Petition — Haddad v. Crosby Corp.

NO. MICH

Supreme Court, U. S,

FILED

SEP 5 1978

, JR., CLERK

IN THE

Supreme Cowt of the United States

OCTOBER TERM 1978

78-375

GENEVIEVE M. HADDAD

Petitioner,

VS.

THE CROSBY CORPORATION, ET AL.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

EUGENE J. METZGER, ESQ.

CarRL W. SCHWARZ, Esq.

METZGER, SHADYAC & SCHWARZ

One Farragut Square South

Washington, D.C. 20006

Attorneys for Petitioner

i

INDEX

Page

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Appendix:

A—First Opinion of the District Court.............. A-|

B—First Opinion of the Court of Appeals ........ A-39

C—Second Opinion of the District Court.......... A-44

D—Second Opinion of the Court of Appeals.... A-52

il

TABLE OF AUTHORITIES

Page

CASES:

Haddad vy. The Crosby Corporation, No. 77-1786

Ss Me, WUD UTED Bias caersccinosasddnensnentcasanenss 6

Haddad vy. The Crosby Corporation, 533 F.2d

SE es AE I scien chcccseseneunasiinatonspvocniies 1,5,6

Haddad vy. The Crosby Corporation, No. 2454-72

Cis ANI RG WUE Bek ci Risatssodpamrceterstventonsens 6

In re Mutual Fund Sales Antitrust Litigation,

374 F.Supp. 95 (D.C. 1973) occce.ccccsscesssessooehe 1,5

Silver v. New York Stock Exchange, 373 US.

IN Cedi dinapchtnassadestasansxxruredeecsnsibinneennnench eae 8,9

United States v. Cartwright, 411 US. 546

Se Ee EOS OE AO EER WT CE DEO 6

United States v. McKesson & Robbins, 351\ U.S.

BE tagciacedipniianlgackenainitbscnsusetbitageeedaniacensses 15

United States v. National Association of Secu-

rities Dealers, Inc., 422 U.S. 694 (1975).......... 2,5,9,12

STATUTES:

Investment Company Act of 1940, 54 Stat. 789,

as amended, 15 U.S.C. §80a-1, ef seq.:

Section 22(d), 15 U.S.C. §80a-22(d)........... 4,5,9,10

Section 22(f), 15 U.S.C. §80a-22(f)............. 2,4,5,9,10

Maloney Act of 1938, 52 Stat. 1070, as

amended, 15 U.S.C. §780-3(b) (8)... 3,7,11

Sherman Act, 26 Stat. 209, as amended, 15

U.S.C. §1 ef seq.:

I ee Wr Sa TO piksiteenmncessacnvasseaisessiorens 2

RE x OP Me EO csnasecacrastnnsiccssesdenscnneess 2

SE CF Ss EM wadsssaeacocsnssbsoncnsininvbsasse 3

IN THE

Supreme Court of the United States

OcTOBER TERM, 1978

No.

GENEVIEVE M. HADDAD,

Petitioner,

VS.

THE CROSBY CORPORATION, ET AL.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Genevieve M. Haddad hereby respectfully petitions for the

issuance of a writ of certiorari to review the judgment of the

United States Court of Appeals for the District of Columbia

Circuit, entered in the above-entitled case on June 6, 1978.

OPINIONS BELOW

The first opinion of the District Court (Appendix A, infra )

is reported as Jn re Mutual Fund Sales Antitrust Litigation, 374

F.Supp. 95 (D.D.C. 1973). The first opinion of the Court of

Appeals (Appendix B, infra ) is reported as Haddad v. The

Crosby Corporation, 533 F.2d 1247 (D.C.Cir. 1976). The

2

opinion of the District Court on remand (Appendix C, infra )

was not reported. The second opinion of the Court of Appeals

(Appendix D, infra ) was not reported.

JURISDICTION

The judgment of the Circuit Court of Appeals was entered

on June 6, 1978. The jurisdiction of this Court is invoked under

28 U.S.C. §1254(1).

QUESTION PRESENTED

This Court in United States v. National Association of

Securities Dealers, Inc., 422 U.S. 694 (1975) found an implied

exemption to the antitrust laws in Section 22(f) of the In-

vestment Company Act of 1940, 15 U.S.C. §80a-22(f), for

intrafund restraints on competitive conduct in the chain of

distribution. Can that opinion form the predicate for exempting

restraints upon interfund competitive conduct, presumably un-

der the Maloney Act or some form of interaction between the

Maloney Act and the Investment Company Act?

STATUTES INVOLVED

Sections 1, 2 and 3 of the Sherman Act, 26 Stat. 209, as

amended, 15 U.S.C. §§1, 2 and 3, provide in pertinent part:

Sec. |. 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. . . .

Sec. 2. Every person who shall monopolize, or

attempt to monopolize, or combine or 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 deemed guilty of a

felony.

‘esi ate ioe Wo adalat

3

Sec. 3. Every contract, combination in the form

of trust or otherwise, or conspiracy, in restraint of

irade or commerce in any Territory of the United

States or of the District of Columbia, or in restraint of

trade or commerce between any such Territory and

another, or between any such Territory or Territories

and any State or States or the District of Columbia,

or with foreign nations, or between the District of

Columbia and any State or States or foreign nations,

is declared illegal.

Section 1(b)(8) of the Maloney Act, 52 Stat. 1070, as®

amended, 15 U.S.C. §780-3(b)(8), provides in pertinent part:

Sec. 1(b)(8). An applicant association shall not

be registered as a national securities association

unless it appears to the Commission that

*— * *

(8) the rules of the association are de-

signed to prevent fraudulent and manipula-

tive acts and practices, to promote just and

equitable principles of trade, to provide

safeguards against unreasonable profits or

unreasonable rates of commissions or other

charges, and, in general, to protect investors

and the public interest, and to remove imped-

iments to and perfect the mechanism of a free

and open market; and are not designed to

permit unfair discrimination between custom-

ers or issuers, or brokers or dealers, to fix

minimum profits, to impose any schedule .of

prices, or to impose any schedule or fix

minimum rates of commissions, allowances,

discounts, or other charges.

4

Sections 22(d) and 22(f) of the Investment Company Act,

54 Stat. 789, as amended, 15 U.S.C. §§80a-22(d) and 80a-

22(f), provide in pertinent part:

Sec. 22(d). No registered investment company

shall sell any redeemable security issued by it to any

person except either to or through a principal under-

writer for distribution or at a current public offering

price described in the prospectus, and, if such class of

security is being currently offered to the public by or

through an underwriter, no principal underwriter of

such security and no dealer shall sell any such

security to any person except a dealer, a principal

underwriter, or the issuer, except at a current public

offering price described in the prospectus. .. .

Sec. 22(f). No registered open-end company

shall restrict the transferability or negotiability of any

security of which it is the issuer except in conformity

with the statements with respect thereto contained in

its registration statement nor in contravention of such

rules and regulations as the Commission may pre-

scribe in the interests of the holders of all of the

outstanding securities of such investment company.

STATEMENT OF THE CASE

Load mutual funds are characterized by contractually

imposed vertical restraints on pricing and by the total suppres-

sion of secondary dealer and secondary brokerage markets

through industry wide utilization of identical agreements.

The complaint herein charged that both were per se

violations of the antitrust laws.1 Some months later, the United

States Department of Justice filed a somewhat similar series of

' Haddad v. National Association of Securities Dealers, Inc., No.

2454-72, D.D.C., complaint filed December 8, 1972.

charges divided into one horizontal and eight vertical counts.2

Both cases—together with others filed consequent upon the

Government action3—were dismissed on the pleadings by the

District Court on the theory that the Investment Company Act

of 1940,4 had created an implied exemption to the antitrust laws

in favor of the Securities and Exchange Commission.5 The

Government case was appealed directly to this Court, where, by

a process of attrition, the “horizontal” count had been reduced,

finally, in the words of defense counsel, to a “non-case.”’6 In

United States v. National Association of Securities Dealers,

Inc., 422 U.S. 694 (1975), this Court sustained the District

Court’s finding of an implied exemption to the antitrust laws in

Section 22(f),? of the Investment Company Act permitting

funds and their underwriters to impose restraints on dealers and

brokers through contract. This Court expressly found that there

were no horizontal restraints charged in the Government case

as it was ultimately structured and reversed the District Court’s

finding of horizontal immunity under Section 22(d), 15 U.S.C.

§80a-22(d).

The Court of Appeals for the District of Columbia Circuit®

then remanded this case to the District Court to determine

whether there were any non-price horizontal elements left in

this case, since any horizontal price elements would appear to

2 United States v. National Association of Securities Dealers,

Inc., No. 338-73, D.D.C., complaint filed February 21, 1973.

3 In addition to these suits, approximately fifty other similar suits

were filed in federal district courts across the country and were

transferred to the lower Court herein by the Judicial Panel on

Multidistrict Litigation.

415 U.S.C. §80a-1, ef seq.

5 In re Mutual Fund Sales Antitrust Litigation, 374 F.Supp. 95

(D.D.C. 1973) (Haddad 1).

6 Record at 50, United States v. National Association of Secu-

rities Dealers, Inc., 422 U.S. 694 (1975).

715 U.S.C. §80a-22(f).

8 Haddad v. The Crosby Corporation, 533 F.2d 1247 (D.C. Cir.

1976) (Haddad II).

»

6

be only peripheral to the vertical pricing arrangements ap-

proved by this Court in the companion Government case.® This

peculiar characterization of inter-product competition as per-

ipheral to intra-product competition, of course, doomed our

case. As we pointed out below, a// restraints on competition

impact ultimately on price or they wouldn’t occur. Only if the

Circuit Court’s opinion were construed as barring “price-fixing”

(which we did not charge with respect to our horizontal

allegations), could any antitrust charge survive this limitation.

We so argued in the District Court which found, quite properly,

that we had not charged any conduct which did not impact on

price. That Court thereupon again dismissed the complaint’?

and was sustained therein by the Circuit, per curiam, on its

opinion."

»-

REASON FOR GRANTING THE WRIT

A secondary brokerage or secondary dealer market could

not be suppressed by means of the vertical understandings

between an underwriter and those in his chain of distribution

which this Court found acceptable.'2 For then any broker could

8 The Court of Appeals in Haddad J] stated as follows:

We recognize that a degree of inter-fund restraint is

implicit in the intra-fund combinations which the Supreme

Court found to be immunized. The fixing of the price at

which each fund’s shares will trade largely eliminates the

price component of inter-fund competition. However, it is

also clear that agreements are possible which are explicitly

inter-fund in nature, which impair competition arising

from factors other than price. Fund managers, for exam-

ple, might agree to the types of securities each would

purchase, and thus position their products in a way to

minimize competition between them.

535 F.2d at 1250.

‘0 Haddad v. The Crosby Corporation, No. 2454-72 (D.D.C. June

30, 1977) (Haddad Hl).

"1 Haddad y. The Crosby Corporation, No. 77-1786 (D.C. Cir.

June 6, 1978) (Haddad IV).

‘2 For an overview of the mutual fund industry, see United States

v. Cartwright, 411 U.S. 546 (1973).

7

trade all other fund shares in such secondary markets. The

suppression of these markets has worked only because common

schemes have been introduced in the bulk of the industry

through a concert of action between its members at every level

of distribution.

Historically, the Congress has, at times, permitted vertical

restraints on competition from a common understanding that

interproduct competition (here suppressed ) would support the

public interest partially curtailed by intra-product restraints

sporadically thought useful. We are to infer an implied

exemption to the antitrust laws in the governing legisla-

tion—the Maloney Act—which itself contains an express prohi-

bition against any deviation from those antitrust laws.'3 Surely

we make mock of the supposed primacy of those antitrust

standards by such outrageous tinkering.

With respect to “load” open end mutual funds—the

-product market in this case—there have been imposed signifi-

cant restraints on a “free and open” market for the trading of

such securities.14 The public offering price is fixed by the issuer

13 The Maloney Act of 1938, 15 U.S.C. §780-3(b)(8), provides

in pertinent part:

(b) An applicant association shall not be registered as

a national securities association unless it appears to the

{Securities Exchange ] Commission that

* * *

(8) the rules of the association are designed

to ... remove impediments to and perfect the

mechanism of a free and open market; and are not

designed to ... fix minimum profits ... or fix

minimum rates of commissions, allowances, dis-

counts, or other charges.

14 There are more than 500 mutual funds in the United States

with total net assets in excess of $55 billion. Of these approximately

420 are “load” mutual funds which account for more than 90% of

industry assets and have more than 8 million shareholder accounts.

8

and both the secondary brokerage and the secondary dealer

markets have been almost entirely suppressed.

This suppression has arisen through two vehicles. A

particular fund enters into contracts through its primary dis-

tribution chain whose members agree not to act as brokers or as

dealers in a secondary brokerage or dealer market. Since such

a marketing strategy would be disasterous for a single fund, the

bulk of the various members of the industry, through concert,

have agreed upon uniform contracts containing identical re-

Straints on alienation. Thus the two secondary markets have

virtually disappeared. This is, of course, an economically sound

strategy for the industry. The brokers receive a triple commis-

sion and the underwriter receives |'2 to 2% of the selling price

on every load fund share sold rather than on 20% or so which

would obtain if a secondary market functioned. The issuer,

who earns his fees based on the size of his fund, gets an

enthusiastic selling force. The retail customer, on the other

hand, pays three times the commissions obtaining with respect

to other securities and receives the advice of a fiduciary —his

broker—-which is strongly biased by force of the dis-

proportionate earnings he receives on this type of security

alone.

The typical load fund today pays a seller net asset value

and charges a buyer net asset value plus 9.3%. A secondary

brokerage market could secure a seller a higher price—say net

asset value plus 3% and a buyer a lower price say net asset

value plus 6%. A secondary dealer market would have to

charge net asset value plus 9.3% but could pay net asset value

plus, say 5%, and attract customers by reason of the higher net

payout.

The extent to which these otherwise per se violations of the

antitrust laws are exempted therefrom either expressly or by

necessary implication in order to make some particular statu-

tory scheme work has been the subject of this and the similar

government case. This “necessary implication” test is the

standard used by this Court in Silver v. New York Stock

9

Exchange.*5 Both the majority and the minority in the compan-

ion government case agreed that it was the test to be applied

here. '6

it has been generally agreed that Section 22(d) of the

Investment Company Act of 1940 imposed a Retail Price

Maintenance Scheme on the primary distribution chain in the

sale of open end mutual funds which went even further and

bound any dealer from selling at other than the price fixed by

the issuer even though he may have acquired his shares from

outside the primary distribution system. This statutory prohibi-

tion was designed to stop non-contractually bound dealers from

impacting negatively on the primary distribution system. The

court below originally ruled that this restriction also effectively

barred a secondary brokerage market, but this Court, in the

companion government case specifically rejected this con-

clusion. 17

Section 22(f) of the Investment Company Act of 1940, in

terms, permits the SEC to establish rules governing restraints

imposed by a fund on alienability of its securities and requires

the publication of such restraints in registration statements.

