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

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## Record

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

## Text

JAN 2 1975

MICHAEL RODAK, JR., CLERK

\ . IN THE .
Supreme Court of the United State

October Term, 1974 —

No. 74-304

Ricuarp A. Gorpoy, individually and as President of Invr-
PENDENT Investor Protective Leaoug, an incorporated asso-
ciation, and in behalf of the membership thereof and in
behalf of all persons similarly circumstanced,
Petitioners,
against

New Yorx Stock Excuanoz, Inc., American Stock Ex-
cHaNok, Inc., and Mere Lywon, Pierce, Fenner & Sirz,
Inc. and Bacuz & Company, Inc., individually and as rep-
resentatives of gj] member firms of the New York Stock
Exchange and American Stock Exchange,

Respondents.

On Writ of Certiorari to the United States
Court of Appeals for the Second Circuit

Appendix

MAXIMILIAN BADER
I. WALTON BADER
Attorneys for Petitioners
40 Morrow Avenue
Scarsdale, N.Y.
Telephone 914-779-1344

Dick Bailey Printers © P.O, Box X, Staten isiand, N.Y. 10302 © Tel.:; (212) 447-6388

TABLE OF CONTENTS

Page
EI a ET EE Tee ee A-l
go | Ee eee oO oe Teer Tee ee TREE A-8

Answer of Detendant New York Stock Exchange and
ER 6 in cache vido eckekahans en A-17

Answer of Defendant Merrill, Lynch, Pierce, Fenn
GG SUM SRCOTPOTEOEE 6. 565 co ccc cewccroeess A-23

Answer of Defendant American Stock Exchange, Inc. A-29
Detendanis’ Motion for Summary Judgment ........ A-35

Defendants’ Rule 9(g) Statement in Support of Motio1
for Summary Judgment .........2.--cceeccees A-37

Affidavit of H. Vernon Lee in Support of Defendants
Motion for Summary Judgment and Exhibit:
pO EES ES LES SERENE NDEI ESO NS A-42
' Exhibit A—Constitutional Provisions and Rules .... A-53
Exhibit B—Constitutional Provisions and Rules .... A-73

Exhibit C—Memorandum to Amex Members and

Member Organizations on April 19, 1968 ........ A-85
Exhibit D—Letter Dated April 24, 1968 ........... A-%
Exhibit E—Letter Dated May 28, 1968 ............ A-98

Exhibit F—Letter Dated June 26, 1968............ A-102

il

Exhibit G—Memorandum Dated September 20,

DOD Se ee ae

ee

FS TLE aE FO AS LE TPE PA PO ON

A-15

situated, have been seriously damaged for the following
reasons as well as others, and, if the illegal practices are not
terminated, will suffer further and irreparable damage in
the future:

a. The plaintiffs have overpaid commissions in their
purchases by reason of the imposition by the “member
firms’’ of an illegal surcharge.

b. The plaintiffs will no longer have equal access to the
securities markets in the same terms and conditions as
mutual funds institutional investors.

c. The plaintiffs will be required to pay commissions to
mutual fund managers and the like to have equal access to
the securities markets and will lose discretionary control
over their securities investments.

d. The plaintiffs will be deprived of a true auction
market with respect to the purchase and sale of securities.

e. The plaintiffs will not have access to the securities
markets on the same basis as “*member firms” and will not
be able to offer their members low cost securities purchase
and sale service.

TWENTY-FIRST: With respect of many of the practices
set forth herein plaintiff has no adequate remedy at law.
With respect to the damage claims set forth therein
plaintiff demands a Trial by Jury of all Issues triable before
a jury.

TWENTY-SECOND: WHEREFORE, PLAINTIFFS
DEMAND:

a. A perpetual injunction restraining the defendants,
and all ‘“‘members’”’ of the defendant Exchanges, from
putting the so-called ‘‘negotiated Commission Rates’’ in
effect on April Sth, 1971.

b. A preliminary injunction restraining the defendants
and all members of the defendant Exchanges, pending the
trial of this action, from putting the so-called ‘‘negotiated
commission rates” into effect on April Sth, 1971.

A-16

c. A mandatory injunction requiring the defendants
NEW. YORK STOCK EXCHANGE, INC. and
AMERICAN STOCK EXCHANGE, INC. to permit the
plaintiff INDEPENDENT INVESTORS -PROTECTIVE
LEAGUE, to conduct trading activities on the defendant
Exchanges without having to purchase “‘seats” thereupon.

d. Damages in the sum of Five Hundred Million Dollars
($500,000,000) trebled to One Billion Five Hundred
Million Dollars ($1,500,000,000) together with an _at-
torney’s fee of Ten Million Dollars ($10,000,000) together
with interest and the costs and disbursements of this ac-
tion.

e. As alternative relief, if the Court should decide that
the defendants are entitled to permit negotiated com-
mission rates that such negotiated rates be open to all
investors and not merely to large investors. -

f. A perpetual injunction restraining the defendants, and
all “member firms” from continuing their discrimination

in commission rates between large investors and small
investors.

Ll,

Fopes, ete. .,

BADER AND BADER
By:

I. Walton Bader
Attorneys for Plaintiff
274 Madison Avenue
New York, N.Y. 10016
Tel. (212) LE2-6860

VA eee ns OPE eT e Re Peer ed) nae REE Pay Saea eR e

eee eee A Susty

pe PNP) ey

ANSWER

ne de i i i hi i nee oe oe ee ee oe ee ee ce ee ce ce ce cere

(SAME TITLE)

Defendants NEW YORK STOCK EXCHANGE, INC.
(the “Exchange’’) and BACHE & COMPANY, INC.
(“Bache”) by their attorneys, Milbank, Tweed, Hadley &
McCloy. for their answer to the complaint:

1. Deny knowledge or information sufficient to form a
belief as to the truth. of the allegations contained in
paragraphs FIRST through FOURTH.

2. Deny each and every allegation contained in
paragraph FIFTH except deny knowledge or information
sufficient to form a belief as to those allegations stated to
be based upon plaintiff's belief.

3. Admit the allegations contained in paragraph
SEVENTH except deny that the Exchange and the
AMERICAN STOCK EXCHANGE (the ““Amex’’) are, in
effect, “public utilities’.

4. Deny each and every allegation contained in
paragraph EIGHTH except admit that all trading of
securities listed on the Exchange or the Amex is performed
by respective members of those exchanges, that the number
of said members is limited by the number of, available
memberships and that membership is acquired by pur-
chase in a competitive auction market.

5. Deny each and every allegation. contained in
paragraph NINTH and admit that the Exchange and the
Amex are subject to regulation by the Securities and
Exchange Commission (the ‘“SEC’’).

6. Declare that they are not required to plead to the
allegations of law pleaded in paragraph TENTH.

7. Deny each and every allegation contained in
paragraph ELEVENTH.

A-18

8. Deny each and every allegation contained in
paragraph TWELFTH except admit that defendants
MERRILL, LYNCH, PIERCE, FENNER & SMITH, INC.
(Merrill, Lynch”’) and-Bache are member organizations of
the Exchange and the Amex and are purportedly sued
individually and as representatives of an alleged class of
“members” of the defendant exchanges.

9. Deny knowledge or information sufficient to form a
belief as to the truth of the allegations contained in
paragraphs THIRTEENTH except admit that in or about
December, 1968 the defendant exchanges, with the ap-
proval of the SEC, adopted rules providing for a volume
discount for transactions involving more than one thousand
(1,000) shares and that in or about April, 1970, the
defendant exchanges, again with the approval of the SEC,
adopted rules providing for an interim service charge to be
imposed upon transactions of one thousand (1,000) shares
of stock or less and that in or about March, 1972, the
interim service charge was discontinued and a new com-
mission rate schedule adopted, with the approval of the
SEC and the Price Commission, incorporating a value-
related volume discount.

10. Deny each and-—every allegation contained in
paragraphs FOURTEENTH through SIXTEENTH.

11. Deny each and every allegation contained in
paragraph SEVENTEENTH except admit that only
members of the defendant exchanges may use the facilities
of their respective exchanges.

12. Deny each and every allegation contained in
paragraph EIGHTEENTH except admit that in or about
April, 1971, the defendant exchanges, pursuant to a
directive issued by the SEC after a series of public hearings,
adopted rules permitting the negotiation of commission
rates on that portion of transactions in securities listed on
the defendant exchanges in excess of Five Hundred
Thousand Dollars ($500,000) and that in April, 1972 said

a

A-19

rules were amended. pursuant to a request of the SEC, to
permit negotiation of commission rates on that portion of
transactions in listed securities in excess of Three Hundred
‘Thousand Dollars ($300,000).

13. Deny each and every allegation contained . in
paragraph NINETEENTH.

14. Deny each and every allegation contained in
paragraph NINETEENTH (a) except deny knowledge or
information sufficient to form a belief as to the allegations
respecting the membership of the Independent Investors
Protective League or the authorization to institute suit
purportedly granted by the members of said organization
contained in paragraph 19(a)(4) and declare that deten-
dants need not plead in response to the allegations con-
tained in paragraph 19(a)(9) through 19%a)(10).

