory power,

however, was conditioned upon the creation of the SEC,

invested with broad discretionary powers equal to the

complex and changing nature of the problems arising in

the securities industry. Cf. H.R. Rep. No. 1383 at 6-7.

Rather than charge the Commission with oversight of

specific instances of abuse, Congress authorized it to con-

dition an exchange’s right to register upon its enactment

of rules “just and adequate to insure fair dealing and to

protect investors.” 15 U.S.C. §78f(d) (1970). And as to

several specific matters inextricably linked with “fair deal-

ing” and “protection of investors” from harmful or unfair

trade practices, the Commission was empowered by § 19(b)

to order exchanges to make such amendments in their rules

as the Commission found necessary to carry out the pur-

poses of the Act.

Yet the legislative history of the Act does not simply in-

dicate the central significance of supervised self-regulation

in effectuating the purposes of the Act. Concerning the

practices here challenged, we find most persuasive Con-

gress’s manifest recognition of the Commission’s compe-

tence to serve the necessary antitrust objective of preserv-

ing competition, by delegating to it control over practices

which, but for 419(b) of the 1934 Act, would be per se

violations of the antitrust laws. Those familiar with the

development of antitrust law know that seven years before

the Securities Exchange Act was passed, the Supreme Court

decided that price-fixing was a per se violation of the Sher-

man Act. United States v. Trenton Potteries Co,, 273 U.S.

43

392 (1927). Despite this clear holding, the 1934 Act ex-

plicitly provides for “the fixing of reasonable ratcs of com-

mission, interest, listing, and other charges” [emphasis

added]. 15 U.S.C. §78s(b)(9) (1970). Reference to the

Senate hearings dispels any doubt on this score, for they

make plain the congressional awareness that this provision

“would permit the Commission to fix rates.” Hearings on

S. Res. 84 (72d Cong.) and 8. Res. 56 and S. Res. 97 (73d

Cong.) Before the Senate Comm. on Banking and Currency,

73d Cong., Ist and 2d Sess., pt. 16, at 7705 (1934) (state-

ment of Samuel Untermyer). Moreover, the practice in the

securities field of industry-wide agreement on minimum

fees—dating back to 1792, see SEC, Report of Special Study

of Securities Markets, H.R. Doc. No. 95, 88th Cong., Ist

Sess., pt. 2, at 295 (1963)—was repeatedly acknowledged

both in committee hearings, see Hearings on S. Res. 84

(72d Cong.) and 8. Res. 56 and S. Res. 97 (73d Cong.)

Before Senate Comm. on Banking and Currency, 73d Cong.,

2d Sess., pt. 13, at 6075, 6080-81 (1934); Hearings on H.R.

7852 and H.R. 8720 Before the House Comm. on Interstate

and Foreign Commerce, 73d Cong., 2d Sess., at 423-34

(1934), and in the debates on the Act, see, ¢.g., 78 Cong.

Rec. 8087, 8091-92, 8490, 8493-94 (1934).

We draw two conclusions from this delegation of power

over exchange commission rates. By permitting so poten-

tially harmful a practice as rate-fixing, Congress recognized

that the exchange commission system bore crucially upon

achievement of the goals of the 1934 Act. Further, by

placing in the hands of the SEC the regulation of rate-

fixing—a practice the effects of which the Supreme Court

acknowledged its inability to assess, see United States v.

Trenton Potteries, supra, 273 U.S. at 398—Congress made

clear its judgment of the Commission’s competence to

assume the central role in assuring investor protection and

exchange fair dealing.

44

Exemption from the antitrust laws with regard to the

fixing of minimum rates of commission is not only man-

dated by both the language and the legislative history of

the 1934 Act, and in particular § 19(b)(9), but is grounded

as well in sound policy considerations governing regulation

of the securities industry. Of principal concern is the

danger, clearly contemplated by Silver, 373 U.S. at 358,

that courts and the SEC would subject exchanges to

repetitive or conflicting standards. There is little question

but that the commission rate structure is the keystone of

the economic viability of the brokerage industry, and a

matter of vital importance to individual investors as well.

Steering effectively between the often competing interests

of “seller” and “buyer”—reducing the barriers to investor

trading, while at the same time assuring a return sufficient

to preserve brokerage capacity—becomes far too hazardous

with two hands on the tiller.