158 373 U.S. 341 (1968).

‘16 422 U.S. at 734 and 739-740.

17 With respect to Section 22(d), this Court in United States v.

National Association of Securities Dealers, Inc., supra, held as follows:

We therefore hold that the price maintenance man-

date of §22(d) cannot be stretched beyond its literal terms

to encompass transactions by broker-dealers acting as

statutory “brokers.” Congress defined the limitations for

the mandatory price maintenance of the Investment Com-

pany Act. We are not only bound by those limitations but .

we are bound to construe them strictly, since resale price

maintenance is a privilege restrictive of a of a free

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

305, 316, 100 L Ed 1209, 76 S Ct 937 (1956). Accord-

ingly, we hold that the District Court erred in relying on

§22(d) in determining that the activities here questioned

are immune from antitrust liability.

422 US. at 720.

10

Contemporaneous SEC studies suggest that the purpose of this

section was to make sure that the public was fully advised of

what such restrictions were, but a majority of this Court in the

companion government case ruled that this language sanction-

ed the restraints imposed by the funds unless and until abro-

gated by SEC rule. Because some of the restraints imposed by

the funds unduly restricted the mght of brokers and dealers in

the securities of those funds to sell to or through nonconforming

persons, the majority found a necessarily implied exemption to

the antitrust laws in such vertical restraints.

Since the government case was limited to the vertical

restraints found insulated by the majority’s interpretation of

Section 22(f) of the Investment ‘Company Act, that case was

dismissed.

Since the thrust of the complaint in this case was against

the suppression of a form or forms of competition—secondary

brokerage and secondary dealer trading—the complaint was

not couched in terms of verticai and/or horizontal counts. It

spoke rather to the concert of the entire industry in restraining

competition throughout the industry. Can the Investment

Company Act, either alone, or in conjunction with some other

legislative mandate be construed as creating some implied

immunization to anti-competitive industry-wide conduct?

As is apparent on their faces, Sections 22(d) and 22(f) are

parts of a Retail Price Maintenance Scheme, that is, one

imposed by the producer on his distributional chain. Both

speak directly and solely to protection of the Primary Dis-

tribution System. Now Retail Price Maintenance did not begin

with the Investment Company Act of 1940. Strong efforts were

made as early as 1929 to enact a Federal Retail Price Mainte-

nance Law. Starting in 1931 with California, some 42 states

adopted Retail Price Maintenance Laws before the 75th Con-

gress finally enacted the Miller-Tydings Act,'® in 1937 giving

federal sanction to such programs. But this depression-born

815 U.S.C. §1 (Miller-Tydings Act repealed in 1975).

abandonment of competition as our primary pricing mechanism

was carefully cabined and confined by a cautious Congress

(which we know has now largely abandoned the experiment).

Retail Price Maintenance was permitted only with respect to

products “in free and open competition” with the products of

another manufacturer. The House Report carefully noted the

problem:

[I]t is contended that price maintenance legislation

tends unduly to enhance the price of goods to the

consumer. To this argument it is answered that the

free play of competition between products of differ-

ent manufacturers of the same general class will

prevent such a result. 19

But if the Investment Company Act only protected intra-

fund, vertical conduct from the antitrust laws, what shields

conduct designed to suppress competition between funds? Since

most underwriters, dealers and brokers are members of the

National Association of Security Dealers, may they look to that

group’s enabling legislation, the Maloney Act? That argument

would appear to have been answered dispositively by the

precise terms of the statute itself. The Maloney Act of 1938

provides in relevant part as follows:

(b) An applicant association shall not be regis-

tered as a national securities association unless it

appears to the [Securities Exchange] Commission

that

” * os

(8) the rules of the association are designed

to ... remove impediments to and perfect the

mechanism of a free and open market... .20

19 H.R. Rep. No. 382, 75th Cong., Ist Sess. (1937).

20 15 U.S.C. §780-3(b).

12

As we have seen, two years later, the Congress modified

this injunction with respect to Retail Price Maintenance, intra-

fund. But it would be absurd to argue that the Maloney Act

created an implied exemption to the antitrust laws because such

exemption was necessary in order to effectuate the statutory

scheme—a statutory scheme which mandated adherence to the

antitrust standards in so many words.

In N.A.S.D., Mr. Justice Powell concluded with respect to

the limited horizontal charges in the government’s complaint

that:

[A]ppellant does not contend that appellees’ activi-

ties have had the purpose or effect of restraining

competition among the funds. Instead, appellant

urges in Count I that appellees’ alleged conspiracy

was designed to enourage the suppression of intra-

fund secondary marketing activities.2'

The NASD could, in support of the vertical restraints on

alienability and Retail Price Maintenance sanctioned by the

Investment Company Act of 1940, agree among its mem-

bers—for example, to discipline members who violate such

intra-fund restraints or to police such intra-fund activity

through some surveillance and reporting system. What the

industry cannot do, however, is to participate in plans, prog-

rams and understandings whereby—i.e., the different funds

would adopt uniform or similar rules respecting alienability or

price with the purpose or effect of assuring that secondary

dealer or brokerage markets would not arise to place com-

petitive pressures on the various primary pricing systems of the

individual funds.

Not for the purpose of proving any “facts” with respect to

this case, but solely to show one way in which inter-fund

activity could, in our view, still run afoul of the antitrust laws,

we should like to quote from one of the few documents we have

21422 US. at 733 (emphasis added ).

13

been able to obtain thus far in this case. The Investment

Company Committee of the NASD was concerned with the

secondary dealer market in fund shares and reported to the

NASD Board, in pertinent part, as follows:

[A]s a matter of policy [we] will use [our] best

efforts to encourage underwriters to amend their

selling group agreements so that sales to dealers are

limited to purchases for investment or to fill orders

from members of the public, and to enforce these

agreements by cancelling contracts with firms that

may not live up to the undertakings of such agree-

ments... . [the Committee] will... continue to

encourage other underwriters to amend and enforce

their selling group agreements as outlined above. It

is suggested that the Executive Director send a letter

to underwriters and distributors of investment com-

pany shares suggesting that they make any necessary

revisions of their selling group agreements to make it

clear that sales may be made only for the purpose of

filling orders from members of the public or for

investment and suggesting the importance of self-

enforcement of selling group agreements by under-

writers. 22

Such a letter was sent.

To urge that members of an industry adopt similar or

identical vertical restraints is to limit, restrain or to dissipate

competition among competitors. But in approving Retail Price

Maintenance—a concept it has since largely abandoned as

counter-productive23—the Congress was very careful to guard

22 Document attached as Exhibit No. 17 to Affidavit of Daniel R.

Hunter, Esquire, United States Department of Justice Antitrust Divi-

sion, dated July 5, 1973, and filed with the United States District

Court for the District of Columbia in the United States v. N.A.S.D.

litigation on July 6, 1973.

23 The Miller-Tydings Fair Trade Act was repealed pursuant to

Pub.L. 94-145 which was passed by the Congress in 1975.

14

the public through the vehicle of inter-product com-

petition—competition which the conduct here complained of

has the precise purpose or effect to pinch off.

Similarly, the destruction of the secondary brokerage mar-

ket is a direct result of the imposition by the industry of uniform

sales agreements. A 1974 Staff Study of the SEC concluded on

this point:

By its terms, Section 22(d) does not apply to

brokered transactions. Nevertheless, no secondary

market in mutual funds has developed because form

sales agreements between underwriters and broker-

dealers effectively prohibit such a secondary mar-

ket.24

This precise conduct is charged in our complaint.

See, e.g.; the following paragraphs from the Com-

plaint in Haddad yv. The Crosby Corporation

et al:

42. The unlawful conduct, acts and practices of

defendants and coconspirators included, among other

things, continuing agreements, understandings and

concerted acts having the common design, purpose,

objective and effect to:

(a) Prevent the defendant broker-dealers from

acting as agents or brokers for the members of

the Investor Class... .

(c) Prevent any defendant, including defendant

broker-dealers, from “crossing” trades by in-

vestors ... as in this set by matching orders with

Sais ....

24 Securities Exchange Commission Report of the Division of

Investment Management Regulation, Mutual Fund Distribution and

Section 22(d) of the Investment Company Act of 1940, p. 109

(August 1974).

15

43. Defendants knowingly and willfully did those

things which, ashereinabove alleged, they combined

and conspired to do, and each defendant accepted,

adhered to and participated in the common design

and scheme knowing that concerted action "as con-

templated and invited, and that such cooperation was

essential to the success of the scheme.

This language, these charges, are incompatible with sole or

even primary intra-fund conduct.

It would seem hornbook that the vertical restraints per-

mitted under the Investment Company Act must be narrowly

construed and not expanded to protect inter-fund anticompeti-

tive conduct. Such a rule is predicated on the precise language

of this Court in another Retail Price Maintenance case, United

States v. McKesson & Robbins,25 wherein it was stated that:

Congress has marked the limitations beyond which

price fixing cannot go. We are not only bound by

those limitations but we are bound to construe them

strictly, since resale price maintenance is a privilege

restrictive of a free economy. (Citation omitted ). . . .26

Sufficient protection to the public interest was

deemed to be afforded by the competition among

different brands. ... In short, the very purpose of the

[ Miller-Tydings and Maguire] Acts is to permit a

manufacturer to set the retail price for his own

products while preserving competition

between... manufacturers.27

We submit, respectfully, but as forcefully as we can, that

Retail Price Maintenance under the Investment Company Act is

entitled to no broader parameters than obtained while a

general Retail Price Maintenance Scheme was in force.

25 351 U.S. 305 (1956).

26 Jd. at 316.

27 Jd. at 317 (Harlan, J., dissenting ).

16

CONCLUSION

For the foregoing reasons, Haddad’s petition for a writ of

certiorari should be granted.

Respectfully submitted,

Attorneys for the Petitioner

EUGENE J. METZGER

CarRL W. SCHWARZ

METZGER, SHADYAC & SCHWARZ

One Farragut Square South

Washington, D.C. 20006

ba

INDEX TO APPENDIX

Page

First Opinion of the District Court .....0000.000cccccccececeeeseeeeeee A-|l

First Opinion of the Court of Appeals .0.....0...000..cccccecccceeee A-39

Second Opinion of the District Court.......00.cccccccccccceeeeeese A-44

Second Opinion of the Court of Appeals ......0...000..ccccc000-. A-52

A-l

United States District Court

FOR THE DISTRICT OF COLUMBIA

In re MUTUAL FUND SALES ANTITRUST LITIGATION.

Civ. A. No. Misc. 103-73

Genevieve M. HADDAD, Plaintiff,

v.

The CROSBY CORPORATION et al.,

Defendants. *

Civ. A. No. 2454-72.

UNITED STATES of America,

Plaintiff,

V.

The NATIONAL ASSOCIATION OF SECURITIES

DEALERS, INC., et al.,

Defendants. **

Civ. A. No. 338-73.

A-2

Authur GROSS, Joseph Lerman, and Rose

Lerman, on behalf of themselves and

all other individual mutual funds shareholders

similarly situated, Plaintiffs,

V.

The NATIONAL ASSOCIATION OF SECURITIES

DEALERS, INC., et al.,

Defendants. ***

Civ. A. No. 426-73.

United States District Court,

District of Columbia.

Dec. 14, 1973.

Daniel R. Hunter, Dept. of Justice, Carl W. Schwarz,

Charles Jay Pilzer, Washington, D.C., David Berger, Phila-

delphia, Pa., for plaintiffs.

Daniel P. Levitt, (Liaison Counsel) Paul, Weiss, Gold-

berg, Rifkind, Wharton & Garrison, Lloyd J. Derrickson,

Washington, D.C., for defendants.

SS ee = "

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MEMORANDUM OPINION

CORCORAN, DISTRICT JUDGE.

THE NATURE OF THE CASE

The above-captioned lawsuits are civil actions alleging

violations of the federal antitrust laws in connection with the

distribution of securities of open-end management investment

companies (“mutual funds”).' The operations of such com-

panies are governed generally by the Investment Company Act

of 19402 (the 1940 Act).

In Civil Action No. 2454-72, plaintiff Haddad purports to

sue on behalf of a class and subclass of mutual fund investors.

Haddad alleges violations of the antitrust laws [Sherman Act,

Sections 1-3, 15 U.S.C. §§ 1-3] and the securities laws [Secu-

rities Exchange Act of 1934, Section 10(b), 1S U.S.C. § 78)

(b); Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5 (1972) ].

The antitrust claim is that the various defendants, including

underwriters of and dealers in mutual fund shares and un-

named co-conspirators have agreed, combined and conspired to

inhibit, or to refuse to participate in, transactions as agents or

brokers in mutual fund shares at prices below the applicable

public offering prices established in the prospectuses of such

mutual funds and have placed unreasonable restraints upon the

transferability of such shares. In essence, the securities claim is

that there is a failure to disclose the alleged antitrust violations

and that such failure constitutes an independent violation of the

securities laws. Haddad alleges damages to her and her

1 By definition an open-end management investment company ts

any issuer which (1) “‘is or holds itself out as being primarily ... in

the business of investing, reinvesting, or trading in securities” (15

U.S.C. § 80a-3); (2) is not a face-amount certificate company or a

unit investment trust (15 U.S.C. § 80a-4); and (3) is “offering for sale

or has outstanding any redeemable security of which it is the issuer”

(15 U.S.C. § 80a-5).

215 U.S.C. § 80a-1 et seq. (1970).

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purported class of undetermined millions of dollars. Haddad’s

antitrust claim requests treble damages and injunctive relief.

The securities claim requests actual damages, punitive dam-

ages, and injunctive relief.

Civil Action No. 338-73 is brought by the Antitrust

Division of the U.S. Department of Justice. The complaint

alleges violations of Section | of the Sherman Act, 15 U.S.C. §

1. The gist of the complaint is that defendants National

Association of Securities Dealers (NASD )3 funds and dealers

have participated in agreements, combinations, and con-

spiracies, the effect of which has been to inhibit a “market” for

“brokerage transactions” and thereby to suppress the growth of

a “secondary market in mutual fund securities,” and to cause

the public to pay artificial and non-competitive sales loads for —

mutual fund shares. The government complaint seeks only

prospective, injunctive relief.