15. Deny each and every allegation contained in
paragraphs TWENTIETH and TWENTY-FIRST.

~

FIRST DEFENSE
16. The complaint fails to state the claim upon which
relief can be granted and this Court lacks subject matter
jurisdiction over the controversy alleged.

SECOND DEFENSE

17. Pursuant to its self-regulatory duties under the
Securities Exchange Act of 1934 (1S U.S.C. §78a et seq.)
the Exchange has adopted rules limiting membership and
fixing minimum rates of commission and other charges,
including the specific volume discount effective from
December, 1968 to March, 1972, the interim service charge
(“surcharge”) effective from April, 1970 to March, 1972
and rules relating to negotiated commissions with respect
to transactions in securities listed on the Exchange, All of
the said rules are subject to review and revision by the SEC

A-20

. under Section 19(b) of the Exchange Act and such review
jurisdiction is continuing to be exercised. By reason thereof
neither the adoption of, nor the adherence to, said rules
may be the subject of an antitrust claim because exclusive
jurisdiction of the subject matter is vested in the SEC.

THIRD DEFENSE

18. The imposing of limitations on membership and the
fixing of minimum rates of commission and charges, in-
cluding the specific volume discount effective December,
1968 to March, 1972, and the surcharge effective from
April, 1970 to March, 1972 and rules relating to negotiated
commissions, by the Exchange are within the scope and
carry out the purposes of the Securities Exchange Act of
1934 (15 U.S.C. §§78a et seq.) and are therefore exempt
from the operation of the antitrust laws.

FOURTH DEFENSE

19. The fixing of minimum rates of commission and
charges, imposing limitations on membership and
establishing the specific volume discount effective
December, 1968 to March, 1972, and the rules relating to
negotiated commissions by the Exchange were, and are,
reasonable and justified and therefore not in contravention
of the antitrust laws.

- FIFTH DEFENSE

20. Since the Securities Exchange Act of 1934 (U.S.C.
§§78a et seq.) provides for review and revision by the SEC
of the Exchange’s rules relating to membership, minimum
rates of commission and other charges, primary

jurisdiction of the subject matter of this action is vested in
the SEC.

Ste et BS mae Aa ad i Sen a CS BRIS eed te all

SIXTH DEFENSE

21. Plaintiff lacks standing to assert a claim under the
antitrust laws either as President of the Independent In-
vestors Protective League or on behalf of its members or on
behalf of an alleged class of small investors and further
lacks standing to sue individually because he has net been
directly injured in his business or property by\ reason of
anything forbidden in the antitrust laws.

SEVENTH DEFENSE

22. Any claim for damages which accrued more than
four years prior to the commencement of this action is
barred’ by the applicable statute of limitations (15 U.S.C.
$1Sb).

EIGHTH DEFENSE

23. By reason of the plaintiff's tardy assertion of \the
illegality of the Exchange rules and regulations with respect
to the volume discount effective from December, 1968\to
March, 1972 and the interim service charge instituted jin
April, 1970 and discontinued in March, 1972 and the
payment to the defendant member organizations
commissions and other charges, including the surcharge i
accordance with the schedules established by the Exchang
and defendants’ reliance upon the apparent acquiescence
of the plaintiff and the purported class, plaintiff and the
alleged class are guilty of laches and are estopped from
asserting any claim against these defendants.

NINTH DEFENSE

24. All the rules challenged herein were promulgated
and adopted by the Exchange and adhered to by the
member organizations pursuant to an order, request or the

A-22

. approval of the SEC and consequently the Exchange and
the member organizations thereof should not be held liable
for any violation of law occasioned therefor by reason of the

good faith reliance by the defendants upon the authority
and jurisdiction of the SEC.

WHEREFORE, defendants the Exchange and Bache,

demand judgment dismissing the complaint with costs and
disbursements. ‘

Dated: New York, New York.
September 18, 1972

MILBANK, TWEED, HADLEY
\ &McCLOY

By s/

(a member of the firm)

1 Chase Manhattan Plaza

New York, N.Y. 10005

Attorneys for defendants

New York Stock Exchange, Inc.
ree and Bache & Company, Inc.

a
A-23

ANSWER OF DEFENDANT MERRILL,
LUNCH, PIERCE, FENNER & SMITH INC.

(SAME TITLE)

Defendant Merrill Lynch, Pierce, Fenner & Smith
Incorporated (‘Merrill Lynch’’) by its attorneys, Brown,
Wood. Fuller, Caldwell & Ivey, for its answer to the
complaint: 3

1. Denies knowledge or information sufficient to'form a
belief as to the truth of the allegations contained in
paragraphs FIRST through FOURTH. ©

2. Denies each and every allegation contained in
paragraph FIFTH except denies knowledge or information
sufficient to form a belief as to those allegations stated to
be based upon plaintiff's belief.

3. Admits the allegations in paragraph SIXTH of the
complaint, except avers that Merrill Lynch is incorporated
under the laws of the State of Delaware.

4. Admits the allegations contained in paragraph
SEVENTH except denies that the New York Stock Ex-
change, Inc. (the “Exchange”’) and the American Stock
Exchange (the Amex”) are, in effect, “public utilities”.

5. Denies each and every allegation contained in
paragraph EIGHTH except admits that all trading of
securities listed on the Exchange or the Amex is performed
by respective members of those exchanges, that the number
of said members is limited by the number of available
memberships and that membership is acquired by pur-
chase in a competitive auction market. ©

6. Denies each and every allegation contained in
paragraph NINTH except admits that the Exchange and
the Amex are subject to regulation by the Securities and
Exchange Commission (the ““SEC’’).

7. Declares that it is not required to plead to the

a

c

A-24°

allegations of law pleaded in paragraph TENTH.
8. Denies each and every allegation contained in
paragraph ELEVENTH.

9. Denies each and every allegation contained in —

paragraph TWELFTH except admits that Merrill Lynch is
a member organization of the Exchange and the Amex and
is purportedly sued individually and as representative of an
alleged class of ‘members” of the defendant exchanges.

10. Denies knowledge or information sufficient to form a
belief as to the truth of the allegations contained in
paragraph THIRTEENTH except admits that in or about
December, 1968 the defendant exchanges, with the ap-
proval of the SEC, adopted rules providing for a volume
discount for transactions involving more than one thousand
(1,000) shares and that in or about April, 1970, the
defendant exchanges, again with the approval of the SEC,
adopied rules ptoviding for an interim service charge to be
imposed upon transactions of one thousand (1,000) shares
of stock or less and that in or about March, 1972, the
interim service charge was discontinued and ‘a.new com-
mission rate schedule adopted, with the approval of the

SEC and the Price Commission, incorporating a value-_

related volume discount.

11. Denies each and every allegation contained in
paragraphs FOURTEENTH through SIXTEENTH.

12. Denies each and every allegation contained in
paragraph SEVENTEENTH except admits that only
members of the defendant exchanges may use the facilities
of their respective exchanges. ot
- 13. Denies each and every allegation contained in

paragraph EIGHTEENTH except admits that in or about
April, 1971, the defendant exchanges,. pursuant to a
directive issued by the SEC after a series of public hearings,
adopted rules permitting the negotiation of commission
rates on that portion of transactions in securities listed on

ee

ee

A-25

f

‘the defendant exchanges in excess of Five Hundred
‘Thousand Dollars ($500,000) and that in April, 1972 said
rules were amended, pursuant to a request of the SEC, to
permit negotiation of commission rates on that portion of
transactions in listed securities in excess of Three Hundred
Thousand Dollars ($300,000).

14. Denies each and every allegation contained in
paragraph NINETEENTH.

, 15. Denies each and every allegation contained in
paragraph NINETEENTH (a) except denies knowledge or
information sufficient to form a belief as to the allegations
respecting the membership of the Independent Investors
Protective League or the authorization to institute suit
purportedly granted by the members of said organization
contained in paragraph 19%a)(4) and declares that
defendants need not plead in response to the allegations
contained in paragraph 19(a)(9) through 19(a)(10).

16. Denies each and every allegation contained in
paragraphs TWENTIETH and TWENTY-FIRST.

FIRST DEFENSE

17. The complaint fails to state a claim upon whici: relief
can be granted and this Court lacks subject matter
jurisdiction over the controversy alleged.

SECOND DEFENSE

18. Pursuant to its self-regulatory duties under the
Securities Exchange Act of 1934 (1S U.S.C. §78a et seq.)
the Exchange has adopted rules limiting membership and
fixing: minimum rates of commission and other charges,
including the specific volume discount effective from
December,-1968 to March, 1972, the interim service charge
(“surcharge’’) effective from April, 1970 to March, 1972
and rules relating to negotiated commissions with respect

A-26

to transactions in securities listed on the Exchange. All of
» the said rules are subject to review and revision by the SEC
under Section 19%(b) of the Exchange Act and such review
jurisdiction is continuing to be exercised. By reason thereof _
neither the adoption of, nor the adherence to, said rules
may be the subject of an antitrust claim because exclusive
_ jurisdiction of the subject matter is vested in the SEC.

