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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1975
- **Citation:** 422 U.S. 659

## Text

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

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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

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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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0179%3A01. Public record. Not legal advice.