Amicus Curiae Brief — Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware

x

pena “wh toe i? FM Seta

Sasispie } mo beg | be Hf y rif x ; PARE LL ye

; xa!

Pk Bs Ay Sith

DEX rin) GEo waite a9

Laat (Oct joe Oo

tT

weacnd? f] atria}

Pah -\

f

: he 2a

i

a

Sars

ieee tnge oe eet

LS A tnt a lip Nee

The interest of the'United Stateso. 20440. 20debeudue.)

' Gebtetneht. Sab epand ad dais ot cow!

Discubiol=c0t séyil cowie A Sasson du colds”

Fy Conclusion eet : :

* Cases:

a

elie tk ne Sthvcgte aeobal ied. £000).

¥ ‘ "

Ot bs oT ANGERAMRONIE coors) aehenets

a ee ee frome? tiie Ree ot, iad if

City of Burbank -v. Lockheed Air’ Terminal, Ine., 41%

AFB: OBIE. BEE BGO Wow dea sorowa?

wrado i-Discrimination Comm'n v. Continental

Air Lines, Iné.} 372 USI714c002. bee cc alk

_ Florida Lime & Avocado Growers, Ine. v. Pawl;373

APR. SMBS. oi) As SR eRe TN Sy eA kh

Parker ¥. Brown, 317-UWS. 841.220 hc08 sa viak-

Penn Dairies, Inc. v. Milk Control €omm'n, 318 US.

OOF: ke.d57 Ra. ALE Sn Paes ee

Securities Exchange Act of 1934, 48 Stat..881, as

amended, 15 US.C. 78a et seq.: !

Section 2,16 U.S.C. 78b...........2....

523-090—73—_1

“Sets aE pan By

A

,

ee

SMT TO TSRRt Lael er

Se pee dnt te dH

“Mews: xen, Pc, min & Sa,

PETITIONER

~

Davi Wark, BT al.

rn 82)

ON WRIT OF CERTIORARI TO THR COURT OF APPEAL OF

THRE STATE OF CALIFORNIA POR THE FIRST APPELLATE

DISTRICT

e—_—_—

:

eo

The United States will discuss the following ques-

tion;

Whether, where an employee of a member firm of

the New York Stock Exchange has entered into an

agreement to arbitrate any dispute relating to his em-

ployment, as required by a rule of the Exchange, the

Securities Exchange Act of 1934 preempts the appli-

cation to such an employment dispute of a California

statute providing that actions for wages can be main-

tained without regard to arbitration agreements.

(2)

fe ete 4 ne

r : MINT 3

Petitioner (“Merrill Lynch’’), a securities broker- :

dealer registered with the ‘Seeurities and Exchange |

tive business (A. 38).*

Respondent David Ware, a California resident and ’

a former registered representative of Merrill‘ Lynch

employed at one of its California offices, has been de- ‘

nied distribution of his earned profit-sharing’ credits

under this forfeiture provision. Mr. Ware brought a

-elass action in a state court in California, alleging that

“the forfeiture provision Was invalid under California

~ Business and Professions Code Section 16600 (Pet.

‘“A.” refers to the printed appendix. “Pet. Br.”, or “Res. Br.”

refers to petitioner's or respondents’ briefs. “Pet. A” refers to

Appendix A of petitioner's brief.

California Court of Appeal affirmed on

the hasis of Section 229 of the California Ann. Labor

Code (Pet. Br. 5), which provides that actions for wages

can be maintained without regard to arbitration

agreements. | a

_ 1, A. federal law will not ordinarily, be found to

supersede or preempt application of a state law unless

there is ‘‘sueh actual conflict between the two schemes

of regulation that both eannot stand in the same

area,”’ or there is ‘‘eyidence of a congressional de-

sign to. preempt the field,”’ Florida Lime & Avocado

Growers, Inc,.y,..Paul, 373 U.S. 132, 141. A finding

of preemption may be dictated by the nature of

the regulated subject, id. at 142, bythe existences of

@ pervasive and comprehensive scheme of. federal

:

Se ar 08 ;, Cy f Burbank v. wie eae

rado Ant Diriniaton ‘Coma’n t Continental “4

el ty eed cP

¥

neces of this ¢ i aoa tae’ 68 cia) Cations

Ann. i tabla te a pesegnc ten so

rities Exchange Act of 1934.