THIRD DEFENSE

19. The imposing of limitations on membership and the
fixing of minimum rates of commission and charges, in-
cluding the specific volume discount effective December,
1968 to March, 1972, and the surcharge effective from
- April, 1970 to March, 1972 and rules relating to negotiated
commissions, by the Exchange are within the scope and
carry out the purposes of the Securities Exchange Act of
1934 (1S U.S.C. §78a et seg.) and are therefore exempt
from the opération of the antitrust laws.

FOURTH DEFENSE .

20. The fixing of minimum rates of commission and
charges, imposing limitations on membership and
establishing the ‘specific volume discount effective
December, 1968 to March, 1972, and the rules relating to
“negotiated commissions by the Exchange were, and are,
reasonable and justified and therefore not in contravention
of the antitrust laws.

FIFTH DEFENSE

21. Since the Securities Exchange Act of 1934 (U.S.C.
§78 et seq.) provides for review and revision by the SEC of
the Exchange’s rules relating to membership, minimum
» tates of commission and other charges, primary

jurisdiction of the subject matter of this action is vested in
the SEC. Sahm

ea

A-27
SIXTH DEFENSE

22. Plaintiff lacks standing to assert a claim under the
antitrust laws either as President of the Independent In-
vestors Protective League or on behalf of its members or on
behalf of an alleged class of small investors and further
lacks standing to sue individually because he has not been
directly injured in his business or property by reason of
anything forbidden in the antitrust laws.

SEVENTH DEFENSE

23. Any claim for damages which accrued more than
four years prior to the commencement of this action is

barred by the applicable statute of limitations (15 U.S.C.
§$15Sb).

EIGHTH DEFENSE 7

24. By reason of the plaintiff's tardy assertion of the
illegality of the Exchange rules and regulations with respect
to the volume discount effective from December, 1968 to
March, 1972 and the interim service charge instituted in
April, 1970 and discontinued in March, 1972 and the
payment to the defendant member organizations of
commissions and other charges, including the surcharge in
accordance with the schedules established by the Exchange
and defendant's reliance upon the apparent acquiescence
of the plaintiff and the purported class, plaintiff and the
alleged class are guilty of laches and are estopped from
asserting any claim against this defendant.

NINTH DEFENSE

25. All the rules challenged herein were promulgated
and adopted by the Exchange and adhered to by the
member organizations pursuant to an order, request or the

A-28

approval of the SEC and consequently the Exchange and
the member organizations thereof should not be held liable
for any violation of law occasioned therefor by reason of the
good faith reliance by the defendants upon the authority
and jurisdiction of the SEC.

WHEREFORE, defendant Merriil Lynch demands
judgment dismissing the complaint with costs and
disbursements.

Dated: New York, New York
September 28, 1972

BROWN, WwoOoD, FULLER,
CALDWELL & IVEY

By s/Roger J. Hawke
(A member of the Firm)
Attorneys for Defendant
, Merrill Lynch, Pierce, Fenner

and Smith Incorporated
One Liberty Plaza
New York, New York 10006
(212) 349-7500

IRIN A-29
ANSWER OF DEFENDANT
IERICAN STOCK EXCHANGE, INC.

AN
rLE)
(SAME TI :
it American Stock Exchange, Inc. by its at-
Detendaivis Polk & Wardwell, answering the complaint
torneys, Da information and belief:

herein Up©, knowledge or information sufficient to form a
1. Denieo the truth of the allegations set forth in

belief as tFIRST.

paragraph ; | nowledge or information sufficient to form a
2. Denieg the truth of the allegations set forth in

belief as (SECOND.
paragraph, knowledge or information sufficient to form a

3. Denieo the truth of the allegations set forth in
belief as tpHIRD.

paragraph pS : ;

4. Denia knowledge or information sufficient to form a
belief Py the truth of the allegations set forth in
peranienh FOURTH. ;

5. Denie® knowledge or information sufficient to form a
belief as {° the truth of the allegations set forth in
paragraph FIFTH, except admits that plaintiff purports to
bring this action on bet:alf of those persons described in
paragraph FIFTH, but denies that this action is validly

_ brought as 4 Class action under Rule 23 of the Federal
Rules of civil Procedure and further denies ;that the
persons so described constitute a class within the meaning
of said Rule. :

6. DenieS knowledge or information sufficient to form a
belief as to the truth of the allegations set forth in
paragraph SIXTH, except admits that the American Stock
Exchange, Inc. is a corporation duly organized and
existing under the laws of the State of New York, and has
an office and place of business at 86 Trinity Place, City and

A-30

State of New York and admits that the American Stock
Exchange, Inc. is registered with the Securities and Ex-
change Commission as a national securities exchange
pursuant to Section 6 of the Securities Exchange Act of
1934, as amended, 15 U.S.C. §78f and that the American
Stock Exchange, Inc. has filed with the Securities and
Exchange Commission, in accordance with said Section 6,
copies of its Constitution and rules and all amendments
thereto.

7. Denies each and every allegation set forth in
paragraph SEVENTH, except admits that the New York
Stock Exchange, Inc. and the American Stock Exchange,
Inc. maintain honest auction markets for the purchase and
sale of securities at prices arrived at by fair bargaining
between buyers and sellers of these securities.

8. Denies each and every allegation set forth in
paragraph EIGHTH, except admits that the New York
Stock Exchange, Inc. and the American Stock Exchange,
Inc. maintain markets where securities listed on those
exchanges can be purchased and sold by members of those
exchanges on behalf of themselves, their member
organizations, and their customers, that the number of
said members is limited by the number of available
memberships and that membership is acquired by pur-
chase in a competitive auction market.

9. Denies each and every allegation set forth in
paragraph NINTH, except admits that the New York Stock
Exchange, Inc. and the American Stock Exchange, Inc.
are subject to regulation by the Securities and Exchange
Commission.

10. Declares that it is not required to plead to the
allegations of law pleaded in paragraph TENTH.

11. Denies each and every allegation set forth in
paragraph ELEVENTH.

12. Denies. each and every allegation set forth in

eee
A-31

paragraph TWELFTH, except admits that defendants
Merrill Lynch, Pierce, Fenner and Smith, Inc. and Bache
and Company, Inc. are member organizations of the New
York Stock Exchange, Inc. and the American Stock
Exchange, Inc. and are purportedly being sued in-
dividually and as representatives of an alleged class of
“members” of the defendant exchanges.

13. Denies knowledge or information sufficient to form a
belief as to the truth of the allegations set forth in
paragraph THIRTEENTH, except admits that in or about
December, 1968 the defendant exchanges, with the ap-
proval of the Securities and Exchange - Commission,
adopted rules providing for a volume discount for tran-
sactions involving more than one thousand (1,)))) shares’
and that in or about April, 1970, the defendant exchanges,
again with the approval of the Securities and Exchange
Commission, adopted rules providing for an interim service
charge to be imposed upon transactions of one thousand.
(1,000) shares of stock or less and that in or about March,

- 1972. a new commission rate schedule was adopted, and in
or about April, 1972, the interim service charge was
discontinued, with the approval of the Securities and
Exchange Commission and ,the Price Commission, in-
corporating a value-related volume discount.

14. Denies each and every allegation set forth in
paragraph FOURTEENTH.

15. Denies each and every allegation set forth in
paragraph FIFTEENTH.

16. Denies each and every allegation set forth in
paragraph SIXTEENTH.

17. Denies each and every allegation set forth in
paragraph SEVENTEENTH, except admits that only
_members of the defendant exchanges may use the facilities
of their respective exchanges, and refers to the published
rules and regulations of the American Stock Exchange,
Inc. for the terms thereof.

A-32

18. Denies each and every allegation set forth in
paragraph EIGHTEENTH.

19. Denies each and every allegation set forth in
paragraph NINETEENTH.

19(a). Denies each and every allegation set forth in
paragraph NINETEENTH (a), except denies knowledge or
information sufficient to form a belief as to the allegations
set forth in paragraph NINETEENTH (a) 4 respecting the
membership of the Independent Investors Protective
League or the authorization to institute suit purportedly
granted by the members of said organization, and declare
that defendant the American Stock Exchange,: Inc. need
not plead in response to the allegations set forth in
paragraph NINETEENTH (a)0 (second of two such
paragraphs) through NINETEENTH (a)10.

20. Denies each and every allegation set forth in
paragraph TWENTIETH.

21. Denies each and every allegation set forth in
paragraph TWENTY-FIRST.

AS AND FOR A FIRST AFFIRMATIVE DEFENSE

22. The complaint fails to state facts sufficient to con-
stitute a cause of action.

AS AND FOR A SECOND AFFIRMATIVE DEFENSE

23. Jurisdiction over the subject matter of this complaint
is yested solely and exclusively with the Securities and
Exchange Commission.

AS AND FOR A THIRD AFFIRMATIVE DEFENSE
24. By reasons of the provisions of the Securities and

Exchange Act of 1934, as amended, 15 U.S.C. §78a et
seq., and the actions of the Secumiies and Exchange

SE are ete Tes

Eee

NN

A-33

Commission thereunder, the acts of the American Stock
Exchange. Inc. alleged in the complaint are exempt and
immune from the provisions of the Robinson-Patman Act
and the Sherman Act upon which the complaint is
predicated.