Nor are the hazards of repetition and conflict in this case

a matter of mere speculation, as a review of the wide-

reaching and systematic character of recent SEC action

regarding rate regulation makes evident. In 1963, follow-

ing the congressional mandate embodied in 15 U.S.C. § 78s

(d), the SEC published its extensive Report of Special

Study of Securities Markets, H.R. Doc. No. 95, 88th Cong., |

1st Sess. (1963), dealing among other matters with the

practice of fixing stock exchange commission rates. Recent

Commission action with regard to the particular practices |

challenged by Gordon began in 1959, with a request to the

NYSE to study the possible introduction of a volume dis-

count. See SEC Securities Exchange Act Release No. 5889

(Feb. 20, 1959). Comment was requested on both NYSE

and SEC proposals on January 26, 1968. SEC Securities

Exchange Act Release No. 8239 (Jan. 26, 1968). On May 28,

1968, the NYSE was asked either to implement a suggested

commission schedule incorporating volume discounts for

Pa

45

round lot portions over 400 shares, or to eliminate minimum

commissions on portions of orders in excess of $50,000,

before September 15 of the same year. Public hearings

also were commenced on May 28, 1968, to determine

“changes in the present commission rate structure .. .

required to benefit the investing public.” SEC Securities

Exchange Act Release No. 8324 (May 28, 1968). The same

release requested that other exchanges make “appropriate”

changes similar to those demanded of the NYSE. The

Commission thereafter notified the NYSE that the require-

ments of Release No. 8324 would be satisfied by provision

for a volume discount on orders in excess of 1000 shares,

Letter of Manuel F. Cohen to Robert W. Haack (August 30,

1968), and on September 4, 1968, it extended the mandated

effective date to December 5, 1968. SEC Securities Ex-

change Act Release No. 8399 (Sept. 4, 1968).

Commission approval was given on August 2, 1970, for

the interim surcharge challenged by Gordon, in order “to

provide emergency financial relief while more fundamental

alterations of the existing rate structure can be considered.”

Approval was subject to the understanding that the sur-

charge would expire after 90 days, and that the NYSE

would restore full brokerage services for small investors

and remove transaction size and other limitations on such

accounts. Letter of Hamer H. Budge to Robert W. Haack,

April 2, 1970. Approval was given on similar conditions

to the Amex proposed rule 396, requesting a like interim

surcharge. Letter of Irving M. Pollack to Ralph S. Saul,

April 10, 1970. The terms of the surcharges were there-

after extended, SEC Securities Exchange Act Release 8923

(July 2, 1970), and expired in March (NYSE) and April

(Amex) of 1972.

The recent SEC program which aims at gradual intro-

duction of negotiated rates strongly enforces our view

46

that it would be unwise for a court to interfere under the

antitrust laws. Although SEC Securities Exchange Act

Release No. 8324 (May 28, 1968) contemplated the intro-

duction of negotiated rates as an alternative to volume

discounts, the Commission determined by October 22, 1970,

that fixed charges on portions of orders in excess of

$100,000 were—even when joined with volume discounts—

neither necessary nor appropriate to achieving the pur-

poses of the 1934 Act. Letter of Hamer H. Budge to

Robert W. Haack, October 22, 1970; SEC Securities Ex-

change Act Release No. 9007 (Oct. 22, 1970). The Com-

mission subsequently indicated that a $500,000 “breakpoint”

would be acceptable, Letter of Richard B. Smith to Robert

W. Haack, February 10, 1971; SEC Securities Exchange

Act Release No. 9105 (March 11, 1971), and sent to the

other exchanges copies of its correspondence with the

NYSE regarding negotiated rates for their “appropriate

consideration.” Letter of Irving M. Pollack to the presi-

dents of the American, Boston, Cincinnati, Detroit, Mid-

west, National, Pacific Coast, Philadelphia-Baltimore-

Washington, Salt Lake, and Spokane Stock Exchanges,

March 17, 1971. In its Statement on the Future Structure

of the Securities Markets (Feb. 2, 1972), issued subse-

quent to the initiation of Gordon’s lawsuit, the Commis-

sion announced its conclusion, grounded on the results of

monitoring undertaken concurrently by the SEC and the

exchanges, that a reduction in the breakpoint to $300,000

was appropriate, and commanded its implementation by

April of 1972. Not long thereafter, SEC Securities Ex-

change Act Reiease No. 10383 (Sept. 11, 1973) decreed

the end of all fixed commission rates by April 30, 1975. As

a further step in the process of gradual abandonment,

SEC Securities Exchange Act Release No. 10560 (Dec.