Civil Action No. 426-73, the Gross case, is another private

antitrust suit and purported class action which substantially

duplicates the government allegations in No. 338-73. This

action seeks injunctive relief and treble damages for injury to

the purported plaintiff class over an indeterminate past period.4

3The NASD, incorporated in Delaware on July 18, 1939,

became registered under the Maloney Act, § I5A of the Securities

Exchange Act of 1934, 15 U.S.C. § 780-3, on August 7, 1939.

National Association of Securities Dealers, Inc., 5 S.E.C. 627 (1939).

It is the only association ever to have applied for or been granted

registration under the Maloney Act. Its membership is comprised of

some 4400 broker-dealers and principal underwriters.

4Since the filing of the above-captioned actions, some fifty

private suits, purporting to be class actions under Fed.R.Civ.P. 23,

have been filed in various United States District Courts around the

country. These cases have been transferred to this district by the

Judicial Panel on Multidistrict Litigation, and are collectively cited as:

In Re Mutual Fund Sales Antitrust Litigation, Civil Action No. Misc.

103-73. Pre-trial discovery and other activity in all cases (including

the instant cases) has been stayed pending disposition of the motions

to dismiss under consideration here.

The Court has also reserved judgment in all alleged class suits on

the question of whether the actions may be maintained as class actions

under Fed.R.Civ.P. 23.

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The individual defendants in each case are principal un-

derwriters5 or broker-dealers® in mutual fund shares.” Addition-

ally the NASD is named as a defendant in all three cases. In

each case the defendants have moved to dismiss the complaints,

pursuant to Fed.R. Civ. P. 12(b) on the grounds:

(a) That as a matter of law, Section 22(d) of the

Investment Company Act of 1940, 15 U.S.C. § 80a-22(d),

establishes a system of fixed, retail price maintenance in the

distribution of investment company securities which is totally

inconsistent with antitrust concepts and which accordingly

creates, as Congress clearly intended, an exemption and immu-

nity from antitrust liability for the defendant dealers’ conduct in

maintaining the fixed, public offering price of such securities;

(b) That as a matter of law, Section 22(f) of the In-

vestment Company Act of 1940, 15 U.S.C. § 80a-22(f),

sanctions contractual restrictions on the transferability or

5 A principal underwriter is defined by the 1940 Act as

any underwriter who as principal purchases from (an

open-end investment) company, or pursuant to contract

has the right... from time to time to purchase from such

company, any such security for distribution, or who as

agent for such company sells or has the right to sell any

such security to a dealer or to the public or both, but does

not include a dealer who purchases from such company _

6 A broker is defined by the 1940 Act as “any person engaged in

the business of effecting transactions in securities for the account of

others, but does not include a bank or any person solely by reason of

the fact that such person is an underwriter for one or more investment

companies.” 15 U.S.C. § 80a-2(a)(6). A dealer is defined as “any

person regularly engaged in the business of buying and selling

securities for his own account, through a broker or otherwise, but does

not include a bank, insurance company, or investment company, or

any person insofar as he is engaged in investing, reinvesting, or

trading in securities, or in owning or holding securities, for his own

account, either individually or in some fiduciary capacity, but not as a

part of a regular business.” 15 U.S.C. § 80a-2(a)(11).

7 The identities of all the parties in each of the above-captioned

cases are reflected in the accompanying Orders.

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negotiability of investment company securities, subject to super-

vision of the Securities and Exchange Commission (SEC),

which restrictions are totally inconsistent with antitrust concepts

and which restrictions, therefore, as incorporated in the defen-

dant dealers’ publicly-filed investment company sales agree-

ments, are exempt and immune from antitrust liability; and

(c) That by the Investment Company Act of 1940, Con-

gress subjected the acts and practices of the defendant dealers

in the distribution of investment company securities to contin-

uous and pervasive regulation by the SEC as well as NASD

acting under the SEC’s supervision; and, accordingly, the SEC

has exclusive jurisdiction to regulate those acts and practices,

and such acts and practices are exempt and immune from the

claims herein alleged as violations of the Federal antitrust laws.

The motions were consolidated for argument.®

il

THE REGULATION OF MUTUAL FUNDS

The dispute can only be determined ultimately by an

analysis of the several subsections of Section 22 of the 1940 Act

and an antiturst exemption purportedly given by Section

ISA(n) of the Securities and Exchange Act of 1934 (the

Maloney Act [15 U.S.C. § 780-3(n)]. Before reaching that

point, however, it would seem appropriate to view the overall

regulatory scheme imposed by Congress on investment com-

panies through the 1940 Act.

8 In opposition to the motions to dismiss all the plaintiffs also rely

on the proposition that a complaint should not be dismissed for failure

to state a claim unless it appears beyond a doubt that plaintiffs are

unable to prove any set of facts which would entitle them to relief.

Neither the defendants nor this Court have any argument with that

general proposition, but, as the issues are drawn here for purposes of

these motions to dismiss, they are strictly legal ones as to which the

facts as alleged in the complaints or otherwise are not relevant.

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It became apparent to the Congress in 1935 that the

disclosure and antifraud provisions of the Securities Act of 1933

(the 1933 Act) and the Securities Exchange Act of 1934 (the

1934 Act) were not adequate for the regulation of investment

companies. Accordingly, it directed the SEC to make a

comprehensive study of the investment company industry with

a view to proposing corrective legislation. The SEC did so9

producing a draft “Investment Trust Bill” which was the subject

of hearings conducted by a Senate subcommittee. '° Representa-

tives of the investment company industry were invited to

participate in the hearings. Ultimately a compromise bill

emerged which finally became law as the Investment Company

Act of 1940, 15 U.S.C. § 80a-1 et seq."'.

The 1940 Act brought many investment companies within

the disclosure requirements of the federal securities laws for the

first time. It tightened up those requirements and tailored them

to prohibit certain undesirable practices in the investment

company industry. Presently, pursuant to the 1940 Act in-

vestment companies must register themselves (§§ 7 and 8) and

their shares [§ 24(a)] with the SEC, update periodically their

filings with quarterly and annual reports [§§ 30(a)-(c)], and

submit prospectuses and sales literature to the SEC [§ 24(b)].

Companies must issue to their shareholders, at least semi-

annually, financial reports containing specific types of informa-

tion [§ 30(d)].

8 Report of the SEC, Investment Trusts and Investment Com-

panies, Part Three, Abuses and Deficiencies in the Organization and

Operation of Investment Companies, H.R.Doc. No.279, 76th Cong.,

Ist Sess. (1939) (hereinafter cited as Investment Trust Study of

1940).

10 Hearings on S. 3580 Before a Subcomm. of Senate Comm. on

Banking and Currency, 76th Cong., 3d Sess. (1940) (hereinafter cited

as 1940 Senate Hearings).

11 That Act included § 22(d), one of the sections in controversy

in this case, discussed infra. Section 22(d) prohibited sales of

investment company shares to the public at any price other than the

fixed public offering price.

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The 1940 Act also imposes detailed restrictions upon

investment company structure, conduct, financial policies, and

dealings with and by affiliates. 12

12 The Act delimits permissible methods for seiecting directors of

investment companies (and trustees in the case of investment trusts )

(§ 16), sets out qualifications for securities custodians [§ 17(i)] and

methods of safekeeping securities [§ 17(g)], and prohibits in-

demnification for official conduct [§§ 17(h) and (i)]. Certain

persons guilty of prior malfeasance are barred altogether from

affiliating with investment companies, advisers, custodians, and prin-

cipal underwriters (§ 9). Others who commit misconduct or abuse

their positions of trust cam be enjoined (§ 36). Misappropriation of

company funds is made a federal crime (§ 37).

The Act also sets out minimum capitalization requirements for

the companies (§§ 14 and 18). It requires a majority shareholder

vote for changes in a company’s open-end or closed-end nature, its

diversification, its capacity to borrow money, issue senior securities,

underwrite others’ securities, purchase and sell real estate and com-

moditie., or make loans, its investment policies and its fundamental

business (§ 13). Certain dividend distributions are barred unless

timely disclosed to the shareholders (§ 19). Investment companies

are barred from participating in certain types of securities transactions

[§ 12(a)] and from making certain loans (§ 21). Some proxy

solicitations are barred [§ 20(a)] and some exchanges need prior

SEC approval (§ 11). Reorganization plans must be submitted to the

SEC, which can render a negative advisory report and seek an

injunction with respect to such reorganizations (§ 25). Voting trusts

and cross or circular ownership patterns are barred (§ 35). Accoun-

tants must meet certain criteria, be selected in a particular fashion,

and perform certain functions (§ 32). The regulated companies must

keep and refrain from destroying certain books and records (&§ 31

and 34). Unit investment trusts (§ 26) and face amount certificate

companies (§§ 28-30) are given special regulatory treatment.

The Act curtails the pyramiding of mutual funds [§§ 12(d)-

(g)]. Unless it is itself the principal underwriter, no investment

company may acquire shares of another company whose principal

underwriter is related to the first company [§ 10(f)]. At least 40% of

the company’s board must consist of independent directors (§ 10).

Advisory contracts must first be approved by a majority of directors

unaffiliated with the adviser or by a majority of shareholders [§

15(c)]. Investment company transactions conducted by or with

affiliated persons are prohibited in some cases and narrowly circum-

scribed in others (§ 17).

‘Ss

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In 1938 (prior to the enactment of the 1940 Act), the

Congress had amended the 1934 Act through the passage of the

so-called ‘“‘Maloney Act,” 15 U.S.C. § 780-3. The Maloney Act

provided for the registration with the SEC of a national

securities association with rule-making power upon the finding

by the SEC that:

the rules of the association are designed to prevent

fraudulent and manipulative acts and practices, to

promote just and equitable principles of trade, to

provide safeguards against unreasonable profits or

unreasonable rates of commissions or other charges,

and, in general, to protect investors and the public

interest, and to remove impediments to and perfect

the mechanism of a free and open market; and are

not designed to permit unfair discrimination between

customers or issuers, or brokers or dealers, to fix

minimum profits, to impose any schedule of prices, or

to impose any schedule or fix minimum rates of

commissions, allowances, discounts, or other

charges. '3

When Congress enacted the Maloney Act in 1938 it

specifically provided:

If any provision of this section is in conflict with any

provision of any law of the United States in force on

June 25, 1938, the provision of this section shall

prevail. 15 U.S.C. § 780-3(n)

The defendant NASD is the only securities association

registered with the SEC under the Maloney Act.

By § 22(a) of the 1940 Act, Congress gave the NASD, as a

registered national securities association, the power to promul-

gate rules setting the minimum price at which its members may

buy redeemable fund shares from a fund, the maximum price at

which its members may resell to or redeem with a fund, and the

13 § 15A(b)(8), 15 U.S.C. § 780-3(b)(8).

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minimum period which must elapse after sale before a member

may resell to or redeem with a fund. The SEC can exercise its

overall supervisory power to promulgate rules superseding

NASD’s rules on sale, redemption and repurchase prices,

holding periods, and sales loads [§ 22(c) 1940 Act].

Section 22(b)(1) of the 1940 Act empowers the NASD to

adopt rules prohibiting members from charging “excessive”

sales loads, provided that such rules “allow for reasonable

compensation for sales personnel, broker-dealers, and under-

writers.”'4 In so doing the NASD is expressly freed from a

provision's in the Maloney Act which had prohibited it from

issuing rules designed to impede “a free and open market,” “‘fix

minimum profits,” “impose any schedule of prices,” or “impose

any schedule or fix minimum rates of commissions, allowances,

discounts, or other charges.” Section 22(b)(3) of the 1940 Act,

added in 1970, authorizes the SEC to alter and supplement, the

NASD’s Section 22(b)(1) rules.16 And in 1970, Congress

added Section 22(b)(4) to the 1940 Act to the effect:

If any provision of this subsection is in conflict with

any provision of any law of the United States in effect

on December 14, 1970, the provisions of this subsec-

tion shall prevail. 15 U.S.C. § 80a-22(b)(4).

An investment company, its principal underwriter, and its

dealers are prohibited from selling redeemable securities for

4 Before 1970, then-Section 22(b) authorized the NASD to issue

rules barring “unconscionable” and “grossly excessive” sales loads,

and then-Section 22(c) empowered the SEC to issue superseding rules

for both NASD members and non-members.

5 § ISA(b)(8), 15 U.S.C. § 780-3(b)(8).

‘6 The SEC may also grant qualified exemptions from NASD

rules for “smaller companies” [§ 22(b)(1)]. Section 22(b)(2),

another 1970 addition, gives the SEC the same rate-fixing powers over

non-NASD brokez-dealers as Section 22(b)(1) gives the NASD over

its members. An underwriter whose shares are distributed by non-

members of NASD. however, may elect to have its shares sold under

the NASD rather than the SEC sales load rule. [| § 22(b)(2)].

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distribution to the public except at a current public offering

price described in the prospectus [§ 22(d)]. Dealers and

principal underwriters may, however, sell such securities to

other dealers, the principal underwriter or the fund at other

than a public offering price. ( Jd.)

An investment company may restrict the transferability

and negotiability of its shares, but only insofar as that is done in

conformity with the company’s registration statement and not

in contravention of SEC rules [§ 22(f)].'7

By rules and regulations upon its own motion and by order

upon application, the Commission may conditionally or uncon-

ditionally exempt persons, securities, or transactions, or classes

thereof, from any provision in the Act or any rule or regulation

thereunder, to the extent such exemption is in the public interest

and not inconsistent with investor protection and the Act’s

purposes [§ 6(c) ].18

Finally, no person may be held liable for any act done in

conformity with an SEC rule, regulation, or order which is later

invalidated [§38(c) }}.

17 The 1940 Act contains other provisions with respect to dis-

tribution. Redemption privileges may not be suspended or postponed

for more than seven days after tender except during certain ex-

ceptional circumstances as defined by the SEC [§ 22(e)]. A fund

may not issue shares for services or property otner than cash or

securities except as a dividend or shareholder distribution or in a

reorganization [§ 22(g)]. Thus wa ering of shares is prevented.

Investment companies issuing periodic payment plan certificates

may charge no more than a 9% sales load, nor deduct more than 50%

of that load from the first year’s payments, nor deduct dis-

proportionate amounts, nor allow periodic payments of less than

certain small amounts, nor make proceeds subject to management or

other fees which exceed the amount the Commission prescribes as

reasonable (§ 27). 1970 amendments added refund requirements

and empowered the SEC to make rules with respect to reserves. (/d.)

Close-end funds are specially regulated with respect to watering

and repurchase prices (§ 23).