AS AND FOR A FOURTH AFFIRMATIVE DEFENSE

25. The subject matter of the complaint is within the
primary jurisdiction of the Securities and Exchange
Commission.

AS AND FOR A FIFTH AFFIRMATIVE DEFENSE

26. The fixing of minimum rates of commission and
charges, imposing limitations on membership and
establishing the specific volume discount effective
December, 1968 to March, 1972, and the rules relating to
negotiated commissions by the American Stock Exchange,
Inc. were, and are, reasonable and justified and therefore
not in contravention of the antitrust laws.

AS AND FOR A SIXTH AFFIRMATIVE DEFENSE

27. Plaintiff lacks standing to assert a claim under the
antitrust laws either as President of the Independent In-
vestors Protective League or on behalf of its members or on
behalf of an alleged class of small investors because he has
not been directly injured in his business or property by
reason of anything forbidden in the antitrust laws.

AS AND FOR A SEVENTH AFFIRMATIVE DEFENSE

28. Plaintiff and the alleged class are guilty of laches and
are estopped from asserting the claims they make in the
complaint against the American Stock Exchange, Inc.

OF

A-34
AS AND FOR AN EIGHTH AFFIRMATIVE DEFENSE

29. All the rules challenged herein were promulgated
and adopted by the American Stock Exchange, Inc. and
adhered to by the member organizations pursuant to an
order, request or the approval of the Securities and Ex-
change Commission and consequently the American Stock
Exchange, Inc. should not be held liable for any violation
of law occasioned therefor by reason of the good faith
reliance by the defendant upon the authority and
jurisdiction of the Securities and Exchange Commission.

AS AND FOR A NINTH AFFIRMATIVE DEFENSE.

30. Any claim against the American Stock Exchange,
Inc. based on acts occurring more than four years prior to
the commencement of this action is barred by the
provisions of Section 4B of the Clayton Act, 14 U.S.C. §
1Sb.

WHEREFORE, defendant American Stock Exchange,
Inc. demands judgment dismissing the ¢omplaint together
with the costs and disbursements of action.

Dated: New York, New York.
September 29, 1972

DAVIS POLK & WARDWELL
By s/

Attorneys for the Defendant
American Stock Exchange, Inc.
1 Chase Manhattan Plaza

New York, N.Y. 10005

Tel. 212 HA 2-3400

A-35
DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT

(SAME TITLE)

SIR:

PLEASE TAKE NOTICE that upon the pleadings
herein, the affidavits of Robert M. Bishop, H. Vernon Lee,
Jr.. and John P. Foynes, and the annexed statement
‘pursuant to Rule 9(g) of the General Rules of this Court,
the undersigned will move this Court before the Hon.
Morris E. Lasker at Room No. 2903, United States Court
- House, Foley Square, New York, N.Y., on December 29,
1972, at 10:00 a.m., or as soon thereafter as counsel can be
heard, or at such other time and place as the Court shall
direct, for an order pursuant to Rules 12(b) and 56 of the
Federal Rules of Civil Procedure, dismissing the complaint
and granting summary judgment in favor of defendants
_ and against plaintiff, and for such other and further relief
\ as is just and proper.

Dated; New York, N.Y.
December 4, 1972

Yours, etc..

MILBANK, TWEED, HADLEY & McCLOY
By s/Isaac Shapiro

(A Member of the Firm)

Attorneys for defendants

New York Stock Exchange, Inc.

and Bache & Co., Inc.

1 Chase Manhattan Plaza

New York, N.Y. 10005

A-36

‘at

LORD, DAY & LORD
By s/John Loflin

(A Member of the Firm)
Attorneys for defendant
American Stock Exchange
2S Broadway

New York, N.Y. 10004

BROWN, WOOD, FULLER, CALDWELL & IVEY
By s/Roger J. Hawk
(A Member of the Firm)
Attorneys for defendant
Merrill Lynch, Pierce, Fenner
& Smith, Inc.
1 Liberty Plaza
New York, N.Y. 10006

TO: BADER AND BADER

Attorneys for plaintiff
274 Madison Avenue
New York, N.Y. 10006

SER roe nS hehe, Oe Praesens SB LORS AE Fae
x aE eg AS Tee Te ee ee
RRS Fae SA et RR ae es

+ =
PER Re

mer

SetARSN AA BRAINS REL Na Was ERNE RE WERE.

A-37

DEFENDANTS’ RULE %g)
STATEMENT IN SUPPORT OF MOTION
FOR SUMMARY JUDGMENT

(SAME TITLE)

_ Defendants respectfully ‘submit that the following
material facts are not in dispute.

1. The New York Stock Exchange (the ““NYSE"’) and the
American Stock Exchange (the ‘“Amex”’) are corporations
organized under the laws of the State of New York for the
purpose of providing for their members and the public two-
way auction markets i in exchange listed stocks, bonds and
other securities.

2. The NYSE presently has 1,366 members, all of whom
are individuals. The Amex presently has, 650 regular
members and 217 associate members, all of whom are
individuals. The NYSE has 527 member organizations and
the Amex has over 500 member organizations.

3. Since their founding, the NYSE and the Amex at all
times have had rules limiting their membership and
prescribing the minimum commissions to be charged by.
members and member organizations on transactions
executed for the investing public in securities dealt in on
the respective exchanges.

4. The NYSE and the Amex were registered by the
Securities and Exchange Commission (the “‘SEC”) as
national securities exchanges in 1934 pursuant to the
provisions of Section 6 of the Securities Exchange Act of
1934 (the ‘1934 Act’’). At the time of said registration, the .
respective constitutions and rules of the NYSE and the
Amex were submitted to and approved by the SEC pur-
suant to the requirements of the 1934 Act.

5. Since registering with the SEC in 1934, the NYSE and
the Amex have changed their respective constitutional

A-38

provisions and ‘rules prescribing minimum commission
rates a number of times. Copies of each such rule change or
amendment were submitted by the exchanges to the SEC as
required ‘pursuant to Section 6(a)(4) of the 1934’ Act and
SEC Rule 17(a)-8. ‘ |

6. The SEC, in carrying out its duty of supervision under
Section 19(b) of the 1934 Act, studied and reviewed all the
proposed changes. After such study and review the SEC in
some instances permitted the proposed changes to become
effective without modification; in other instances the SEC
requested modifications in the proposed changes which
were then adopted by the NYSE and the Amex.

7. In 1959, at the request of the SEC, the NYSE un-
dertook a study which revealed that the inflexibility of the
then prevailing commission rate structure had a potential
for causing market dislocations because of the growth of
institutional-size. business. Beginning in 1965, the Amex
undertook studies of its own intra-member and non-
member commission rate structures, with particular
emphasis on institutional-size transactions.

8. The period of study expended on the problem of a |

volume discount extended over a period of some six years—
from 1962 to 1968. Both the NYSE and the SEC developed
proposals to deal with market problems created by the
absence of a volume discount. These proposals were made _
, public and comment invited on January 26, 1968 in the
SEC's Exchange Act Release No. 8239. On May, 1968, the
SEC wrote the NYSE and the Amex advising of the
Commission's determination that “changes in the present
‘commission rate structure are required to benefit’ the in-
' vesting public,” and directing that interim adjustments be
made in the exchange’s commission rate structures pen-
ding a final revision at the conclusion of the SEC Rate
Hearings. On December 5, 1968, the rules of the NYSE
and the Amex were modified to provide for a volume
discount on all public orders for securities listed on the

&

‘

A-39

respective exchanges involving more than 100 shares of
stock.

9. Studies prepared by the NYSE, the Amex, and the
SEC indicated that the securities commission business was
sorely pressed in late 1969 and early 1970 by reason of the
peak volume demands, increasing costs (there had not been
4 commission increase in over a decade) and the
dirainution of revenues from institutional trades which
were subject to a discount. In order to correct these dif-
ficulties and protect small investors—whose trades many
brokerages would no longer accept—the NYSE and the

~ Amex proposed to the SEC the imposition of an interim

service charge on smaller orders. The SEC approved this
proposal on the condition that the imposition of the service
charge be for a strictly limited time and that the exchanges
ensure that small investors were not discriminated against
and that member organizations took all steps to ameliorate
their financial problems.| This interim service charge
became effective on both exchanges in April, 1970. It was
due to expire 90 days later, but because of continuing
financial difficulties, the NYSE and the Amex proposed its
extension. The SEC, after public hearings in July, 1970
approved. The interim service charge remained in effect
trom April, 1970 until April, 1972, when the present rate
structures were enacted by the exchanges.

10. As a result of the intensive investigation of the
commission rate structure over nearly a decade, including
two SEC reports (The Special Study of 1963 and the In-
stitutional Investor Study of 1971) and ‘two years of
testimony and evidence in the Rate Hearings, the SEC
determined, in lage 1970, that fixed charges for portions of

* orders above a certain amount were neither necessary nor

appropriate under the 1934 Act. The NYSE and the Amex
each adopted the new rate proposal theh urged by the SEC
for the negotiation of commission rates on that portion of
orders in excess of $500,000 (i. ¢., $500,000 was established

A-40

as the “breakpoint’’ between fixed minimum and
negotiated commission rates).