14,1973) requested the immediate introduction of limited

— a

47

price competition in transactions falling below the cur-

rent breakpoint.

The Commission’s program of measured introduction of

negotiated rates has been carefully gauged to avoid un-

desirable side-effects on both the industry and the invest-

ing public. The Statement on the Future Structure of the

Securities Markets, 15, cautions:

We must bear in mind . . . that we are dealing with

an industry which has operated under fixed commis-

sion rates for a very long time. It is necessary to

measure the effect of competitively determined com-

missions very carefully on a step by step basis.

We are told, for example, that among the consequences

certain to result from the introduction of negotiated rates

across the boards is the failure of a nmuber of inefficient

brokerage firms. Baxter, NYSE Fived Commission Rates:

A Private Cartel Goes Public, 22 Stan. L. Rev. 675, 699

(1970). The SEC study revealed that the exchanges have

operated for a long time under cartelized commission rates,

which exceed those which would have been charged by

firms of efficient scale. Thus, firms too small and inefficient

to survive in a competitive market have so far been

sheltered. Introduction of negotiated rates across the en-

tire range of trades would, it is thought, cause many of

these firms to go under. Baxter, supra, 22 Stan. L. Rev.

at 699. Much of the damage resulting from such attrition

would be borne by the investing public, to whom failing

member firms would be indebted in the form of credit bal-

ances. Measured withdrawal could avoid the loss of those

investor funds by allowing failing brokers to “exit by or-

derly merger or liquidation rather than by bankruptcy.”

Note, Fixed Brokerage Commissions: An Antitrust Anal-

48

ysis After the Introduction of Competitive Rates on Trades

Exceeding $500,000, 85 Harv. L. Rev. 794, 811 (1972).

We have recounted at such length the Commission’s

actions on brokerage rate changes not solely to demonstrate

the extraordinarily active surveillance by the Commission,

in accordance with Congress’s expressed declaration, nor

even to establish that the invocation of antitrust jurisdic-

tion would result in repetition of and conflict with SEC

action. Of greater importance, it seems to us, is the re-

minder it offers that when something as crucial to the

survival of the securities industry as its very ancient rate

structure is at stake, diagnoses and changes must come

from an agency with the Commission’s expertise. The

wisdom of the SEC’s actions is, of course, not before us.

We stress only that it is clear that, with respect to the

fixing of commission rates, the process of administrative

review in the first instance is far superior to judicial

review.

That Congress recognized agency superiority in this

regard should not, moreover, come as a great surprise,

for the courts themselves, by the time of the 1934 Act’s

passage, had admitted as much in abandoning the rule of

reason approach to price-fixing. Indeed, the adoption of

a standard of per se illegality in Trenton Potteries was .

thought necessary by the Supreme Court to relieve the

8 By this we do not intend to imply that withdrawal of antitrust

jurisdiction is based on the SEC’s “primary” jurisdiction over the

practices challenged by Gordon. Cf. Thill Securities Corp. v. New

York Stock Exchange, 483 F.2d 264, 276-77 (7th Cir. 1970) (Swygert,

J., concurring). As our earlier discussion of the language and history

of the 1934 Act indicates, we are of the view that Congress intended

to exempt commission rate-fixing from the operation of the antitrust

laws, and consequently deprived the courts of even “secondary” juris

diction to entertain Sherman Act claims like that which Gordon

asserts. Judicial review of SEC action would, however, be proper

either under the Administrative Procedure Act, 5 U.S.C. §§ 702, 704

(1970), or pursuant to the provisions of the 1984 Act, 15 U.S.C.

(1970).

$

49

judiciary of the need to determine the reasonableness of

prices set by horizontal agreement. The Court there stated:

In the absence of express legislation requiring it, we

should hesitate to adopt a construction {of the Sherman

Act] making the difference between legal and illegal

conduct in the field of business relations depend upon

so uncertain a test as whether prices are reasonable—

a determination which can be satisfactorily made only

after a complete survey of our economic organization

and a choice between rival philosophies.