18 Baum v. Investors Diversified Services, 286 F.Supp. 914, 921

(N.D.I11.1968), aff'd, 409 F.2d 872 (7th Cir. 1969).

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Since 1940, the SEC has actively regulated the pricing and

distribution of mutual fund shares. The Commission has

promulgated a rule '* for calculating fund share prices. It has

promulgated another rule 2 allowing discount sales to certain

groups and individuals and has periodically proposed2' and

adopted22 amendments to this rule. It recently proposed a third

rule23 relating to no-load exchange privileges for fund share-

holders who wish to switch to other load funds. The Commis-

sion has entertained a wide variety of applications for ex-

emption from these rules and the relevant statutory sections and

has granted some of these applications.24 SEC administrative

proceedings have barred both underpricing and overpricing of

fund shares.25

19 Rule 22c-1, 17 C.F.R. § 270.22c-1, adopted in Investment Co.

oF Release No. 5519 (1969), CCH Fed.Sec.L.Rep. °67-’69 Decisions

77,616.

20 Rule 22d-1, 17 C.F.R. § 270.22d-1, adopted in Investment Co.

Act Release No. 2798 (1958).

21 Investment Co. Act Release No. 5507 (1968), in CCH

Fed.Sec.L.Rep. ’67-’69 Decisions J 77,609; Investment Co. Act Re-

lease No. 6069 (1970) in CCH Fed.Sec.L.Rep. °69-’70 Decisions

{ 77,826 and Investment Co. Act Release No. 7571 (1972) in CCH

Fed.Sec.L.Rep. ’72-’73 Decisions J 79,148.

22 Investment Co. Act Release No. 6347 (1971), in CCH

Fed.Sec.L.Rep. ’70-’71 Decisions J 77,953.

23 Rule 22d-2, proposed in Investment Co. Act Release No. 7555

(1972), CCH Fed.Sec.L.Rep. ’72-’73 Decisions J 79,132.

24 See the list of more than 100 such applications in 4 CCH

Fed.Sec.L.Rep. at p. 68,751 et seq. The Commission staff has issued

an abundance of letters in response to “no action” requests with

respect to these rules and the basic statutory provisions. From 1971

through March 21, 1973, there were 49 such letters listed in 4 CCH

Fed. Sec. L. Rep. at pp. 63,134; 63,789; and 63,894.

25 See, e. g., Spiro Sideris, Exchange Act Release No. 8816

(1970) (underpricing); Russell L. Irish, Exchange Act Release No.

7687 (1965), CCH Fed.Sec.L.Rep. ’64-’66 Decisions J 77,274 (over-

pricing). The commission has also sought to regulate excessive

“indirect” compensation to fund dealers. E. g., SEC approval of new

NASD Rules of Fair Practice. Section 26(k), which bars members

from selling certain investment companies’ shares in such a way that

the companies will reciprocate with portfolio brokerage commissions,

and conversely, Exchange Act Release No. 10147 (May 14, 1973), 5

Fed.Sec.L.Rep. 9 79,372.

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The SEC has approved NASD Rule 26 which regulates in

great detail the distribution, redemption, and repurchase of

mutual fund shares.26 The rule27 says, inter alia, that principal

underwriters must require their dealers to sign selling agree-

ments containing certain restrictive provisions, that sales loads

may not be “unfair,” that the public offering price must be

calculated in a particular fashion, that dealers and underwriters

may not withhold customers orders or accumulate inventories,

that certain conditional orders are barred, that the fund may

not redeem at prices above net asset value, that sales loads must

be refunded if the purchasers redeem soon after purchase, that

fund shares may not be purchased at prices lower than the

fund’s next-quoted bid, and that non-contract dealers may not

sell their shares back to the fund unless they are record owners

of the shares. The SEC has. supervised NASD enforcement of

this rule and reviewed NASD enforcement proceedings.28

For more than three decades, since the enactment of the

1940 Act, the agreements between dealers and principal under-

writers, and between principal underwriters and mutual funds,

have been filed with the SEC. The agreements are filed under

both the 1933 Act and the 1940 Act.29 The Investment Trust

Study of 1940 described such agreements in detail.90 The 1940

Act specifically calls for written contracts between funds and

their principal underwriter [§ 15(b)]. As noted above, the

Commission has approved a NASD rule which requires dealer-

underwriter agreements; and Commission decisions have fre-

26 Proposed Amendment to the Rules of Fair Practice of

National Ass’n of Securities Dealers, Inc., 9 SEC 38 (1941).

27 NASD Rules of Fair Practice, Article III, Section 26 in CCH

NASD Manual § 2176.

28 See note 25 supra.

29 See Part IV infra.

30 See note 47 infra and accompanying text.

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quently turned on particular provisions of the dealer-

underwriter agreements.?'

THE OPERATION OF A MUTUAL

FUND: RESALE PRICE MAINTENANCE

We look briefly at the manner in which a typical mutual

fund operates within the foregoing framework.32

A mutual fund is an investment company which invests in

the securities of other corporations and issues and has out-

standing common stock representing an interest in the assets of

the fund. The owner of the stock of the fund is entitled, on

demand, to receive from the fund his proportionate share of the

market value of the fund’s net assets. To insure that the fund

has sufficient cash or liquid assets on hand to meet current

redemptions, the fund offers its common stock continuously.

The offering price per share consists of the “net asset value” per

share, computed daily, plus a sales charge or “load.” The

viability of a fund thus depends upon a distribution system

which will effect continuous sales at prices which will support

current redemption demands.

The primary distribution of the shares of a fund is con-

trolled for the most part by § 22(d) of the 1940 Act and follows

a basic pattern throughout the industry, 7. e., (1) a fund enters

into a contract with a principal underwriter who has the

31 See, e. g., Mutual Funds Advisory, Inc., Investment Co. Act

Release No. 6932 (Jan. 12, 1972); First Multifund of America, Inc.,

Investment Co. Act Release No. 6700 (1971), CCH Fed.Sec.L.Rep.

’70-’71 Decisions J] 78,209 at p. 80,602; Russell L. Irish, Exchange Act

Release No. 7687 (1965), CCH Fed.Sec.L.Rep. °64-'66 Decisions

77,274 at 82,431 n.13.

32 See generally Investment Trust Study of 1940; Report of the

Securities and Exchange Commission on the Public Policy Implica-

tions of Investment Company Growth, H.R.Rep.No.2337, 89th

Cong., 2d Sess. (1966) (hereinafter cited as Public Policy Report).

A-15

exclusive right to purchase the shares from the fund; (2) the

principal underwriter acts only as a wholesaler supplying shares

to retail dealers; (3) the retail dealers, who sell the shares to the

investing public, are bound by contracts, commonly known as

uniform sales agreements, with the principal underwriter which

require that those dealers shall not sell at other than the public

offering price, thus insuring that the price of the fund shares will

not be the subject of competition among sellers of shares in the

same fund; (4) the sales charge or “load” (which usually

amounts to 7.5% to 8.5% above net asset value ) is split between

the underwriter and the dealer making the sale while the fund

receives the net asset value component of the public offering

price; and (5) when the shares are redeemed by the fund, as

they must be upon demand, the redemption price is the net

asset value prevailing at the time of redemption.

It is obvious from the foregoing outline of marketing

procedures that the sale and distribution of mutual fund shares

is accomplished through a retail price maintenance system

which is patently repugnant to the free and open competition

requirements of the Sherman Act. This price maintenance

scheme, however, does not operate in a vacuum. Rather, it is

expressly immunized from the otherwise applicable antitrust

laws by virtue of the provisions of the 1940 Act and the

Maloney Act. As the SEC recently reported to Congress,

“Section 22(d) is an exception to the usual congressional

policy, expressed in the antitrust laws, against price fixing.39

It has been authoritatively recognized that the Maloney

Act, superimposed upon the regulatory scheme of the 1940 Act,

provides a limited immunity for participants in the primary

33 Public Policy Report 218-19. See Report of the Staff of the

Securities and Exchange Commission on the Potential Impact of a

Repeal of Section 22(d) of the Investment Company Act of 1940, pt.

I, at | (November 10, 1972) [hereinafter cited as SEC Staff Report

on Repeal of § 22(d)], CCH Fed.Sec.L.Rep.No.450 (Nov. 15, 1972)

pt. IT, at A-I.

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distribution system of mutual fund shares under SEC-approved

NASD rules. That exemption 34 was noted by Mr. Justice

Frankfurter in his dissenting opinion in International Associ-

ation of Machinists v. Street, 367 U.S. 740, 809-10 n. 16, 81

S.Ct. 1784, 1820, 6 L.Ed.2d 1141 (1961):

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Again, in United States v. Socony-Vacuum Oil Co., 310

U.S. 150, 227 n. 60, 60 S.Ct. 811, 846, 84 L.Ed. 1129 (1940),

Mr. Justice Douglas stated:

It should be noted in this connection that the

typical method adopted by Congress when it has

The Maloney Act of 1938 added § ISA to the

Securities Exchange Act of 1934. 52 Stat. 1070, 15

U.S.C. § 780-3. In order to be registered, a number

of statutory standards must be met. The statute

specifically requires that an association’s rules pro-

vide for democratic representation of the member-

ship and that dues be equitably allocated. See

§ 15SA(b)(5) and (6). Only one association, the

National Association of Securities Dealers, Inc., has

ever applied for or been granted registration. NASD

membership comprises roughly three-quarters of all

brokers and dealers registered with the Securities and

Exchange Commission. Loss, Securities Regulation

766-67 (1951 Supp.1955). Sections !SA(i) and (n)

of the Act authorize the NASD to formulate rules

which stipulate that members shall refuse to deal

with non-members with immunity from the antitrust

laws. See S.Rep. No. 1455, 75th Cong., 3d Sess. 8-9

(1938); Loss, op. cit., supra, 769-770. The Commis-

sion has stated that it is “virtually impossible for a

dealer who is not a member of the NASD to

participate in a distribution of important size.” Na-

tional Association of Securities Dealers, Inc., 19

S.E.C. 424, 441.

34 See also the exemption from the antitrust laws provided by §

22(b) (4):

If any provisions of this subsection is in conflict with any

provision of any law of the United States in effect on

December 14, 1970, the provisions of this subsection shall

prevail. 15 U.S.C. § 80a-22(b) (4).

lifted the ban of the Sherman Acct is the scrutiny and

approval of designated public representatives. Under

the N.I.R.A. this could be done through the code

machinery with the approval of the President as

provided in §§ 3(a) and 5, supra note 18. Under

§ 407(8) of the Transportation Act of 1920, [41 Stat.

482; 49 U.S.C. § 5(8)}, carriers, including certain

express companies, which were _ consolidated

pursuant to any order of the Interstate Commerce

Commission were relieved from the operation of the

Antitrust Laws. And see the Maloney Act (§ 15A of

the Securities Exchange Act of 1934, 52 Stat. 1070,

15 U.S.C.A. § 780-3) providing for the formation of

associations of brokers and dealers with the approval

of the Securities and Exchange Commission and

establishing continuous supervision by the Commission

over specified activities of such associations. . . .

(Emphasis added. )

The plaintiffs recognize a limited antitrust immunity ac-

corded to the primary distribution system. The gravamen of

their complaints, however, is that the defendants have con-

spired to use the primary distribution system to foreclose the

development of a secondary market in mutual fund shares.

This is allegedly accomplished through the use of the uniform

sales agreements mentioned above, which even after primary

distribution of the shares, set the price at which the shares shall

thereafter be sold, thus precluding the dealers from selling

shares as brokers in a brokerage market or as dealers in a

secondary dealer market in which marketplace conditions and

arms-length bargaining would be the price-setting factors. The

plaintiffs insist that Congress, while allowing the primary

A-18

market to flourish with benefit of antitrust immunity, did not

intend to foreclose secondary market growth, but that such

secondary markets are in fact being discouraged and sup-

pressed by certain NASD rules and the restrictive provisions

contained in the industry-wide uniform sales agreements be-

tween principal underwriters and dealers.

IV

SECTION 22, 1940 ACT

[1] The fact that a secondary market is to all intents and

purposes non-existent might seem to substantiate the plaintiffs’

claims. However, the position of the plaintiffs fails to take into

account that the creation and maintenance of a free and open

secondary market would be totally inconsistent with and might

destroy the primary marketing system that is created by the

1940 Act, and particularly by § 22(d), the repeal of which has

several times been urged upon Congress with no success. It is

an economic fact, recognized by Congress, that the two mar-

kets—the primary market described in Part III] supra, and a

secondary market as urged by the plaintiffs—cannot co-exist

and both remain viable. Having established a resale price

maintenance system in the primary distribution system in which

ordinary competitive influences cannot operate, Congress has

rejected all attempts to foster a secondary market which might

operate to the detriment of the primary market.

In support of those conclusions we look to the legislative

history of the key sections of the 1940 Act and to the congres-

sional intent in enacting that legislation.

A. Section 22(d)

Section 22(d) provides in pertinent part,

. no principal underwriter of such security and no

dealer shall sell any such security to any person

except a dealer, a principal underwriter, or the issuer,

except at a current public offering price described in

the prospectus.

A-19

As written, and as applied, that language clearly con-

templates a congressionally sanctioned retail price maintenance

system which is inconsistent and in conflict with the antitrust

laws so far as underwriters and dealers are concerned.

Plaintiffs assert, however, that since the term “broker” or

“broker-dealer” is not used in the subsection, that 22(d)

permits a person to sell to another through a broker at a price

less than the specified public offering price for the same shares,

and that the absence of a significant brokerage market in those

shares implies the existence of conspiratorial anti-competitive

activity on the part of defendants to prevent the growth of that

market.

This argument, however, ignores the price maintenance

purpose of § 22(d) and its corollary that there must not be

price discrimination between similarly situated investors.

On this latter point, so far as this Court is aware, there is no

SEC or SEC staff pronouncement which can be construed to

Sanction price discrimination between similarly situated in-

vestors. To the contrary the SEC has said:

The purposes of the Section [22(d)] are to prevent |

discrimination among purchasers and to provide for

orderly distribution of such shares by preventing their

sale at a price less than that fixed in the prospectus.

Investment Company Release No. 2798 (December

2, 1958). See also Investment Company Release

Nos. 8816 (February 13, 1970); 2718 (May 29,

1958); 89 (March 13, 1940). See In the Matter of

Investors Diversified Service, 39 SEC 680 (1960).

Again, in its most recent annual report the SEC has stated:

Section 22(d) precludes the sale to public investors

of redeemable investment company securities which

are being currently offered to the public on or

through an underwriter except at a current public

offering price described in the prospectus. SEC,

Thirty-eighth Annual Report 97.