11. The $500,000 breakpoint was considered ex-
perimental and both exchanges instituted a program of
monitoring the impact of negotiated rates, again at SEC
direction. On February 2, 1972, the Commission an-
nounced its determination that the breakpoint should be
lowered to $300,000. Both the NYSE and the Amex ac-
ceded and adopted the necessary changes in their
respective constitutions in April, 1972.

12. During the course of the regulatory activity relating
to the volume discount, interim service charge and
negotiated commission rates, the SEC’s Rate Hearings,
commencing on July 1, 1968, received evidence and
testimony on every aspect of the exchanges’ commission
rate structure. After the Hearings terminated in 1971, the
NYSE proposed, and the SEC approved, the present rate
schedule which was adopted by both exchanges in April,
1972. The present commission rate structure repealed the
previously adopted volume discount and interim service
charge and replaced it with a schedule of commission rates
incorporating a cost-related discount for volume tran-
sactions as well as negotiated rates of commission on that
portion of orders in excess of $300,000.

Dated: New York, New ‘York
December 4, 1972

Respectfully submitted,

MILBANK, TWEED, HADLEY & McCLOY
1 Chase Manhattan Plaza

New York, N.Y. 1000S

Attorneys for defendants

New York Stock Exchange, Inc.

and Bache & Co., Inc.

A-41

LORD, DAY & LORD

25 Broadway

New York, N.Y. 10004
Attorneys for defendant
American Stock Exchange, Inc.

BROWN, WOOD. FULLER,
CALDWELL & IVEY

1 Liberty Plaza

New York, New York

Attorneys for defendant

Merrill Lynch, Pierce, Fenner
& Smith, Incorporated

A-42

AFFIDAVIT OF H. VERNON LEE IN SUPPORT
OF DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT

AND EXHIBITS ANNEXED
(SAME TITLE)
STATE OF NEW YORK ( f:
COUNTY OF NEW YORK)

H. VERNON LEE, JR., being duly sworn, deposes and
says: 2
1. I am Vice-President and Secretary of the American a
Stock Exchange (the ‘“‘Amex”’), a defendant herein, and I 7
am familiar with this matter. I make this affidavit in 3
support of the defendants’ motion for an order dismissing a
the complaint filed in this action and granting summary
judgment to the defendants.

2. The Amex is a New York corporation, incorporated
under the New York Not-for-Profit Corporation Law,
whose business and purpose is to provide a securities
marketplace in New York City for its members who are
brokers and dealers in securities. As a two-way auction
market for securities listed on the Amex, activity in the
Amex is characterized by competition both between and
among buyers and sellers. The Amex presently has 650
regular members, who have direct access to the trading
floor, and 217 associate members, who may do business on
the trading floor only through a regular member. In ad-
dition, there are over 500 regular and associate member
organizations, partnerships and corporations in which the
general partners or the directors and major stockholders
are Amex. members or are approved by the Amex’s Board
of Governors.

3. The Amex-was first organized in 1908 as the New York
Curb Agency, an outdoor marketplace for corporate

neon

eS A-43

securitir

Curb Mes. In 1921 the name was changed to the New York
with thlarket and a-constitution was adopted to coincide
locatione outdoor exchange’s move indoors to its present
changeg on Trinity Place. In 1953 the name was officially
days asj{ to the American Stock Exchange. Since its early
rules li an outdoor exchange, the Amex has maintained
MINIMUniting access to its facilities and prescribing the
non-M€m commission rates which could be charged to
AmeX. bers on transactions in securities listed on the
AMEX T Members and member organizations who violate
chargeautes with respect to the minimum commission rates

actN- bie to non-members are subject to disciplinary
4A. Su

cha 8° absequent to the enactment of the Securities Ex-
a a Act of 1934 (the 1934 Act"’), the Amex submitted
naeicaes Securities and Exchange Commission (the ‘“SEC’’)
copies ‘lication for registration as a national securities
provisi&®: The Amex also submitted for SEC approval
minimu®! its Constitution and Rules, which contained
registeP"S requiring members to charge specified
time of!M commissions to non-members. The Amex was
of theced with the SEC on September 23, 1934. At the
force . | its registration the Amex was required by §6(a)(1)
of [the 1934 Act to agree “to comply, and to en-
thereun. . compliance by its members, with the provisions
by the £ 1934 Act]... and any rule or lation . . . -
that thader."’ The registration was granted n findings
with thGEC, as required by §§6(d) and 6(b) of the 1934 Act,
regulate Amex was “‘so organized as to be able to comply
just ane provisions of [the 1934 Act] . . . and the rules and
investotions thereunder and the rules of the exchange are
“inclugd adequate to ensure fair dealing and to protect
disciplirs [.]" and further, that the rules of the Amex
consistde provision for the expulsion, suspension, or

ining of a member for conduct or proceeding in-

ent with just and equitable principles of trade... ”

A-44

S. Since the SEC originally approved the Constitution
and Rules of the Amex upon its registration on September
23, 1934, the constitutional provisions and rules
prescribing minimum commission rates chargeable to non-
members have been changed by the Amex a number of
times. The Amex has submitted copies of each rule change
or amendment to the SEC as required pursuant to §6(a)(4)
of the 1934 Act and SEC Rule 17(a)—8. The Amex’s
present constitutional provisions and. rules relating to
commission rates (annexed as Exhibits A and B) are the
product of studies conducted by the Amex and the New
York Stock Exchange (the NYSE”), as well as hearings
and studies conducted by the SEC [Report of the Special
Study of Securities Markets, House Doc. No. 815, 88th
Cong., Ist Sess. (1963) and The Institutional Investor
Study, House Doc. No. 92-64, 92nd Cong., Ist Sess.
(1970)].

6. In late 1962 the Costs and Revenues Committee of the
NYSE, at the direction of the SEC, initiated a study of the
need and feasability of implementing a volume discount for
lage transactions in securities. In a report transmitted by
the NYSE to the SEC on November 29, 1965, the Cost and
Revenue Committee recognized the need for volume
discounts due to the growing number of institutional-sized
transactions and the lack of any provision in the existing
non-member commission rate structure for discounts on
block trades. In a later report submitted by the NYSE to
the SEC on January 2, 1968, the Committee made specific
proposals to minimize and control customer-directed
“give-ups”, the reciprocal and rebative methods block
traders utilized to avoid commission rates. On January 26,
1968, the SEC proposed for adoption by national securities
exchange Rule 10b-10, a provision which would restrict
give-ups.

7. In 1965 the Amex commissioned Haskins and Sells, a
major accounting firm, to undertake a study of the ex-

?

Een

A-45

change’s intra-member commission structure and to
evaluate its fairness and adequacy. In early 1968, Amex’s
Board of Governors appointed a Subcommittee on
Commission Structure [the ‘““Subcommittee”’], to review all
aspects of the exchange’s commission rates in light of
changing market conditions, costs of doing business, and

_ needs of the investing public. The Subcommittee submitted
its first memorandum to Amex members and member
organizations on April 19, 1968 (annexed as Exhibit C), in
which it reported preliminary findings on the existing intra-
member commission rates and solicited the opinions and
suggestions of the Amex membership.

8. Amex President Ralph S. Saul transmitted the
Subcommittee’s April 19 memorandum to the SEC in a
letter to Chairman Manuel F. Cohen on April 24, 1968.
(Annexed as Exhibit D). In that letter, Mr. Saul informed
Chairman Cohen that the Subcommittee was presently
studying the commission rates charged to non-members of
the Amex. Mr. Saul also expressed the Amex’s opposition
to the SEC’s proposed Rule 10b-10 as not in the public
interest, and advised that the Subcommittee would con-
sider possible alternative methods for dealing with the
problem of customer-directed give-ups.

9. On May 28, 1968, Chairman Cohen transmitted to the
Amex a letter of the same date written to President Robert
W. Haack of the NYSE advising that, as a result of its
extensive and continuing study of the commission rate
structure of national securities exchanges, the SEC
believed “changes in the present commission rate structure
are required to benefit the investing public."’ (The letter of
transmittal to the Amex and the Haack letter are both
annexed as Exhibit E). The letter contained a request by
the SEC, pursuant to its authority under §19 (b) of the 1934
Act to fix reasonable rates of commission, that the NYSE,
on or before September 15, 1968, make changes in its
commission rates which would either (a) conform to an

ee

A-46

SEC proposed commission schedule (attached to the Haack
letter) or (b) eliminate minimum ‘conimission rates on all
orders in excess of $50,000. This request was said to be
made “in the context of the Commission’s responsibilities
to consider the national policies embodied both in the
securities laws and in the antitrust laws.” In his letter of
transmittal to the Amex, Commissioner Cohen stated that
“the Commission has not directed a similar letter to your
Exchange because of possible differences in the ~’ tation
prevailing” but “requests that you give immediate at-
tention to appropriate modifications of your commission
rate structure, including any necessary interim steps.” The
letter to President Haack also announced that the SEC,
pursuant to its authority under §21(a) of the 1934 Act,
would hold public hearings on the commission rate
structure issue commencing July 1, 1968 (the “Rate
Structure Hearings”).