2. Prior to enactment of the Securities Exchange

Act of 1934, the ‘power of regulation of the nation’s

securities | | $ rested primarily with thé ex-

changes themselves, sibject to ‘such limited and largély

ineffecttial state of local laws as might have ‘borne

upon their operations. The legislative history of ‘that

Act, engendered by the stock market crash of 1929,

reveals that Congress concluded that the prevailing

degree of reliance on ‘self-regulation of the activities

of exchanges and their members was inadequate, that

their autonomy should be limited, and that a measure

of federal regulation was required.?’ But Congress

did not give the newly-created Securities and Ex-

change Commission total and exclusive power over

* See nai Stock Benhengs Practices, Report of the Senate

Committee on Banking and Currency, S. Rep. No. 1455, 73d Cong.,

2d Sess.; S. Rep. No. 792, 73d Cong., 9d Sess. ; H. Rep. No. 1383.

73d Cong., 2d Sess.

In particular, the Act drew a significant distin

between the scope of authority left to the exchanges

free of federal regulation with respect to “administra-

tion of their ordinary fairs,” and the restricted au-

mittee’s report stressed that uider the Act “the ini-

tiative and responsibility for promulgating ‘regula-

tions pertaining to the administration of their ordinary

affairs remain with the exchanges themselves.” But

“where * * * [exchanges] fail adequately to provide

protection to investors * afi Commission is au-

thorized to step in and compel them to do so.” §. Rep...

No. 792, 73d Cong., 2d Sess. 13.°

The Act contains a general Standard that, to ob-

tain registration, an exchange must have rules that are

“just and adequate to insure fair dealing and to pro-

* The intention was therefore one of “letting the exchanges take

the leadership with Government playing a residual role. Govern-

ment would keep the shotgun, so to speak, behind the door, loaded,

well oiled, cleaned, ready for use but. with the hope it would never

have:to be used.” Douglas, Democracy and Finance, 88 (Allen

ed., 1940). ;

and’ diseretion. as to’ their rules,/'Thus, exchanges are

generally authorized. under Section..6(c), 15 U.S.C.

78f(e), to’ promulgate and enforce rules “not inconsist-

ent with'* *.* [the Act] andthe applicable laws of the

State in» which * * .*. [the exchange} is located.” +

Moreover, ‘Seetion 19(b), of the Acts:15 U.S.C. 78s(b),

which authorizes the ‘Commission ‘to alter or supple-

ment” ‘exchange rules on twelve specified subjects and

“similar matters” by rule or regulation.or by order,

may be regarded as implicitly authorizing exchanges to

adopt rules,on the enumerated. matters, none of which

"Before an exchange tay be registered, it limét agree to tur:

nish “copies of any amendments to the rules of thé exchange forth-

with upon their adoption,” Section 6(a) (4), 15 U.S.C. T8f(a) (4).

Commission Rule 17a-8, 17 C.F.R, 240.17a-8, requires that each

exchange submit to the Commission the text of “any proposed

amendment or repeal of, or any addition to, its rules,” including

its, constitution, articles. of incorporation, by-laws, and stated

policies, at least three weeks before any action is taken on the

proposal... >. eter ach

| “Such matters as (1) safeguards in respect of the financial

ibnidtanatbeheane ot eeadeiabbaidhtten

evasion of financial responsibility through the use of corporate

¥

‘The Commission is authorized to act under Section

vee Ape hliponne a change in an exchange’s Assi

AGRE, ARGS? >, maui Be. Slik ets S

zk

" s t< Ps

Unibet Bete 19(b), therefore, i ts Flouse con

mittee’ Report on the bill stated,’

cumstances ; reer wetvarviraenay and von

terest, listing, and other charges; (10) minimum units of trading;