A-20

Thus, the language of the statute, its legislative history and

subsequent interpretation by the SEC all indicate that its object

was to allow the pre-1940 method of mutual fund share

distribution to continue subject to the changes necessary to

suppress what was sometimes dubbed the “bootleg” market.

Greene, The Uniform Offering Price of Mutual Fund Shares

Under the Investment Company Act of 1940, 37 U.Det.L.J.

369, 371 (1960); In the Matter of Spiro Sideris, Securities

Exchange Act Release No. 8816 (Feb. 13, 1970).

The legislative history of § 22 indicates that in the pre-1940

period there was in fact a secondary market very similar in size

and scope as that for which plaintiffs here attempt to make a

case.35 This market—the “bootleg market”—was being main-

tained by brokers and dealers who were not under contract with

the issuers or underwriters and who were not, accordingly, a

part of the established distribution system of any given fund.

Those non-contract broker-dealers, without the authority

of fund underwriters and in competition with authorized retail

distributors of mutual fund shares, were buying shares in the

market directly from shareholders at a price slightly above the

published redemption price and reselling them to investors at

35 Hearings on S.3580 Before a Subcomm. of the Senate Comm.

on Banking and Currency, 76th Cong., 3d Sess. (1940); Hearings on

H.R.10065 Before a Subcomm. of the House Comm. on Interstate and

Foreign Commerce, 76th Cong., 3d Sess. (1940); S.Rep.No.1775,

76th Cong., 3d Sess. (1940); H.R.Rep.No.2639, 76th Cong., 3d Sess.

(1940); Hearings on S.1659 Before the Senate Comm. on Banking

and Currency, 90th Cong., Ist Sess. (1967); Hearings on H.R.9510

and H.R.9511 Before the Subcomm. on Commerce and Finance of

the House Comm. on Interstate and Foeign Commerce, 90th Cong.,

Ist Sess. (1967); S.Rep.No.1351, 90th Cong., 2d Sess. (1968);

Hearings on S.34 and S.296 Before the Senate Comm. on Banking

and Currency, 91st Cong., Ist Sess. (1969); Hearings on H.R.11995,

§.2224, H.R.13754 and H.R.14737 Before the Subcomm. on Com-

merce and Finance of the House Comm. on Interstate and Foreign

Commerce, 91st Cong., Ist Sess. (1969); S.Rep.No.184, 91st Cong.,

2d Sess. (1969); H.R.Rep.No.1382, 91st Cong., 2d Sess. (1970);

H.R.Rep.No.1631, 91st Cong., 2d Sess. (1970).

A-2|

prices lower than those fixed by the funds’ principal under-

writers.36 Contract dealers operating in the primary

distribution-system, on the other hand, were obligated by their

distribution contracts to sell fund shares at the price (including

the sales charge) set by the principal underwriters.

Thus, non-contract dealers were effectively by-passing the

primary distribution system and retaining for themselves the

selling commissions in full.37 If investors bought in the secon-

dary market but redeemed through the fund, it was feared that

redemptions would exceed sales of new shares and the fund

would no longer have the cash available to satisfy its redemp-

tion obligations. Thus if the proceeds of new sales did not

accrue to the fund, forced liquidation might result.

The congressional response to the problems of the pre-

1940 market conditions was § 22. By § 22(f), infra, a fund was

given the right to limit transferability. By § 22(d), all dealers

were required to maintain the public offering price in sales to

the public. The effect of the Act was for the first time to bind

non-contract dealers to the public offering price. A stated

purpose of § 22(d) was to insure that “no securities issued by

an investment company shall be sold to insiders or to anyone

other than an underwriter or dealer except on the same terms as

are Offered to other investors.”38

This was a clear recognition that cut-price competition

resulted in discrimination between similarly situated investors.

“Another factor in the decision to give statutory sanction to

price fixing in 1940 was the fact that mutual fund distribution

was then and for many years thereafter conceived of as a

specialized type of underwriting, and underwriting was re-

garded as a field in which the law sanctioned price fixing.” 1967

36 Investment Trust Study of 1940, 865; see also Hearings on

H.R.9510 and 9511 Before the Subcomm. on Commerce and Finance

of the House Comm. on Interstate and Foreign Commerce, 90th

or Ist Sess. 59 (1967) (hereinafter cited as 1967 House Hear-

ings).

ab 37 Investment Trust Study of 1940, 864; Public Policy Report

19.

38 1940 Senate Hearings 1057.

A-22

Senate Hearings 153-54 (Chairman Cohen). Cf. United States

v. Morgan, 118 F. Sup. 621, 697 (S.D.N.Y.1953).

As alluded to supra, a very real danger of the “bootleg”

market was that its short term price advantage would drain

profits from the primary distribution system and leave the

issuers unable to engage in continuous sales of new securities

necessary for long-term growth and the financial health of a

fund. According to one commentator, a purpose of the price

maintenance provisions was “to prevent the cut-price com-

petition which had then been making serious inroads upon the

contractual distribution system of the mutual fund underwriting

firms.” Greene, Uniform Offering Price, supra, 37 U.Det.L.J. at

371.

Section 22(d) has been reconsidred by Congress several

times. Its modification or repeal has been urged. Congress has

consistently refused to modify or repeal it, and in the course of

hearings on various proposals, the position of the SEC and the

congressional intent are clearly reflected. For example, in 1967

Congress was re-examining the problems of public offering

prices and sales loads. It was being urged that competition for

sales loads could only be realized by a repeal of 22(d). While

testifying before the Senate Committee, then-Chairman of the

SEC Cohen remarked:

However, this argument [that 22(d) be repealed to

allow competition] overlooks a fundamental theme

of state and federal securities regulation. Securities

regulation has done a good deal for the knowl-

edgable investors, principally by increasing the quan-

tity and improving the quality of the information

available to them. But one of its primary concerns

has always been the welfare of the unsophisticated

investor, who is often the one most likely but least

able to bear the burden of high charges in a com-

petitive market. If it is desirable for millions of

unsophisiticated investors of modest means to invest

in securities through the medium of mutual funds, it

A-23

is also desirable that they should not subsequently

have cause to believe that they were unfairly dealt

with. On balance, we concluded therefore that a

modification of the manner in which sales charges on

mutual fund shares are now regulated was more

consonant with the spirit and purpose of the securities

laws than the elimination of Section 22(d). We

therefore recommended that sales charges be limited

to 5% of the amount invested, with authority in the

Commission to raise this limit in appropriate situ-

ations.39

It is significant to note, that in the same hearings, some

participants recognized that brokerage transactions, necessarily

executed in the secondary market, were within the prohibition

of § 22(d).

Senator Proxmire, for example, asked whether or not the

SEC would recommend the repeal of 22(d) “in order to permit

price competition in the sale of the same mutual fund by

various broker-dealers.”’4° Senator Mondale stated that section

“*22(d) permits—indeed makes it illegal for agents to sell at a

sales charge less than that prescribed by the company,4' while

Professor Paul Samuelson, Massachusetts Institute of Tech-

nology, testified that “Congress should repeal the provision in

section 22(d) of the Investment Company Act of 1940 which

prohibits a broker from selling mutual fund shares to the public

at less than the public offering price.”42 Later in the hearings,

Senator Mondale again remarked that “Section 22(d) makes it

illegal for an agent to charge less than his company says he

must charge as an agent’s fee, but it does not prohibit or have

anything to do with competition as between companies.’’43

39 Hearings on S.1659 Before the Senate Comm. on Banking and

Currency, 90th Cong., Ist Sess. 154-55 (1967) (hereinafter cited as

1967 Senate Hearings).

40 Jd. 51-52.

41 Id. 275 (emphasis added ).

42 Jd. 348 (emphasis added ).

43 Jd. 769 (emphasis added ).

A-24

Similar statements appear in the House Hearings, in-

cluding the following exchange between Congressman Watkins

and then-SEC Chairman Cohen:

Mr. Cohen. The statute now, and since 1940, interferes

with competitive business in this area.

Mr. Watkins. Not to the extent you are proposing.

Mr. Cohen. I am sorry, sir. The statute is unequivocal.

No person, no matter where he got it, from the issuer, from

another dealer, or even from a private person, no broker-

dealer may sell a share of a particular fund at a price less

than that fixed by the issuer.

Mr. Watkins. True.

In the same House Hearings, the Department ef Justice,

while urging the repeal of 22(d), characterized its provisions as

follows:

It is true that Congress, in originally enacting the

“fixed price” provisions of Section 22(d) in 1940,

provided for the mutual fund industry an exception

to the basic competitive requirements of the antitrust

laws. In view of changed conditions, however, and

the fact that the mutual funds are so important an

outlet for the small investor, it would seem that he

should not perhaps be deprived of the opportunity of

purchasing his investment at a price arrived at

through the free operation of competitive forces.45

The SEC took the same view. The then-Chairman Cohen

stated that “sellers of mutual fund securities have been in-

sulated by Federal Law from price competition at the retail

level ever since 1940” (1967 Senate Hearings 26), and that §

22(d) “provides an exemption from the antitrust laws” (1967

House Hearings 1940). Furthermore, the Sec’s view that

44 1967 House Hearings 711.

45 Jd. 21 (letter from Warren Christopher, Deputy Attorney

General, to Chairman Harley O. Staggers, October 18, 1967).

A-25

§ 22(d) requires retail price maintenance by broker-dealers

who are members of the primary distribution system is also

evident in its acceptance of NASD Rule 26(e), which provides

that “no member shall offer or sell any such security except at

the effective public offering price described in the current

i of the issuing company... .”” CCH NASD Manual

2176.

The same thread runs through hearings conducted in

1969,46 again with a view to the modification or repeal of

§22(d). In the 1969 Senate report, we find these comments on

§ 22(d):

The provision for “reasonable loads to investors” is

intended to assure that the sales loads fixed by the

principal underwriters ( which continue to be protected

against price competition by Section 22(d) of the act)

will be established at levels which recognize the

interests of investors.

The provisions of this proposed section shall prevail

over any conflicting provision of Federal law. This

provision, which is identical to Section 15A(n) of the

Securities Exchange Act, is designed to make it clear

that no other provision of Federal law, including the

antitrust laws, prevents a registered securities associ-

ation from adopting rules consistent with, and neces-

sary to effectuate, the purposes and provisions of this

section. S.Rep.No.184, 91st Cong., Ist Sess. 18

(1969) (emphasis added ).

The basic sales commission charged for mutual fund

shares is in most instances about 8% percent of the

total payment or 9.3 percent of the amount invested.

46 Hearings on S.34 and S.296 Before the Senate Comm. on

Banking and Currency, 9ist Cong., Ist Sess. (1969); Hearings on

H.R.11995, $.2224, H.R.13754 and H.R.14737 Before the Subcomm.

on Commerce and Finance of the House Comm. on Interstate and

Foreign Commerce, 91st Cong., Ist Sess. (1969).

A-26

This charge is protected by Section 22(d) of the

Investment Company Act which provides for a unique

scheme of retail price maintenance. Under this sec-

tion, all dealers, regardless of the source of the shares

they sell, are prohibited by law from cutting the sales

charge fixed by the mutual fund underwriter. Price

cutting in this field is a Federal crime.

In its deliberations your committee considered the

possibility of deleting Section 22(d) from the act.

However, impressive testimony was given that there

had not been sufficient study of the consequences of

such an amendment. Therefore, your committee

requests the Securities and Exchange Commission to

review the consequences of such a proposal on both

the investing public and mutual fund sales organiza-

tions and report to it as soon as is reasonably

practicable. Id. 7-8 (emphasis added).

It is thus conclusively established that competition in the

sale of a single fund’s shares is effectively precluded by the 1940

Act which was intended, via § 22(d), to prevent the sale of

fund shares at a price less than that fixed in the current

prospectus. It is obvious that Section 22(d) of the 1940 Act

was premised upon a congressional understanding that princi-

pal underwriters and broker-dealers were exempt from the anti-

trust laws when entering into uniform sales agreements for

mutual fund shares. It is also obvious that even at the expense

of a secondary market Congress intended to maintain the resale

price maintenance system. Congressional intent is entitled to

substantial weight lest this Court “change the design that

Congress fashioned.” State Board of Insurance v. Todd Ship-

yards Corp., 370 U.S. 451, 458, 82 S.Ct. 1380, 1385, 8 L.Ed.2d

620 (1962).

y

A-27

B. Section 22(f)

[2] Section 22(f) is a necessary companion to § 22(d). If

the problems of the competitive market created by non-contract

brokers were to be met, restrictions on alienability were neces-

sary. And Section 22(f) provides:

No registered open-end company shall restrict the

transferability or negotiability of any security of

which it is the issuer except in conformity with the

statements with respect thereto contained in its regis-

tration statement nor in contravention of such rules

and regulations as the Commission may prescribe in

the interests of the holders of all of the outstanding

securities of such investment company.

| Paraphrased, that language states clearly that if (1) re-

strictions on transferability or negotiability are included in the

registration statement, and if (2) these restrictions are not in

contravention of such rules and regulations as the commission

may prescribe in the interest of the shareholders, then such

restrictions are permissible even if they create departures from

antitrust standards.

As noted above in the discussion of § 22(d), Congress

considered the 1940 Act in the light of then-existing conditions,

particularly the disruptive influence upon the market in mutual

fund shares by the practices of non-contract dealers and

brokers.

To overcome this disruptive competition prior to the

enactment of the 1940 Act, some funds restricted the alien-

ability of their shares, “providing substantially that the shares

could only be sold or tendered for redemption io the open-end

investment company.” 47 Such restrictions were usually included

in the share certificates.48

47 Investment Trust Study of 1940, 865.

= 1940 Senate Hearings, 292 (remarks of SEC General Counsel

David Schenker).

A-28

From and after 1940, § 22(f) required that any restriction

on alienability be included in the registration statements and,

additionally, that they be subject to the rule-making authority

of the SEC. Clearly, by § 22(f) Congress specifically empower-

ed mutual funds to restrict the tranferability and negotiability of

their shares, subject, of course, to disclosure in registration

statements and to the rule-making authority of the SEC. Just as

clearly Congress sanctioned such restrictions with full knowl-

edge of their effect upon a secondary market which existed at

the time and in full recognition of the antitrust implications.

Restrictions on alienability have consistently appeared in

registration statements and in uniform sales agreements since

the passage of the 1940 Act. Not only are such contracts

required by SEC-approved Rule 26 of the NASD Rules of Fair

Practice, CCH NASD Manual § 2176, but they are also

disclosed in the registration statements. It is undisputed that

these agreements have remained virtually unchanged since they

were first filed with the SEC along with and as part of the

registration statements. It is also undisputed that the SEC has

never challenged the validity of uniform sales agreements.