10. In a letter to the SEC on June 26, 1968, President
Saul advised that after careful consideration of the
Commission’s proposed Rule 10b-10 and recent studies by
the Amex staff, the Amex Board of Governors “has agreed
in principle to eliminate . . . customer-directed give-
ups...” (Annexed as Exhibit F). The letter also advised
that the Board of Governors “has also agreed that a
modification of the present minimum commission rate
structure to provide volume discounts is also ap-
propriate . . . ’ Finally, the letter stated that the Amex’s
staff had been directed by the Board of Governors “‘to work
with the Commission to achieve meaningful and prompt
implementation of-the Board of Governors’ position with
respect to discounts and give-ups.”

11. On September 20, 1968 the Subcommittee on
Commission Structure transmitted to Amex members and
member organizations a memorandum recommending
adoption of a volume discount on transactions in securities
involving more than 1,000 shares and an amendment to the

A-47

Amex’s Constitution which would prohibit customer-
directed give-ups. (Annexed as Exhibit G).

12. Pursuant to a vote of its membership, on December
5. 1968 the Amex effectuated amendments to its Con-
stitution which provided for volume discounts on tran-
sactions in securities involving more than 1,000 shares, and
prohibited customer-directed give-ups.

13. Between 1968 and 1970, because of a tremendous
rise in the volume of public transactions on the national
securities exchanges, the facilities and resources of Amex
members became increasingly overburdened. The expense
of expansion needed to meet the increased, demand, as well
as rising costs during a decade in which there had been no
increase in commission rates, contributed to a drastic
decline in the profits of the securities industry. The hardest
hit were member organizations which primarily handled
small orders for individual customers. The volume
discount, which\ became effective on December 5S, 1968,
threatened only to exacerbate the situation because of the
likelihood that it would reduce commission revenues.

14. On February 13, 1970 and March 16, 1970, the
NYSE presented to the SEC statistical evidence demon-
strating the financial distress of the securities industry and
the need for interim relief in the form of an increase in
commission rates. On March 19, 1970, the NYSE sub-
mitted to the SEC a proposed rule which would impose an
interim service charge, in addition to the existing minimum
commission rate, on all pubiic transactions in listed
securities involving 1,000 shares of stock or less.

15. In a letter to the SEC on March 26, 1970, the Amex
expressed its support of the NYSE’s proposed interim
service charge and set forth the results of a survey con-
ducted among Amex member: organizations which in-
dicated the need for temporary relief of that nature.
(Annexed as Exhibit H).

A-48

16. In a letter to the NYSE on April 2, 1972, the SEC
expressed its non-objection to the proposed interim service
charge on transactions involving 1,000 shares or less.
(Annexed as Exhibit I). The SEC stated that its own data
had confirmed the loss experience of the industry and that
“past losses and the prospect of continued financial drain
have influenced many member firms to impose limitations
on their services to small investors.’’ The SEC conditioned
its non-objection to the interim service charge upon its
limitation to a 90 day period and the requirement that steps
be taken to ensure the restoration of full brokerage services
for small investors.

17. On April 2, 1972, the Amex transmitted to the SEC
copies of its new Rule 396, which provided for an interim
service charge essentially the same as that proposed by the
NYSE. In its letter of transmittal, the Amex agreed to
adhere to the conditions stated by the SEC in its letter of
April 2 to the NYSE. (A copy of Rule 396 and the Amex’s
letter of transmittal to the SEC are annexed as Exhibit J).
The interim service charge went into effect on April 6, 1970
and was to expire on July 6, 1970.

18. On April 10, 1970 the SEC responded to the Amex’s
April 2 submission with a letter expressing its non-
objection to Rule 396 imposing an interim service charge.
(Annexed as Exhibit K).

19. Prior to the expiration date of the interim service
charge, studies conducted by the NYSE revealed that the
financial condition of the securities industry had not
improved. These findings were relayed to the SEC on June
18, 1970 by President Haack of the NYSE. In a letter on
June 29, 1970, the Amex advised the SEC that economic
conditions among its member organizations had steadily
deteriorated since the interim service charge was initially
requested and that the continued application of the sur-
charge was urgently needed. (Annexed as Exhibit L).

a ————
A-49

20. On July 2, 1970 the SEC announced that the Rate
Structure Hearings, originally convened on July 1, 1968,
would be reconvened on July 13, 1970 to receive evidence
on the need to extend the interim service charge. In its
announcement. the SEC stated that it would not act to
terminate the service charge pending the outcome of the
hearings on its extension.

21. On July 16, 1970, the Amex transmitted to the SEC
the results of a new survey of member organizations
supplementing the results of the survey conveyed in its
March 26 letter which first demonstrated the need for an
interim service charge. (Annexed as Exhibit M). The
results of the new survey revealed that the overwhelming
majority of member organizations surveyed had continued
to suffer substantial losses even with the additional income —
provided by the service charge.

22. The SEC continued its supervision of the financial
state of the securities industry and did not revoke its ap-
proval of the interim service charge. The interim service
charge was repealed in April, 1972, when Amex Rule 396
was changed to prohibit the imposition of any charge in
excess of the prescribed commission rates presently in
effect.

23. On June 30, 1970, as a result of its own studies on the
commission rate structure, the NYSE submitted to the SEC
a proposed permanent schedule or “rate package” to
replace the interim commission rates then in effect. On July
2, 1970 the SEC announced that its Rate Structure
Hearings would reconvene on July 20, 1970 to receive
testimony and other relevant data concerning the NYSE’s

"proposed new rate package. (Exchange Act Release No.
8924, dated July 2, 1972, Annexed as Exhibit N).

24. On July 16, 1970, the Amex submitted to the SEC its
views “as to the importance of the commission rate-making
process, and the relationship of that process to the func-
tioning of the exchange markets and the regulation of

et

~~ (pT Me te i RE AS Pein MeL ECT CoE TE PRC IE oar te ee aga

A-50

securities markets.” (Annexed as Exhibit O). In its sub-
missions the Amex expressed its support of the procedures
followed by the NYSE in developing its June 30 commission
rate schedule proposal.

25. On March 17, 1971, the SEC transmitted to the

{ Amex copies of correspondence which had passed between
the Commission and the NYSE relating to the NYSE’s June

30 commission rate proposal. (Annexed ibit P.) On

October 22, 1970 the SEC had ad the NYSE that
“fixed charges for portions of orders if excess of $100,000
are neither necessary nor appropriate.” On February 10,

1971 the SEC directed the N 0 take action to im-
plement, by April, 1971, negotiated commission rates on
institutional-sized orders, but agreed to accept $500,000 as
the breakpoint for the negotiated rates. On March 9, 1971,
the NYSE responded that the April 1 deadline did not offer
sufficient time to review the SEC’s proposal and implement
a constitutional amendment. The SEC on March 10, 1971
reiterated its April 1 deadline, and warned the NYSE that
the maintenance of minimum commission rates on portions
of orders above the $500,000 breakpoint after the deadline
“would be unreasonable and could be contrary to the
Exchange Act.”

26. In a letter to the SEC on :March 26, 1971, President
Saul of the Amex stated that “in view of the Commission’s
position, the Exchange is obliged to recommend ap-
propriate revisions to its Constitution and Rules to
eliminate fixed minimum commissions on that portion of
an order in excess of $500,000.” (Annexed as Exhibit Q)

27. Pursuant to a vote of the membership, the amend-
ments to the Amex’s Constitution providing for negotiated
commission rates on that portion of orders in excess of
$500,000 became effective on May 3, 1971.

28. The SEC consistently maintained that the $500,000
breakpoint for negotiated commission rates did not
represent a final determination as to commission rate

4

A-51

structures, and that the Commission would review the
impact of the changes. Accordingly, to allow the SEC and
the exchange to observe the workings of competitive rates,
on May 3, 1971 the Amex effectuated Rule 398, which
required members to report executions of orders exceeding
$500,000. (A copy of Amex letter to SEC, dated April 28,
1971, transmitting proposed Rule 398 is annexed as
Exhibit R).

29. On February 2, 1972, the SEC advised in its
“Statenrent on the Future Structure of the Securities
Markets” that the breakpoint for portions of orders subject
to negotiated commission rates should be lowered from
$500,000 to $300,000. The Commission directed the NYSE
to take the required.action implementing such a change
within 90 days. In a letter on March 19, 1972 the SEC
advised the Amex that it should begin to draft rule changes
providing for a lowering of the breakpoint for negotiated
commission rates to $300,000. (Annexed as Exhibit S). The
Amex replied by letter on March 28, 1972, submitting to
the SEC, pursuant to SEC Rule 17(a)-8, copies of proposed

tule changes providing for a lowering of the breakpoint to

$300,000. (Annexed as Exhibit T).

30. On April 24, 1972, pursuant to a vote of its mem-
bership, the Amex amended its Constitution to adopt a

‘commission rate schedule providing for cost-related

discounts for volume transactions and negotiated com-
mission rates on that portion of orders in excess of
$300,000. Concurrently, provisions for the earlier volume
discount and the interim service charge were repealed.