(11) odd-lot purchases and sales (12) RT

gin accounts ; and (13) similar matters.” Sle WE SS i

“It is clear from this

gtess did not intend to em

:

<9°-tfh lie Cotinpinighiciuatees dente tale. anak.

si Goh 19 eo its “reserved” Sen tagals hy ty

sagt operation of exchange marie and the oad

_ of persons who use those markets. —

Finally, although criminal sanctions were provided

for violations of the Act or Commission rules or regu-

lations, 15 U.S.C. 78ff(a), there are no such federal |

sanctions for violation of rules of an exchange.‘ \ :

See, € .g. the Commission’s authority to regulate weet !

transactions concerning options under §9(b) of the Act, 15 ;

U.S.C. 78i(b) ; members trading for their own accounts, § 11(a),

1b ae 78k (a) ; hypothecating of customers’ securities, §8, 15

US. 78h.

* Security Industry tudy, Report of the Subcommittee on

Securities of ‘the lass Committee on Banking, Housing and

Urban Affairs, S. Doc. No. 93-13, 93d Cong, ist Sess. 143,

*To the contra rary, the Act’ merely provides that, to obtain

fegistfation, an exchange must file with the Commission an

agreeinent “to enforce so far as is within its powers compliance

by its members” with the Act and the Commission’s rules and

regulations thereunder. 15 U.S.C. 78f(a) (1).

‘ ols pes a

299 of the California Ann, Labor "Code soi ‘ah

“disparate” ‘results. and would conflict with Ye

oe ing ce ah

Br. 22), pc wely neither. the Securities poo

Act nor any rule or regulation adopted thereuz

by the Commission purports to establish arbitration

as the generally-favored procedure for resolving all

disputes between exchange me and their em-

ployees.’ In other words, there is no basis for suggest-

ing that Rule 347(b) was required f-implemont the

literal language of the Act or any Cor

Moreover, an exchange rule like Rule 347(b), which,

if applicable, would ‘merely require the -respondent

to arbitrate his dispute with his employer, deals ‘with

one of the “ordinary affairs” of the exchange that,

as we have shown (supra, p. 5), Congress did not

intend were to concern the Compiission; the rela-

tionship of such a rule to investor protection, fair

dealing or fair exchange administration—which are

the standards under Section 19(b)—is extremely

attenuated and peripheral, if it exists at all. Accord-

ingly, the Commission. would have: no jurisdiction

° Petitioner's reliance (Pet. Br, 17) upon. a passing reference

to arbitration in Silver ©. New York Stock Ewehange, 873 U.S.

341, 354, n, 9, is misplaced, for there the Court..was dealing, in

another context, with exchange rules concertiing relationships be-

re eens enn ne eee Senn ae

the-counter eee 11-18 m. 18, 23) od

TY . Fy _* a

or regn-

lation purports to displace state law or to:require na-.

tion-wide uniformity as to.an: exchange’s ordinary af-

fairs, To ‘the contrary, in. the Act Congress several

times indicated its ‘intention that state law, should con-

tinue:'to ‘apply where the Act does not.”..As we haye

noted, under Section 6(¢) an exchange is authorized

to adopt’ and -enforee .rules. not inconsistent. with the

Act “and the applicable laws of the State in which it

“Win view of the Cominiisios 's lack ‘of jurisdiction concern-

ing’ Sti¢h ‘niatters, ‘its lence’ when Rule’247) was submitted in

other rights \and| ies that may exist at Jaw.or in equity,”

further, provides that nothing in,the Act “shall affect the

we ‘of Rent ae pean ts * * © of any state

*'*'® iiisofar a8 it does not conflict with” thé ‘Act or the Com

mission’s rules and tegulations thereunder. 15. U.S.C. 78bb(a).