Indeed, the SEC has noted that these agreements require a

dealer “‘to place all orders with the principal underwriter and to

refrain from any attempt to obtain shares from other

sources. "49

It is thus apparent that Congress designed §§ 22(d) and

22(f) to create and protect a primary distribution system which

is repugnant to the antitrust laws and did so in complete

recognition of the fact that the legislation would frustrate the

growth of a free secondary market. That statutory scheme is

“incompatible with the maintenance of (an) antitrust action.”

49 SEC Staff Report on Repeal of § 22(d) A-109. See Report of

the Special Study of Securities Markets of the Securities and Exchange

Commission, H.R.Doc.No.95, 88th Cong., Ist Sess. 98 (1963), where-

in reference is made to the “fair trade arrangements established by the

Act, the NASD rules and private sales agreements . . .”; Greene,

Uniform Offering Price, supra, 37 U.Det.L.J. at 371-72.

A-29

Silver v. New York Stock Exchange, 373 U.S. 341, 358, 83 S.Ct.

1246, 10 L.Ed.2d 389 (1963).

Whether the mutual fund marketing structure mandated

by Congress in 1940 should be eliminated or modified is an

issue for Congress and the SEC, not the Judicial Branch, to hear

and to decide. In fact, in urging its complaint upon the Court,

one of the plaintiffs, viz., the Department of Justice, seeks to

accomplish indirectly what it has failed, so far, to achieve

directly—the repeal or modification of § 22(d)—in hearings

before both Congress5° and the SEC.5'

Vv

IMPLIED IMMUNITY

[3] Even if a specific exemption granted by the Maloney

Act were deemed to be inadequate to grant immunity from the

impact of the antitrust laws, the defendants urge that the 1940

Act, particularly § 22 thereof, created a pervasive regulatory

scheme which highlighted the Congressional intent to immunize

the investment company industry from the impact of the

antitrust laws.

The plaintiffs, on the other hand, urge that repeals of the

antitrust laws by implication are “strongly disfavored, and have

only been found in cases of plain repugnancy between the

antitrust and regulatory provisions.” They argue that, in the

instant case, plain repugnancy is not apparent.

The most recent pronouncement of the Supreme Court on

this particular point is to be found in Hughes Tool Company v.

Trans World Airlines, 409 U.S. 363, 93 S.Ct. 647, 34 L.Ed.2d

577 (1973).

In Hughes Tool the respondent TWA challenged as viola-

tive of the antitrust laws certain transactions and activities of

50 1967 House Hearings.

51 Jn the Matter of Mutual Fund Distribution and the Potential

Impact of a Repeal of Section 22(d) of the Investment Company Act

of 1940, SEC File No. 4-164 (1973).

A-30

petitioner Hughes Tool (Hughes). The Supreme Court, dis-

missing the action, held that the challenged transactions “were

under the control and surveillance of the Civil Aeronautics

Board” (CAB); that pursuant to the Federal Aviation Act of

1968 the CAB applying antitrust standards has reviewed the

same kind of conduct which TWA alleged to be violative of the

antitrust laws. The Court stated:

In this context, the authority of the Board to grant the

power to “control” and to investigate and alter the

manner in which that “control” is exercised leads us

to conclude that this phase of CAB

jurisdiction . . . pre-empts the antitrust field. 499

U.S. at 385, 93 S.Ct. at 660 (footnote omitted ).

And the Court further stated that where the CAB author-

izes control of an air carrier to be acquired by another person or

corporation and where the CAB specifically authorizes as in the

public interest specific transactions between the parent and the

subsidiary, the way in which that control is exercised in those

precise situations is under the surveillance of CAB, not in the

hands of those who can invoke the sanctions of the antitrust

laws. 409 U.S. at 387, 93 S.Ct. at 661.

Further, the Court said that its holding was “consistent

with the view expressed in Silver v. New York Stock Ex-

change . . . that a statutory scheme that does not create a

total exception from antitrust laws may, nonetheless, in particu-

lar and discrete instances hy implication grant immunity from

an antitrust claim.” 409 U.S. at 385 n.14, 93 S.Ct. at 660

(emphasis added ).

The Court in Hughes Tool relied heavily on its prior

decision in Pan American World Airways v. United States, 37]

U.S. 296, 83 S.Ct. 476, 9 L.Ed.2d 325 (1963), which also

involved the pervasive regulatory scheme of the CAB and an

implied repeal of the antitrust laws. In Pan American the Court

found that the Sherman Act could not be applied to matters

which the CAB had approved in exercising its statutory func-

tion.

A-31

It would be strange, indeed, if a division of territories

or an allocation of routes which met the requirements

of “public interests” as defined in § 2 were held to be

antitrust violations. . . . If the courts were to intrude

independently with their construction of the antitrust

laws, two regimes might collide. 371 U.S. at 309-10,

83 S.Ct. at 484.

The Court then found that the implementation of antitrust

policy in the public interest was for the CAB, under the Federal

Aviation Act’s comprehensive regulatory scheme, and not for

the courts. In the case at bar, as in Hughes Tool and Pan

American, there exists a pervasive regulatory scheme coupled

with a legislative history manifesting congressional intent to

immunize the investment company industry from the operation

of the antitrust laws to the limited extent necessary to carry out

the purpose of the independently defined federal policy legisla-

ted in the regulatory act, i.e. the Investment Company and

Maloney Act.52

52 In Hecht v. Pro-Football, Inc. 144 U.S. App.D.C. 56, 444 F.2d

931 (1971), cert. denied, 404 U.S. 1047, 92 S.Ct. 701, 30 L.Ed.2d 736

(1972), the Court held the following to be relevant criteria for

determining which conduct is immune from the antitrust laws:

Putting the problem in this light, relevant criteria would

include the specific language of the congressional statute

involved, any legislative history which would throw light

on the congressional intent, the relative importance of the

governmental action which is asserted to override antitrust

policy, whether the governmental agency is required to

take into consideration the possible anticompetitive effect

of its actions, whether the agency is required to adhere to a

clearly defined and restricted statutory directive, and to

what extent the agency’s actions are subject to judicial

review. 144 U.S.App.D.C. at 60, 444 F.2d at 935.

See also Thill Securities Corp. v. New York Stock Exchange, 433

F.2d 264, 270 (7th Cir. 1970), cert. denied, 401 U.S. 994, 91 S.Ct.

1232, 28 L.Ed.2d 532 (1971), where the Court also discussed

immunity criteria; United States v. Morgan, 118 F.Supp. 621

(S.D.N.Y.1953).

A-32

The decisions in Hughes Tool and Pan American are

consistent with the views expressed in Silver v. New York Stock

Exchange, supra, where the Supreme Court held that the Stock

Exchange was not exempt from the antitrust laws when,

pursuant to its rules, it ordered its members to remove certain

telephone connections they had with the offices of a non-

member. Although the Exchange was generally regulated by

the Securities Exchange Act of 1934, the Court noted that the

SEC lacked jurisdiction to review cases such as petitioner’s

where the Exchange has enforced its rules. Silver v. New York

Stock Exchange, supra, 373 U.S. at 358, 83 S.Ct. 1246.

The Court’s opinion in Silver turned on the fact that there

was no justification for the Exchange rule under the Securities

Exchange Act because that rule did not provide any procedural

safeguards for the petitioner. The Court did find, however that

“particular instances of exchange self-regulation which fall

within the scope and purposes of the Securities Exchange Act

may be regarded as justified in answer to the assertion of an

antitrust claim.” 373 U.S. at 361, 83 S.Ct. at 1259. The Court

noted further that “‘(s)hould review of exchange self-regulation

be provided through a vehicle other than the anti-trust laws, a

different case as to anti-trust exemption would be presented.

See note 12, supra.” 373 U.S. at 360, 83 S.Ct. at 1258. The

Court’s reference, “note 12,” refers expressly to the SEC’s

jurisdiction under the Maloney Act and states that were there

such SEC jurisdiction in a Silver-type situation, “a different case

would arise concerning exemption from the operation of laws

designed to prevent anti-competitive activity . . .” 373 U.S. at

358 n.12, 83 S.Ct. at 1257.59

53 But see Harwell v. Growth Programs, Inc., 451 F.2d 240 (Sth

Cir. 1971), reh. denied, 459 F.2d 461, cert. denied, 409 U.S. 876, 93

S.Ct. 126, 34 L.Ed.2d 129 (1972), where the Court applied the Si/ver

rationale to self-regulatory activities of the NASD. Harwell, however,

did not involve a claim of limited antitrust immunity under § 22 of the

1940 Act.

A-33

This Court is persuaded that the instant case is that

“different case.”54 The Investment Company Act and the

Maloney Act read together demonstrate that Congress intended

to eliminate free competition in the distribution of mutual fund

shares. The language of both acts clearly defines the pervasive

statutory and administrative control over the area and mani-

fests a congressional intent to leave this complex field to the

supervision and control of an expert administrative agency.55

The SEC and the NASD have the statutory authority to control

the area and both have in fact taken an active role. The NASD,

under the control and supervision of the SEC, has adopted

specific rules to govern the activities of principal underwriters

and broker-dealers. The Maloney Act, Section 15A(b)(8),

specifically requires the SEC to employ antitrust standards, i.e.,

“to protect the public interest,” when reviewing the rules

promulgated by the NASD.°56 Still further, the SEC has adopted

54 Cf. Gordon v. New York Stock Exchange, Inc., et al., 366

F.Supp. 1261 (S.D.N.Y.1973), where the Court, in dismissing an

antitrust attack on the commission structure of both the New York

and American Stock Exchanges, found that the fixing of commissions

falls within the congressional policy of exchange self-regulation

embodied in the Securities Exchange Act of 1934.

55 In Baum v. Investors Diversified Services, Inc., 286 F.Supp. 914

(N.D.I11.1968), aff'd on other grounds, 409 F.2d 872 (7th Cir. 1969),

the plaintiff alleged a violation of the Robinson-Patman Act. After

reviewing the SEC involvement, the court held:

The foregoing demonstrates that the SEC has exercised its

broad regulatory authority in this industry to establish a

framework of pricing practices within which investment

companies must operate. It has specifically approved the

alleged discriminatory pricing system under attack in the

case at hand, and has justified the system as being “in the

public interest and consistent with the protection of in-

vestors and purposes fairly intended by the policy and

provisions of this Title.” 286 F.Supp. at 924.

56 See also Section 6(c) of the 1940 Act which empowers the

SEC to “exempt any person, security, or transaction... from any

provision” of the Act “if and to the extent that such exemption is

necessary or appropraite in the public interest and consistent with the

protection of investors and the purposes fairly intended by the policy

and provisions” of the Act. 15 U.S.C. § 80a-6(c) (emphasis added ).

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rules specifically designed to govern non-NASD members in the

distribution and redemption of mutual fund shares. See 15

U.S.C. § 780(b)(8)-(10). In connection with its regulatory

function, the SEC has extensively reviewed the distribution and

redemption practices in the investment company securities

industry and even has reviewed the secondary market for such

securities. 57

This Court’s opinion is further strengthened by the Su-

preme Court’s decision last Term in United States v.

Cartwright, 411 U.S. 546, 93 S.Ct. 1713, 36 L.Ed.2d 528

(1973). That case challenged a reyulation issued by the

Secretary of the Treasury covering valuation of mutual fund

shares for Federal Estate Tax purposes. The Court at least

impliedly recognized the pervasive regulatory scheme in the

investment company industry.

Private trading in mutual fund shares is virtually non-

existent. Thus at any given time, under the statutory

scheme created by the Javestment Company Act,

shares of any open-end ‘iutual fund with a sales load

are being sold at two distinct prices. Initial purchases

by the public are made from the fund, at the “asked”

price, which includes the load. But shareholders

“sell” their shares back to the fund at the statutorily

defined redemption or bid price. 411 U.S. at 549, 93

S.Ct. at 1715 (emphasis added ).

The Court went on to state that the regulation in question

was “manifestly inconsistent with the most elementary provi-

sions of the Investment Company Act of 1940 and operates

without regard for the market in mutual fund shares that the

Act created and regulates.” 411 U.S. at 557, 93 S.Ct. at 1719

(emphasis added ).

The plaintiffs place great reliance on other recent Supreme

Court decisions. Principally they rely upon Otter Tail Power

57 See, e. g., Public Policy Report; SEC Staff Report on Repeal of

§ 22(d): In the Matter of Mutual Fund Distribution and the Potential

Impact of a Repeal of Section 22(d) of the Investment Company Act

of 1940, SEC File No. 4-164 (1973).

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Co. v. United States, 410 U.S. 366, 93 S.Ct. 1022, 35 L.Ed.2d

359 | 1973), in which the Court refused to imply immunity from

the antitrust laws. Plaintiffs cite Otter Tail to show that even

extensive regulation of an industry does not thereby immunize

that industry from the antitrust laws. The Court’s language is

clear and unequivocal, however, for it found congressional

intent not to displace the antitrust laws, but rather to retain the

applicability in order to promote competition. That is not the

case here.

It is clear, then, that Congress rejected a pervasive

regulatory scheme for controlling the interstate dis-

tribution of power in favor of voluntary commercial

relationships. When these relationships are governed

in the first instance by business judgment and regu-

latory coercion, courts must be hesitant to conclude

that Congress intended to override the fundamental

national policies embodied in the antitrust laws. See

United States v. Radio Corporation of America,

supra, 358 U.S. 334, at 351, 79 S.Ct. 457, 3 L.Ed.2d

354. This is particularly true in this instance because

Congress, in passing the Public Utility Holding Com-

pany Act, . . . was concerned with “restraint of free

and independent competition” among public utility

holding companies. See 15 U.S.C. § 79a(b)(2). 410

U.S. at 374, 93 S.Ct. at 1028 (emphasis added ).

Otter Tail accordingly is not controlling.

Nor does Federal Maritime Commission v. Seatrain Lines,

Inc., 411 U.S. 726, 93 S.Ct. 1773, 36 L.Ed.2d 620 (1973),

support plaintiffs’ position. That case dealt with the scope of an

express repealer of the antitrust laws in the 1916 Shipping Act5®

which by its terms, limited antitrust immunity to conference

agreements approved by the Federal Maritime Commission

(FMC). At issue was whether an agreement which confers no

58 46 U.S.C. §814. See Note, the Shipping Industry Seeks a Safe

Haven: Merger Jurisdiction for the FMC?, 5 Law & Pol. Int’l Bus. 274

(1973).