31. The existing commission rate structuré of the Amex
is the subject of continuous study by the exchange and the
SEC. The SEC not determined that the Amex’s present .
commission rates represent a final resolution of the
commission rate structure. Of particular interest to the
SEC and the Amex in their continuing observation of the
impact of existing commission rates, is the advisability of

A-52

, lowering the breakpoint between minimum and negotiated
commission rates below its present $300,000 level.

32. The plaintiff in this action, Richard A. Gordon, has

never applied for, or been denied application for, mem-

_ bership in the Amex during the past six years. This in-

| formation is based on an examination of A:nex records. It
was not necessary to examine’ the records to ascertain |

whether the Independent Investors protective League has

ever applied for membership in the Amex, since only in-

dividuals are eligible for Amex membership.

—— . 4
Se SN oe Pia te ee hoe eee ee

So eet

s/H. Vernon Lee, Jr.
H. VERNON LEE, JR.

A-53
EXHIBIT “A”

American Stock Exchange
Constitution .
Article VI, Revised to August 1, 1972

ARTICLE VI
Commissions and Charges
General Rule

Sec. 1. *** Commissions shall be charged and collected
upon the execution of all orders for the purchase or sale,
for account of others, of securities, including securities
“when, as and if issued’’, listed or admitted to unlisted
trading upon the Exchange, and these commissions shall
be at rates not less than the rates in this Article prescribed,
and shall be net and free from any rebate, return, discount
or allowance made in any shape or manner, or by any
method or arrangement direct or indirect. No bonus or
percentage or portion of a commission, whether or not such
commission be at or above the rates herein established, or
any portion of a profit except as may be specifically per-
mitted by the Constitution or by a rule adopted by the
Board of Governors, shall be given, paid or allowed directly
or indirectly, or as a salary or portion of a salary, to 2 clerk
or person for business sought or procured for any member
of the Exchange or member firm or member corporation.
No member, member firm or member corporation shall
make a proposition for the transaction of business at less
than the minimum rates of commission prescribed in this
Article. No member, member firm ur member corporation
shall, in consideration of the receipt of business in
securities dealt in on the Exchange and at the direct or
indirect request of a non-member or by direct or indirect
arrangement with a non-member, make any payment or
give up any work or give up all or any part of any com-
mission or other property to which such member, member

A-54

firm or member corporation is or will be entitled. ***

Transactions on another exchange.

Notwithstanding the provisions of this Article, any
member of the Exchange or member firm or member
corporation which is a member or registered firm or
corporation of another exchange located in the United
States or Canada, or registered with a Canadian exchange
as being entitled to a return of commission from members
of such exchange, may in respect of transactions made on
such other exchange’ charge the rates of commission
prescribed by such other exchange.

Amendment.
*** November 1, 1968, effective December 5, 1968.

Schedule of Stock Commissions >
Sec. 2. Commissions shall be as: follows:
Non-Member rates

(a) The minimum commission rates to non-members on 3
- stocks, rights and warrants (hereinafter referred to as
stocks), shall be as follows:

On 100 share orders

(1) On each order for 100 shares, on stocks E.
selling at $1.00 per share and above, commissions
shall be based upon the amount involved in the
order and, subject to the provisions of subsections
(f), (h) and (1) of this Section 2, shall be not less
than the rates hereinafter specified:

Amount involved in the Order Minimum Commission

$100—but under $800 2.0% of money invoived + $ 6.40
$800—but under $2,500 1.3% of money involved + $12.00
$2,500—and above 0.9% of money involved + $22.00

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A-83

such non-member breaches any provision of its
agreement with the Exchange or whenever such
non-member ceases to maintain its principal place
of business in one of the United States, the District
of Columbia or the Commonwealth of Puerto Rico,
or ceases to be a member of the National
Association of Securities Dealers, Inc. or to be
subject to Section 15(b)(8) of the Securities Ex:
change Act of 1934 or whenever the primary
purpose of such non-member and of any parent of
such non-member (as defined in Rule 314) ceases
to be the transaction of business as a broker or
dealer in securities within the meaning of such
rule. Whenever such non-member ceases to be
qualified to receive any such discount such non-
member shall be required to give the Exchange
prompt written notice thereof;

(4) At any time and from time to time during
normal business hours the Exchange shall have
access to the books and records of such introducing
non-member as its principal place of business in
order to determine compliance by such introducing
non-member with its agreement with the Ex-
change. Whenever any such examination by the
Exchange fails to establish to the satisfaction of the
Exchange compliance by such introducing non-
member with the provisions of its agreement with
the Exchange, or whenever such introducing non-
member ceases to qualify for the discount provided
by Article VI, Section 2, paragraph (n) of the
Constitution, the Exchange may send written
notice to such introducing non-member ter-
minating such agreement and shall thereupon
notify members and member organizations and
non-member broker-dealers subject to agreements
under Section (a) of this Rule of such termination;

A-84

(S) Unless sooner terminated by the introducing
non-member or the Exchange, such agreement
shall terminate whenever the provisions of Article
VI, Section 2, paragraph (n) of the Constitution
shall expire.

* Amendments.
Adopted effective April 3, 1972.

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A-85

AMERICAN STOCK EXCHANGE
SUBCOMMITTEE ON COMMISSION STRUCTURE

Memorandum
April 19, 1968

‘To: Members and Member Organizations
EKROM: Subcommittee on Commission Structure
SUBJECT: Intra-Member Commission Rates

The Subcommittee on Commission Structure has been
appointed by the Board of Governors to review alt aspects
of the Exchange's commission rates in light of changing
market conditions, costs of doing business, and needs of
ihe investing public. As a first step in such a review, the
Subcommittee on Commission Structure has examined the
intra-member commission rate structure of the Exchange.
The Subcommittee has been aided in its examination by a
report of Haskins & Sells, a major secthinting firm,
engaged by the Exchange in 1965 to. make a study of the
intra-member commission structure and to evaluate its
fairness and adequacy to each segment of the membership.

It should be emphasized that this memorandum does not
cover commission rates charged to public customers.

The purpose of this memorandum is to obtain your
reaction to the Subcommittee’s review of the intra-member
commission rate schedules and to have the benefit of your
suggestions and. ideas. No final decisions have been
reached and suggestions will be welcomed. The purpose of
this review is to strengthen the Exchange as a public
marketplace and to insure an equitable division of com-
missions among members.

The Subcommittee feels these matters merit the most
searching consideration. A suggested procedure for ex-
pressing your views in writing or in person is outlined at the
end of this memorandum.

A-86

Present Intra-Member Commission Rate Schedules

The intra-member commission schedules of the Ex-
change cover charges by members to other members for
execution on the floor and clearing of transactions. There
are three intra-member rates: the first covering the
execution of a transaction (the ‘floor brokerage” or floor
‘“give-up”’ rate), the second covering both the execution
and clearing of a transaction (the ‘‘clearance” rate), and
the third covering the execution of orders entrusted by
members to the specialist for execution (the ‘‘specialist’s
commission’’). These rates are prescribed by the Exchange
Constitution on a per round-lot basis based on share price.

American Stock Exchange clearance and floor brokerage
rates have traditionally been higher than corresponding
New York Stock Exchange rates. American and New York
Stock Exchange floor brokerage and clearance rates for
regular members are set forth in Attachment A. These
differences apparently stemmed from differences in
average share prices on the two exchanges when the
original schedules were adopted many years ago.

There is one other significant difference between the
intra-member rates of the two exchanges. On this Ex-
change the specialist earns a commission substantially less
than the floor brokerage rate on orders entrusted to him for
execution though the specialist performs the same service
and assumes the same risks as the floor broker. On the New
York Stock Exchange, as well as most other exchanges, the
specialist receives full floor brokerage on orders left with
him for. execution. (See Attachment B). ‘

The lower specialist’s commission on this Exchange was
apparently established for two reasous. First, the specialist \
on this Exchange also acts as odd-lot dealer and the
revenue from this source was supposed to offset the lower
specialist’s commission. Second. the lower rate was in-
tended to encourage a flow of limit orders to the book,
thereby making it easier for the specialist to provide orderly
markets.

A-87

The Haskins & Sells report examined specialist income.
It was their finding that specialist income from odd-lots
plus income earned from the present specialist floor
brokerage rate was less than the income a specialist would
earn if he received the entire floor brokerage as on the New
York Stock Exchange.

It should also be pointed out that there are differences in
risks when comparing odd-lot dealer activities on this
Exchange with those on the New York Stock Exchange. On
that exchange, associate brokers of the odd-lot firms can
immediately offset positions in the round-lot market. A
specialist on the American Stock Exchange cannot offset
positions in the round-lot market unless such trading meets
the same performance standards now applied to his round-
lot training.

Changes in the Exchange Marketplace —

-In recent years, there have been several important.
changes in the Exchange marketplace affecting the intra-
member commission rate schedules:

1. The average price of shares traded on the Exchange
has risen from $7 in 1962 to approximately $24 at the
present time, an increase of over 200%. Nearly 87% of
Exchange shares volume is now concentrated in stocks
selling over $5 per share and 40% of such volume is in
stocks selling over $20 per share. Comparable percentages
five years ago were 60% and 12%. With the change in the
average price of shares traded on the Exchange, income
trom floor brokerage business has increased substantially.
The strengthening of the Exchange’s listing and delisting
requirements should serve to maintain average share prices
at sigher levels than in the past and continue the trend
away from volume in lower price brackets.