_Anaddition, Section 28(b) provides in pertinent part:

“Nothing in this chapter shall be construed to modify existing

law * *'* (2) ‘with regard to the binding effect of * * © [ox

change} ‘action [to settle disputes between its members] on any

person who has agreed to be bound thereby.” ra

The parties (Pet. Br. 15, Res. Br. 16-20) disagree about the

proper ‘applicability to ‘the instant’ ‘case of the “nonwaiver”

provision of Section 29(a) of the Act, 15-U.S.C, 78ec(a), which

provides: |

“Any condition,. stipulation, or provision binding ‘any per-

son té waive compliance with ahy provision of this chapter or of

any vule-or regulation thereunder, or of any rule of an exchange

requived:thereby shall be void.” «>». >: ead

~ If; a3 we believe, the-exchange rule in issue here is not “re-

quired” by the Act nor by “any rule or regulation thereunder,”

Section 29(a) is inapplicable,

na.

oy ono Ais yiticin’, st) ane

express language of the

Act show that a basic intent of the statute was pro-

tection of the investing public through ‘the’ “main- _

tenance of fair and honest markets,” See Section 2 of

Fe ee."

the Act, 15 U.S.C. 78b.. Exchange. rules that are not

substantially rélated to the statutory objectives should

| not be considered paramount to otherwise ¢onilicting

| statutes. Compare Silver v, New York Stock Kachange,

373 U.S. 341.” Rule 347(b); as applied here, cannot

be said to be related to the regulatory. objectives of the

statute.in any but. the most indirect manner, and there-

* Thus, if the law of New York, where the Exchange is lo-

| cated, contained a provision like Section 229 of the California

Ann. Labor Code, there would be even less basis for a claim of

preemption. , ; ot 3 Sal wap ry ; :

**The parties. have. made frequent reference to Silver. x.

New York Stock Exchange, 873U.S, 341, where: this Court

considered the question whether the federal Securities Exchange

Act of 1934 had impliedly repealed the federal antitrust laws.

| The preemption issue presented here, however, is

not by the principles concerning implied repeal and conflict

| between different laws adopted by Congress at different times,

| but by this Court's separate, if analogous, body of authority

| concerning the sensitive interrelationship between laws adopted

by separate, coordinate sovereignties, federal and state. More

12

fore» it is not the type ofvexchangeé self-regulation

change Act that might) oust:conflicting provisions of -

‘state law. If the exchange-rule in issue. before this

‘Court did involve a iaatter sufficiently important to

the Act’s objectives to be within the ambit of the Com-

mission's pervasive regulatory oversight as delineated

by the Act, 'staté law in conflict with the rule would

be preempted. However, the method for resolving dis-

not such 9 matter. N . |

so than with the case of mr aged repeal, “an unexpressed

purpose to nullify” state law “is not lightly to be attributed

. pone agli Ar Brown, 317 U.S. 341, 351, and a claim

conflict must i orig, even more persuasive where

state law is concerned than where a claim of implied repeal

of another federal law is made. Penn Dairies, Inv. v. Milk

Control Comm'n, 318 U.S. 261, 275, As noted in the Memoran-

LEELA ET ELLE ELE TEIN LITER EOD! ERD LE SLI LOH SPEDE:

etapa tin tid, - Re a re a

aa

"Nel a ticrabecsaia judgment at our

| Seater Geora ie

“ Gera P, Nortow, ©

XM | Assistant to the Solicitor General,

‘WRENCE E. NERHEIM, |

Ricuarp E. Navan, (le

_ Assistant General Counsel, : ef

Martin 8. Brraas,

Attorney,

Securities and haahangs Commission.

-Ocroper 1973.

0.6. GOVERNMENT PRINTING OFFICE, 1979