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ongoing obligations is an “agreement” within the meaning of

the Act. The Court held that Congress did not intend to invest

the FMC with the power to shield from antitrust liability

mergers which create no continuing responsibilities. Further-

more, the Court found in examining the legislative history there

was an overriding federal policy to promote competition. Since

the FMC’s power to immunize agreements from the antitrust

laws was limited only to those agreements approved by it, this

Court fails to see in what manner the claim for limited

immunity in the present case offends the Seatrain principle

since there is no similar requirement conditioning exemptions in

the 1940 Act.59

This Court is not, of course, unmindful of the fact that

“(r)epeals of the antitrust laws by implication from a regu-

latory statute are strongly disfavored, and have only been

found in cases of plain repugnancy between the antitrust and

regulatory provisions.” United States v. Philadelphia National

Bank, 374 U.S. 321, 350-351, 83 S.Ct. 1715, 1734, 10 L.Ed.2d

915 (1963) (footnotes omitted). See also United States v.

McKesson & Robbins, Inc., 351 U.S. 305, 316, 76 S.Ct. 937,

100 L.Ed. 1209 (1956); California v. FPC, 369 U.S. 482, 82

S.Ct. 901, 8 L.Ed.2d 54 (1962); United States v. Borden Co.,

308 U.S. 188, 60 S.Ct. 182, 84 L.Ed. 181 (1939). That

principle, of course, rests upon the sound basis that “antitrust

laws represent a fundamental national economic policy.” Car-

59 Cf. Ricci v. Chicago Mercantile Exchange, 409 U.S. 289, 302-

303 n. 13, 93 S.Ct. 573, 34 L.Ed.2d 525 (1973), where the Court

recognized that where a regulatory act contains an express exemption

from the operation of the antitrust laws, or where a regulatory agency

is specifically directed to consider competitive factors in the exercise of

its duties, it is necessary to conclude that Congress intended to exempt

from the antitrust laws activity subject to the administrative agency’s

adjudicative or rule-making authority.

Moreover, the cases at bar do not involve the doctrine of primary

jurisdiction. See, e. g., Chicago Mercantile Exchange v. Deaktor, 414

U.S. 113, 94 S.Ct. 466, 38 L.Ed.2d 344 (1973): Ricci v. Chicago

Mercantile Exchange, supra.

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nation Co. v. Pacific Westbound Conference, 383 U.S. 213, 218,

86 S.Ct. 781, 784, 15 L.Ed.2d 709 (1966).6 With that

fundamental policy in mind, the Court does not hold that the

Investment Company Act and the Maloney Act “completely

displace the antitrust laws.” Hughes Tool, supra, 409 U.S. at

389, 93 S.Ct. 647. What the Court does find is a “limited

antitrust exemption.” Carnation Co., supra, 383 U.S. at 219, 86

S.Ct. 781. Here, given the fact that Congress clearly intended

to substitute a pervasive regulatory scheme, i.e., § 22 of the

1940 Act, for the usual antitrust prohibitions in the narrow area

of distribution and sale of mutual fund shares, it is clear that the

price maintenance practices complained of are immune from

ordinary antitrust strictures.®'

60 See, e.g., United States v. Borden Co., 308 U.S. 188, 200, 60

S.Ct. 182, 84 L.Ed. 181 (1939). Cf. Maryland & Virginia Milk

Producers Ass’n Inc. v. United States, 362 U.S. 458, 80 S.Ct. 847, 4

L.Ed.2d 880 (1960).

6’ Notwithstanding this conclusion, two SEC rulings, cited by

plaintiffs, in support of their contention that the price maintenance

requirements of § 22(d) would not apply if the broker-dealer acted in

the capacity of a broker rather than a dealer, deserve mention. One is

an Opinion of SEC General Counsel, Investment Company Act

Release No. 87 (March 14, 1941). In response to an abstract inquiry,

the General Counsel thought that the term “dealer” in § 22(d)

“refers” to the capacity in which a broker-dealer is acting in a

particular transaction.” He concluded that when a broker-dealer acts

as a broker in a specific transaction, he is not bound to sell at the

public offering price. In the Matter of Oxford Co., Inc., 21 SEC 681

(1946), involved a disiplinary proceeding for a broker-dealer alleged

to have violated his fiduciary duty to his clients. There the broker-

dealer sold mutual fund shares from one of his accounts to another

related account, charging the public offering price and retaining the

sales load for himself. The SEC, citing the General Counsel’s opinion,

rejected the technical defense that the subject’s actions were man-

dated by § 22(d).

The Court concludes that reliance on these two decisions is

misplaced. They are ad hoc decisions in no way related to the

regulated distribution system. Furthermore, they do not address the

problem of likely discrimination between similarly situated investors.

Such shortcomings preclude a basis for allowing industry-wide cut-

price competition in brokerage transactions contrary to the purposes

of § 22(d).

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Vi

CONCLUSION

In light of the foregoing, the Court concludes that the

plaintiffs in each of the above-captioned cases have failed to

state a claim upon which relief can be granted, and that

accordingly the motions to dismiss in each such case must be

granted. Orders are filed herewith.

ORDERS IN NOS. 2454-72, 338-73, 426-73.

This matter having come on for ruling on the defendants’

motions pursuant to Rule 12 of the Federal Rules of Civil

Procedure to dismiss the complaint for failure to state a claim

upon which relief can be granted, the parties having filed briefs

in support of their respective positions, and the Court being

fully advised in the premises and having issued its Memo-

randum Opinion on December 14th, 1973;

It is this 14th day of December, 1973,

Ordered that the above-captioned case be, and the same is,

hereby dismissed on the merits and with prejudice for failure to

state a claim upon which relief can be granted.

ORDER IN NO. MISC. 103-73.

Upon the Court’s own motion, it is this 14th day of

December, 1973,

Ordered that all further proceedings relating to (1) an-

swers Or motions with respect to the complaints, (2) class

certification, and (3) discovery, by any party in any case in the

above-captioned action heretofore or hereafter filed in this

Court are stayed pending further order of this Court following

disposition of any appeal from the Orders entered by this Court

on December 14, 1973, in Haddad v. The Crosby Corp., et al.,

Civil Action No. 2454-72; United States v. National Association

of Securities Dealers, Inc., Civil Action No. 338-73; and Gross,

et al. v. National Association of Securities Dealers, Inc., et al.,

Civil Action No. 426-73.

So ordered:

A-39

United States Cot of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 74-1347

GENEVIEVE M. HADDAD, INDIVIDUALLY

AND REPRESENTATIVELY ON BEHALF OF ALL

OTHERS SIMILARLY SITUATED, APPELLANT

Vv.

THE CROSBY CORPORATION, ET AL

Appeal from the United States District Court for the

District of Columbia

(D.C. Civil Action 2454-72 )

Submitted without argument—17 February 1976

Decided 6 April 1976

Eugene J. Metzger and Carl W. Schwarz, were on the brief

for appellant.

Lee Loevinger and David J. Saylor, were on the brief for

appellees Bache & Co., Inc., Blythe Eastman Dillon & Co.,

Dean Witter & Co., Inc., Hayden Stone, Inc., Hornblower &

Weeks-Hemphill. Noyes, Inc., E.F. Hutton & Co., Inc., W. E.

Hutton & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc.,

Paine, Webber, Jackson & Curtis, Inc., Reynolds Securities Inc.,

and Thomson & McKinnon Auchincloss, Inc.

Robert E. Jensen and Richard M. Phillips were the brief for

appellees Wellington Management Company.

J. Sumner Jones was on the brief for appellees Institutional

Equity Corp. and Summit Management & Research Corp.

A-40

William H. Jeffress, Jr., was on the brief for appellees

Vance, Sanders & Company, Inc.

Michael H. Diamond was on the brief for appellees The

Crosby Corporation, Fidelity Management & Research Co.,

Edward C. Johnson, I], Edward C. Johnson, III], C. Rodgers

Burgin, William L. Byrnes, Alfred B. Cornell, Gilbert H. Hood,

Jr. George K. McKenzie, George S. McEwan, Horace

Schermerhorn, D. George Sullivan and Caleb Loring Jr.

John T. Tansey was on the brief for appellees Piedmont

Capital Corp. and Lexington Management Corporation.

Rodney Page was on the brief for appellee American Funds

Distributors, Inc.

Edgar H. Brenner and Kenneth A. Letzler, were on the

brief for appellee Investment Company Institute.

Joseph B. Levin was on the brief for appellee National

Association of Securities Dealers, Inc.

Before: BazeLONn, Chief Judge, Witkry, Circuit Judge

and MERHIGE,* Judge, United States District

Court for the Eastern District of Virginia

Per Curiam. This appeal arises out of District Judge

Corcoran’s dismissal’ of a broadly based private antitrust

action? against numerous individuals and organizations associ-

ated with load mutual funds, or the distribution or trading of

their shares. The primary thrust of the complaint is that

* Sitting by designation pursuant to 28 U.S.C. §292(d) (1970)

‘In re Mutual Fund Sales Antitrust Litigation, 374 F Supp. 98 (D. DC. 1973)

2 The co:nplaint alleges restraints of commerce in violation of Sections |, 2. and 3

of the Sherman Act, 1S USC. §§ 1, 2, 3 (1970), and “combinauon, conspiracy.

scheme, artifice and common device to defraud and deceive” in violauion of the

Secunues Exchange Act of 1934, 15 US.C. §§ 784 ef seg. (1970), the Investment

Company Act of 1940, 15 US.C. §§ 904-1, et seg. (1970), and partucularly rule 10b-5

issued pursuant to the 1934 Act. 17 C.F.R § 240. 10b-5 (1975). Complaint, App. to

Petstioners’ Br. at 23, 29.

3 Defendants include directors, underwriters, and investment advisors of desig-

nated load mutual funds, an associauon of mutual funds and affiliated personnel, a

number of broker-dealer firms trading in toad mutual funds, and the National

Association of Secuntues Dealers. Complaint, App. to Petitioner's Br. at 12-17.

A-41

defendants have conspired to restrain competition in the trad-

ing of mutual fund shares, by vertical* and horizontal5 agree-

ments fixing the prices at which shares will be traded. The

District Court ruled that these allegations failed to state a claim

upon which relief could be granted, because the price mainte-

nance practices attacked are sanctioned and excluded from the

coverage of the antitrust laws by Sections 22(d) and (f) of the

Investment Company Act of 1940.6 These sections, respectively,

require dealers to sell investment company shares at the public

offering price,” and allow open-end funds to restrict the trans-

ferability of their securities by statements contained in the

registration statement which are not inconsistent with SEC rules

and reguiations.®

In great measure, the disposition of this appeal is governed

by the Supreme Court’s opinion in United States v. National

Association of Securities Dealers. In that Government action

“The vertcal agreements involved here were between the funds and their

underwniters. and subsequent broker-dealers trading in the shares. They sought to

assure that all sales would be made at the fund's public offering pnce.

5 The honzontal restraints alleged involved agreements between broker-dealers to

trade at the fund’s public offering pnce, and perhaps others.

615 U.S.C. §§ 804-22(d) and (f) (1970).

7 Section 22(d) reads as follows: a

No registered investment company shall sell any redeemable security issued

by it to any person except either to or through a pnncipal underwniter for

distribution or at a current public offering price described in the prospectus, and,

if such class of security 1s being currently offered to the public by or through an

underwriter, no principal underwnter of such secunty and no dealer shall sell any

such security to any person except a dealer, a principal underwnter, or the issuer,

except at a current public offenng price descnbed in the prospectus

® Section 22(f) reads as follows:

No registered open-end company shall restrict the transferability or

negotiability of any secunty of which it is the issuer except in conformity with the

Statements with respect thereto contained in its registration statement nor in

contravention of such rules and regulations as the Commission may prescribe in

the interests of the holders of all of the outstanding secunties of such investment

company

9422 US 694 (1975).

Under the Expediting Act. 15 US ©. § 29(1970). the appeal to the Supreme

Court by the Government was taken from the same opimon of Judge Corcoran

which ts now before us.

A-42

which Judge Corcoran heard in conjunction with the private

suit now before us, the Supreme Court affirmed the district

court’s dismissal. That decision by the Court leads us to affirm,

with two reservations, the findings and conclusions expressed in

the opinion below.

First, while the Supreme Court flatly affirmed the dismissal

on the basis of Section 22(f), it reversed the holding that an

alternative ground for dismissal exists under Section 22(d).

The Section 22(d) requirement that underwriters and dealers

sell only at the fund’s public offering price could not, said

the Court, “‘be stretched beyond its literal terms to encompass

transactions of broker-dealers acting as _ statutory

‘brokers.’ 19 Thus that section was held not to jusufy immuni-

zation of secondary market transactions from the antitrust laws.

This reasoning is directly applicable to the private suit before

us, and thus, following the Supreme Court, we reverse as to the

Section 22(d) grounds for dismissal.

Second, while the Supreme Court’s opinion is entirely

dispositive of those aspects of the private action relating to

intra-fund restraints—that is efforts to assure that all sales of a

given fund will be made at the public offering price—it is not

entirely clear to us that this is the only type of restraint aileged

in the complaint. The Supreme Court’s opinion explicitly

denied that the Government complaint contained any allega-

tions as to restraints of competition between funds," and thus its

holding is not dispositive as to any explicitly inter-fund com-

binations which the private parties might assert.

We recognize that a degree of inter-fund restraint is

implicit in the intra-fund combinations which the Supreme

Court found to be immunized. The fixing of the price at which

each fund’s shares will trade largely eliminates the price

component of inter-fund competition. However, it is also clear

that agreements are possible which are explicitly inter-fund in

nature, which impair competiticn arising from factors other

10 Jd at 720

Jd at 733&n44

A-43

than price. Fund managers, for example, might ugree as to the

types of securities each would purchase, and thus position their

products in a way to minimize competition between them.

We do not feel able, on the face of the complaint, to

~ determine whether such allegations are implicit in the action

before us. However, we find some reason so to suspect, and

thus remand to Judge Corcoran for a determination of the

matter. In particular, we note one clause of the private

complaint which seems to have had no parallel in the Govern-

ment’s action. '2 Petitioners below alleged, combinations to

‘“[pJrevent, restrain, lessen and eliminate competition in the

trading of the securities of load mutual funds in general and the

Fidelity Group Mutual Funds in particular among defendant

broker-dealers... .” 13 While this might be read solely to allege

intra-fund restraint, its language, coupled with the list of

defendants, which includes fund managers as well as broker-

dealers, might also lead one to a contrary conclusion.

The case is affirmed in part, reversed in part, and RE-

MANDED to District Judge Corcoran for further proceedings

not inconsistent with this opinion.