United States v. Trenton Potteries, 273 U.S. 392, 398 (1927).

Such questions as the effect of fixed commission rates on

trading volume and broker solvency, or the effect of com-

petition on and the necessity for exchange membership,

are not of the sort which courts can answer as well as the

SEC. The statutory scheme exhibits congressional con-

fidence that the Commission will be more capable of resolv-

ing problems of this nature.

We are not unmindful of the Seventh Circuit’s decision

in Thill Securities Corp. v. New York Stock Exchange, 433

F.2d 264 (7th Cir. 1970), heavily relied upon by Gordon

and the Department of Justice as amicus curiae for appel-

lant.* The claim there presented against the NYSE’s anti-

rebate rule is of a different character from Gordon’s

challenge to rate-fixing practices.. For, as the Thill court

stated, there was “no evidence as to the extent to which

the challenged rule is subject to actual review by the

SEC ...” 433 F.2d at 270. Moreover, the anti-rebate

practice, not specified in any of the twelve subsections of

§19(b), may not be within that core of antitrust immunity

to which we have referred. But it is a fact that at the time

Thill was decided, the SEC was conducting hearings into,

9 The SEC has also filed a brief as amicus curiae for the appellees.

50

among other matters, the “economic access to exchange

markets by nonmembers broker-dealers . . .” SEC Securities

Exchange Act Release No. 8324 (May 28, 1968). And it

would be difficult to maintain that the effect of the anti-

rebate rule on investor protection, fair dealing in securities,

or fair administration of an exchange is in any significant

respect different from the practice of commission rate-

fixing.** See Note, Antitrust Laws and the Securities Ex-

changes, 66 Nw. U.L. Rev. 100, 106 n. 40 (1971). Thus, to

the extent our decision today is inconsistent with Thill, we

find ourselves constrained to disagree with the holding there

announced.”

We emphasize that the conclusion we reach today by no

means implies that Gordon at no time may have access to

the courts. After Commission action, judicial review of its

decision is proper pursuant to the provisions of the Ad-

10 As such, it would appropriately fall within the rule which we today

announce, under the language of § 19(b) (13), 15 U.8&.C. § 78s(b) (13)

(1970) (“similar matters”).

ll Judge Campbell in Thill relied heavily upon United States v. Phila-

delphia National Bank, 374 U.S. 321 (1963) for the proposition that

implied exemption from the antitrust laws was «@ fortiori improper

on the facts before the court. 433 F.2d at 272. In Philadelphia

National Bank the Court held that, despite the congressionally required

approval of the Comptroller of the Currency, pursuant to the Bank

Merger Act of 1960, 12 U.S.C. § 1828 (1970), a merger between the

Philadelphia National Bank and Girard banks remained subject to

antitrust action by the Department of Justice.

Although we are not unmindfu) of the disfavor with which antitrust

exemption is generally regarded, see, ¢.g., California v. Federal Power

Commission, 369 U.S. 482 (1962), we perceive significant differences

between Philadelphia National Bank and the case which we today

decide. We note that the history of the Bank Merger Act evidenced

a congressional intent not to immunize bank mergers from at least

Sherman Act attack, see 374 U.S. at 352, whereas the 1934 Act en-

trusts the SEC with supervision of rate-fixing, a practice which out-

side the confines of the 1934 Act is a per se violation of the Sherman

Act. Cf. Silver v. New York Stock Exchange, 373 U.S. at 347-49

(recognising that a group boycott carried owt within the framework

of the 1934 Act is not a per se antitrust violation).

51

ministrative Procedure Act, 5 U.S.C. $4 702, 704 (1970),

see Independent Broker-Dealers’ Trade Association v. SEC,

442 F.2d 132 (D.C. Cir.), cert. dented, 404 U.S. 828 (1970),

and, in the case of Commission orders, under the provisions

of the 1934 Act, 15 U.S.C. § 78y (1970). On such review, a

court is competent to consider, in accordance with standards

appropriate for review of agency action, see Administrative

Procedure Act §10(e), 5 U.S.C. § 706 (1970), the weight

given by the Commission to competitive factors in achieving

the goals of the 1934 Act.

For the reasons stated, we affirm the district court’s

grant of summary judgment and dismissal of Gordon’s

claim.

Affirmed.