12 See Government Complaint. App. to Individual Respondent's Br at |

'3 Complaint, App to Petitioner's Br at 25

A-44

IN THE

United States Bistrict Court

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 2454-72

GENEVIEVE M. HAapDDaD,

Plaintiff,

V.

THe Crossy CORPORATION, ef al,

Defendants.

MEMORANDUM AND ORDER

The plaintiff, Genevieve M. Haddad, filed this private

antitrust action on December 8, 1972. Her complaint, in

essence, asserts that the named defendants, including principal

underwriters and broker-dealers, together with other unnamed

co-conspirators, have combined to restrain competition in the

trading of open-end investment company (mutual fund) secu-

rities through horizontal and vertical agreements fixing the

prices at which shares will be traded. Allegedly such conduct

violates Sections | through 3 of the Sherman Antitrust Act, 15

U.S.C. §§ 1-3.!

In early 1973, shortly after commencement of the present

litigation, two related antitrust suits were filed in this Court

' The complaint further contends that defendants’ failure to disclose these alleged

anutrust violations constitutes a separate violauwn of Section 10(b) of the Secunties

Exchange Act of 1934. 15 USC. § 78)(b) and Exchange Act Rule 10b-5, 17 CFR

§ 240. 10b-5

A-45

— United States of America vy. National Ass'n of Securities

Dealers, et al., Civil Action No. 338-73 (hereinafter NASD),

and Gross, et al. v. National Ass'n of Securities Dealers, et al.

Civil Action No. 426-73 (hereinafter Gross ).2

The NASD complaint was filed by the Antitrust Division of

the Department of Justice. It charged that the defendants, the

Nauonal Association of Securities Dealers (NASD), certain

mutual funds, mutual fund underwriters, and securities broker-

dealers, combined and agreed to restrict the sale and fix the

resale prices of mutual fund shares in secondary market

transactions between dealers, from an investor to a dealer, and

between investors through brokered transactions. Specifically,

Count I of the complaint alleged a horizontal conspiracy among

NASD members to prevent the growth of a secondary dealer

market and brokerage market in the purchase and sale of

mutual fund shares, while Counts II-VIII alleged various

vertical restrictions on secondary market activities. The United

States contended that those agreements, combinations, and

conspiracies violated Section | of the Sherman Antitrust Act, 15

U.S.C. § 1.

The allegations of the complaint in Gross substantially

corresponded to those made by the United States in the NASD

case.

Motions to dismiss for failure to state a claim upon which

relief could be granted were filed by the defendants in each of

the above-mentioned actions. These motions were argued on a

consolidated basis and, on December 14, 1973, this Court

dismissed the three complaints pursuant to Fed. R. Civ. P.

12(b)(6). We held that Sections 22(d) and (f) of the

? The complaints in the present case, NASD, and Gross were followed in turn by

approximately fifty private antitrust suits. filed in federal district courts across the

country Those cases were subsequently transferred to this Court by the Judicial Panel

on Multdistnct Liugauon, and were collectively capuoned: In Re Mutual Fund Sales

Anutrust Litigation, Civil Action No Misc. 103-73. All activity in those cases, including

discovery. was stayed pending our ruling on several motions to dismiss filed in the

Haddad, NASD, and Gross acuons The stay was later extended unul final disposition

of ans appeals nouced from this Court's ruling on those mouons

A-46

Investment Company Act of 1940, 15 U.S.C. §§ 80a-22(d) and

(f), when read in conjunction with the Maloney Act, 15 U.S.C.

§ 780-3, afforded antitrust immunity for all of the practices

challenged, and that apart from such explicit statutory immu-

nity, the pervasive regulatory scheme established by those

statutes conferred a limited antitrust immunity in the narrow

area of distribution and sale of mutual fund shares. In Re

Mutual Fund Sales Antitrust Litigation, 374 F. Supp. 95

(D.D.C. 1973).

An appeal from this Court’s decision in NASD case was

lodged in the Supreme Court by the Justice Department.

pursuant to the Expediting Act, 15 U.S.C. § 29. Appeals were

also taken to the United States Court of Appeals for this circuit

by plaintiffs in Haddad and Gross. The Court of Appeals stayed

its proceeding pending resolution by the Supreme Court of the

NASD appeal.?

On June 6, 1975, the Supreme Court affirmed our dismissal

of the complaint in NASD. United States v. National Ass'n of

Securities Dealers, 422 U.S. 694 (1975). The majority ob-

served that the vertical restrictions attacked by the government

in Counts II-VIII of the complaint “are among the kinds of

agreements authorized by § 22(f) of the Investment Company

Act.” 422 U.S., at 728. That being so, the Court held that “the

antitrust laws must give way if the regulatory scheme estab-

lished by the Investment Company Act is to work.” 422 US., at

729-30. As to the horizontal conspiracy between NASD and its

members alleged in Count I,4 the Court found that “the SEC’s

3 It should be noted that plainuff Haddad, in support of her request for a stay of

appellate proceedings. represented that “the complaint in the Government case

made basically the same antitrust allegations as did the Haddad case,” and further

stated that “the outcome of that case will directly control the result in the instant

appeal.” Memorandum in Support of Mouon to Stay Proceedings, at 1-2.

Count I “orginally appeared to be a general attack on the NASD’s role in

encouraging the restrictions on secondary market acuvities challenged in the remainder

of the Gevernment’s complaint,” and the conduct alleged in that count “focused in

large part on NASD rules, and on information distnbuted by that association to its

members.” 422 US., at 730. However, the Jusuce Department retreated to a degree

from that position before this Court and the Supreme Court, suggesting that Count |

“should be interpreted as a challenge to various unofficial NASD interpretauons and to

{ defendants’ ] extension of the rules in a manner that inhibits a secondary market.” 422

US. at 732.

A-47

exercise Of regulatory authority under [the Investment Com-

pany Act of 1940] and the Maloney Act is sufficiently pervasive

to confer an implied immunity.” 422 U.S., at 730. In so

deciding, the Court emphasized:

It should be noted that the Government does not contend

that appellees’ activities have had the purpose or effect of

restraining competition among the various funds.5 Instead,

the Government urges in Count I that appellees’ alleged

conspiracy was designed to encourage the suppression of

intrafund secondary market activities, precisely the restric-

tion that the SEC consistently has approved pursuant to

§ 22(f) for nearly 35 years. 422 US., at 733 (footnotes

omitted ) (emphasis supplied ).

The Court found “[t]his close relationship is fatal to the

Government’s complaint, as the Commission’s regulatory

approval of the restrictive agreements challenged in Counts II-

VIII cannot be reconciled with the Government's attack on the

ancillary activities averred in Count I.” 422 US., at 733-34.

Consequently, it held that “[tJo the extent that any of | the

defendants’) ancillary activities frustrate the SEC’s regulatory

objectives it has ample authority to eliminate them.” 422 U.S.

at 734.6

Subsequent to the Supreme Court’s decision in NASD,’ the

Court of Appeals summarily affirmed our dismissal of the

5 At the same tume, however, the Court observed:

Indeed, it appears that vigorous interbrand competition exists in the mutual-fund

industry —between the load funds themselves, between load and no-load funds

between open- and closed-end companies, and between all of these investment

forms and other investments. 422 US., at 733, n. 44 (citauion omitted ).

6 Of equal significance is the Counr’s elaboration on the nature of “ancillary

acuviues” which the SEC possesses authority to eliminate:

The Commission can, for example, require amendment of the NASD rules

regulating the conduct of its membership, see 15 U.S.C. § 780-3(k)(3), oF

exercise the more general rulemaking power conferred by § 37(a) of the In-

vestment Company Act, 15 U.S.C. § 804-37( 4), 10 contain any of the challenged

activities that might in any way frustrate its regulation of the restrictions ut

authorizes under § 22/f), 422 US., at 734, n. 46 (emphasis supplied )

” After receipt of the Supreme Court’s mandate in the NASD case, this Court

dismissed the fifty muludistnct cases which previously bad been stayed. See n. 2, supra.

No Appeals were nouced in any of those acuons.

A-48

complaint in Gross, No. 74-1361, Order, September 29, 1975

(unpublished ), and, on April 6, 1976, an opinion was rendered

in the Haddad appeal. Haddad v. The Crosby Corporation, 533

F.2d 1247 (D.C. Cir. 1976).

In the Haddad opinion, the Court of Appeals concluded

that the Supreme Court’s decision in NASD was “entirely

dispositive” of those aspects of the Haddad case relating to

vertical restraints, that is, “efforts to assure that all sales of a

given fund will be made at the public offering price.” But, it

also found that other types of restraints might be “implicit” in

the Haddad complaint. 533 F.2d, at 1250. The Court reasoned

as follows:

The Supreme Court’s opinion explicitly denied that the

Government's complaint contained any allegations as to

restraints of competition between funds, and thus its

holding is not dispositive as to any explicitly inter-fund

combinations which the private parties might assert.

We recognize that a degree of inter-fund restraint is

implicit in the intra-fund combinations which the Supreme

Court found to be immunized. The fixing of the price at

which each fund’s shares will trade largely eliminates the

price component of inter-fund competition. However, it is

also clear that agreements are possible which are explicith

inter-fund in nature, which impair competition arising from

factors other than price. Fund managers, for example,

might agree as to the types of securities each would

purchase, and thus position their products in a way to

minimize competition between them. 533 F.2d, at 1250

(footnotes omitted ) (emphasis supplied ).

The Court of Appeals felt unable to determine whether

such allegations are in fact implicit in the Haddad complaint.

However, it found “some reason so to suspect,” and noted, with

respect to paragraph 42(f) of the complaint in particular, that:

Petitioners below alleged combinations to “[p|revent,

restrain, lessen and eliminate competition in the trading of

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the securities of load mutual funds in general and the

Fidelity Group Mutual Funds in particular among defen-

dant broker-dealers ... ’’ While this might be read solely

to allege intra-fund restraint, its language, coupled with the

list of defendants, which includes fund managers as well as

broker-dealers, might also lead one to a contrary con-

clusion. 533 F.2d, at 1250 (footnote omitted) (emphasis

supplied ).

Accordingly, the Court affirmed in part, reversed in part,

and remanded the Haddad case for further proceedings in the

district court to determine whether or not the complaint impli-

citly alleges “agreements .. . which are explicitly inter-fund in

nature, which impair competition from factors other than

price.”

On remand, this Court requested memoranda illuminating

any allegations within the scope of the Court of Appeals’

opinion which might be present in the Haddad complaint.

Extensive briefs were submitted by the parties and oral argu-

ment presented thereon.

After careful consideration of the complaint in the present

case, the memoranda and oral presentations of the parties, and

the decisions in NASD and Haddad, we conclude that the

complaint contains no implicit averments of inter-fund agree-

ments impairing competition arising from non-price factors.

Rather than relying upon the language of paragraph 42(f)

of the complaint, wherein the Court of Appeals found language

which might implicitly allege an antitrust violation, Haddad

now maintains that the “gravamen of [her] complaint is to be

found at paragraphs 33-40.” Plaintiffs Statement, at 3. Plain-

uff’s characterization of the basic allegations contained in those

paragraphs is as follows:

[T]hey charge suppression of a secondary market in

“load” mutual funds. Such a charge is in essence a charge

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of a horizontal conspiracy among brokers (albeit with the

participation of underwriters and fund advisors who were

equally beneficiaries of the conspiracy) since only brokers

could effect such a conspiracy. No underwriter and no fund

advisor could be a direct party to a suppression of a

secondary market since the parties to the suppressed trans-

action would be the buying or selling public and its

brokers. Nor could a vertical arrangement of a single fund

or of all funds survive brokeraged secondary market

transactions. What buyer would pay $269.70 (on a $2,900

transaction) by purchasing in the primary market when he

could pay (effectively) $100 in the secondary market? What

seller would choose the primary market when his buyers

were in the secondary? What broker would refuse to do

business where the customers were? And, finally, what

fund advisor would hold to a 9.3% rate when his customer

base was eroding? Plaintiffs Statement. at 3 (emphasis

supplied ).

The conspiracy posited by plainuff does not appear to be

the type which the Court of Appeals suspected might be

implicit in her complaint. On the basis of Haddad’s own

interpretation of the thrust of paragraphs 33-40 and this Court’s

analysis of the complaint as a whole, it is apparent that the

plaintiff does not challenge agreements, explicitly inter-fund in

nature, which impair competition among the funds arising from

non-price factors. Instead, Haddad alleges a conspiracy

“among the brokers” (rather than among the funds), which

has the design and direct effect of maintaining the public

offering prices which customers must pay to purchase mutual

fund shares in the primary market, while absent such restraint,

the customer theoretically might pay a lower price in a secon-

dary or brokerage market.® Although the plaintiff correctly

® The plainuff Pnncipally contests the wntten agreements which govern relations-

hips between main parucipants in the primary market distribution of mutual fund

shares Her theory is that these contracts suppress the growth of a secondary market.

See e.g. Complaint, at 4 40.

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contends that “[a]ll restraints on competition have con-

Sequential impacts on prices,’’? her arguments are devoid of a

single reference to possible anticompetitive purposes or effects

of the scheme suggested other than price maintenance. 10

For the foregoing reasons, this Court is of the opinion that

the plainuff never intended her complaint as an attack on non-

price, inter-fund restraints, and that no such allegations are

implicit in her complaint.

Il

It is, accordingly, by this Court this 30th day of June, 1977,

ORDERED that the complaint herein should be. and the

same hereby 1s, dismissed.

/s/ HOWARD F. CORCORAN

Judge

§ Plainuffs Reply Statement, at 2.

10 Further indication that the present action 1s premised enurely upon a price-fixing

theory is presented in paragraph 44 of Haddad’s compiaint wherein the allegation of

injury to plainuff and her purported class is limited to the effects of inhibited price

competution

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1977

No. 77-1786

Civil 2454-72

GENEVIEVE M. HADDAD, Appellant

Vv.

THE CROSBY CORPORATION, et al

Appeal from the United States District Court for the

District of Columbia.

Before: LEVENTHAL, ROBINSON AND WILKEY, Circuit Judges

JUDGMENT

This cause came on to be heard on the record on appeal

from the United States District Court for the District of

Columbia, and was argued by counsel. While the issues

presented occasion no need for an opinion, they have been

accorded full consideration by the Court. See Local Rule

13(c).

On consideration of the foregoing. It is ordered and

adjudged by this Court that the judgment of the District Court

appealed from in this cause is hereby affirmed on the basis of

Judge Corcoran’s opinion in the District Court.

Per Curiam

For the Court

GEORGE A. FISHER

Clerk

Filed: June 6, 1978.