2. Volume on the Exchange has continued to expand,
rising from a daily average volume of 1,224,640 shares in
1962 to 4,562,112 shares in 1967.* In the first quarter of

A-88

~

1968 daily average volume rose to over S million shares.

3. The steady growth in volume has prompted many
commission firms to purchase additional seats on the
Exchange or activate seats held by office partners in order
to execute transactions through their own floor members.

4. Increased business generated by the successful
completion of the new seat plan, in which 151 associate
member firms acquired regular memberships, has
strengthened the economic position of floor brokers
executing business for other members. Despite the
presence on the floor of more floor partners representing
their own firms, expanding volume has required increasing
use of independent brokers to handle overflor floor
business.

5. Through intensive efforts over the past several years,
the Exchange’s specialist system has been substantially
strengthened. Specialist units have buttressed their capital
and manpower, training programs have helped insure that
new specialists are qualified, and specialists have steadily
raised their level of performance. As a result of increased
demands by the Exchange, specialists have increased their
participation, or principal trading, in the market from —
16.3% in 1962, when volume averaged 1.2 million shares a
day, to 15.5% in 1967, when volume averaged over 4.5
million shares. At the same time, specialist stabilization
has risen from’ 74.6% in 1962 to 95.6% today. Im-
provement in specialist performance has substantially
improved the quality of the market provided by the Ex-
change.

6. Changes in Exchange volume, price levels and
regulatory standards have imposed greater market-making
demands upon Exchange specialists. With greater public
interest in our market, the Exchange specialist must meet
sudden surges in selling pressure or buying power usually
concentrated on one side of the market. To fulfill his

A-89

function of providing a fair and orderly market, the
specialist must risk substantially more capital fo take or
supply stock in these situations.

Specialists’ Commissions

’ Against this background, the Board of Governors of the
Exchange has approved in principle an increase in
specialist's commissions.

These considerations were persuasive in adopting that
position:
e To attract capital and manpower to specializing
there must be a reliable source of income to buffer
the risks of dealer activity. Specialists’ commission
income serves this purpose by providing a con-
tinuous source of capital and incentive in the
performance of market-making activities during
good markets and bad.
¢ The specialist performs the basic brokerage
function with respect to orders left with him for
execution. In addition to the actual execution, the
specialist has the various tasks and _ liabilities
associated with handling the order and reporting
its execution. On most other exchanges the
specialist receives the full floor brokerage for
performing this service.
¢ A specialist’s ability to make trading profits is
restricted by standards of performance imposed by
the Exchange upon his market-making activities.
These standards have tended to make brokerage
commissions an increasingly important source of
capital and incentive in the performance of
market-making activities.
¢ Haskins & Sells found that specialist income
from odd-lots plus income from specialist com-
missions is not equivalent to the income a specialist
would earn if he received the entire floor brokerage
rate as on most other major exchanges.

A-90

e Coupled with increased regulatory requirements,
the increases in Exchange volume and price levels
described above have imposed greater market-
making demands upon specialists and obligated
specialists to risk substantially more capital.

Finally, the Haskins & Sells report recommended that in
view of increased demands made upon the specialist's
dealer function, specialist commission income be increased
approximately SO%.

Floor Brokerage

After a preliminary review of the intra-member floor
rates the Subcommittee has not yet reached any definitive
conclusions with respect to floor brokerage rates. However,
it is helpful to list some of the reasons it has considered for
and against a downward revision in the floor brokerage
rate.

Reasons for a downward revision in the floor brokerage
rate include the following:

¢ The rate would be more in line with floor

brokerage on other exchanges.

¢ Such a step would benefit members who are

directly responsible for bringing business to the

Exchange and who have been faced with steadily

increasing costs of doing business.

¢ A downward revision might encourage firms

doing a public commission business to bring more
’ business to the Exchange and make increasing use

of independent floor brokers.

Some of the reasons for maintaining the present rate may
be summarized as follows:

© The impact of a change on one segment of the
membership might be unduly severe.

¢ If floor brokerage rates are lowered, this would
mean that the Exchange, with its direct mail
clearance, could compete unfairly“with clearing

A-9]

members having correspondent relationships with
out-of-town firms.

¢ A downward revision in the rates might have an
impact, on seat values.

Weighing these pros and cons, the Subcommittee is
inclined to believe that some lowering of the floor
brokerage rate may be necessary and desirable in the best
interest of the Exchange and the membership as a whole.

‘In line with these views and the Board's approval in
principle of an increase in specialists’ commissions, a test ,
schedule has been prepared which couples an increase in
the specialist rate with a downward revision in the floor
brokerage rates. This test schedule is set forth in At-
tachment C for membership consideration.

Future Programs

‘The Exchange is now planning or implementing several
programs which may affect intra-member rates.

In February, the Board of Governors authorized the
Exchange administration to develop a plan for the
automated execution of odd-lots on the Exchange. The
Exchange has a responsibility to insure that it provides
efficient service to the membership in the servicing of odd-
lot orders. New procedures must be devised to increase
efficiency and productivity in the execution of odd-lots and
automating odd-lot executions will be a ase step in that
direction.

The Exchange's automation objectives on the floor are to
increase productivity by automating activities which
support the auction market, thus permitting greater
volume to be handled without proportionate increases in
personnel and trading facilities and freeing members from
non¢productive clerical tasks. |

The Exchange has instituted a direct mail desting
service which is now in operation with three firms on line
and a considerable number to be added this year. Over SO

A-92

firms have indicated their interest in this service. Its
purpose is to reduce the cost of doing business on the
Exchange for firms which do not have clearing facilities in
New York.

The Subcommittee intends to continue its inquiry into all
phases of the commission schedule. At this point, however,
the comments of regular members,’ allied members and
associate members on the above matters and any alter-
native approaches will be most welcome. The Sub-
, committee would appreciate any written comments before
May 15, 1968. These should be addressed to Mr. H.
Vernon Lee, Jr., Vice President, Membership Services
Division. Arrangements can also be made with Mr. Lee’s
office for a personal appearance before members of the
Subcommittee. The Subcommittee and the Exchange,
administration stand ready to answer any questions you
may have.

. Sincerely yours, —

JOHN (H. SCHWEIGER,
Chairman
GORDON H. HENSLEY
JAMES J. LEE

. HAROLD J. MINTZ
JOHN WASSERMAN

MACRAE SYKES

FRANK C. GRAHAM, JR.

RALPH S. SAUL
Ex-Officio

A-93

ATTACHMENT A
Present Regular Member Schedule
(Rate Per 100 Shares)

Floor
Brokerage Clearance
Price Range ASE |NYSE| ASE WY SS}
.03 0S
ce nc eb tan paedes (05) (05)
. .0S .08
/ . re ee ere
sina ” (.10) (.10)
1/64 of $l under .............. 17 ae
OED cevissccesscvenas (.10) (.20)
NR eS law iae we weal wedi 17 .25
(.25) (.375)
over 2/32 of Sl under .......... 33 50
SEO Seaeca sen senerncs (.25) (.50)
8/32 0f$lunder .............. 55 .85
SUE ova pies cece eesnes (.50) (.75)
1/2o0f$lunder$i ............ 1.00 ; 1.50
(.50) (.80)
Slunder$2 ..............-65- 1.75 2.75
; (1.25) (2.00)
INE pvevacguwkah® ane 2.05 3.20
(1.40) (2.25)
SPEED id dccsecsweevenas 3.80 4.90
(2.10) (3.50)
SiO under S22 ......cccccccces 4.00 6.05
(3.10) (6.20)
SR under.$40 ..........cceees 5.10 7.75
(3.65) (7.30)
S40 under $100 ............... 5.65 8.60
’ (3.85) (7.70)
- $100under $150 .............. 6.50 9.75
. (8.70)
9.75
(9.00)
9.75

(10.00)

A-94

ATTACHMENT B
Present Regular Member
Specialist Floor
Brokerage Schedule

(Rate Per 100 Shares)
ASE NYSE
Specialist Specialist
Price Range Fir. Brokerage _ Fir. Brokerage
RFEROGETE a cscsccccccsncsess Ol .0S
RFETBEEL cc cecesseccccccccs 02 .10
1/64 of $1 under 2/32 of $1 ..... .07 .10
MIB. vv vivecccscccavececs .07 .25
over 2/32 of $1 under 8/32 of $1. —.13 , .25
8/32 of $1 under 1/2 of $1 eTTTy .22 | 50
1/2ofSiunder$1 ............ 35 . 50
AIRE acc cg sescscscecens -70 1.25
tg PTTeT TTT TTT ee 80 1.40
Pere 1.35 2.10

$10 under $20 ................ 1.70 3.10
$20 ante DTD ccscqvecccssshes 2.00 3.65
$40 under $100 enecnenccsecons | 2.20 3.85
$100 under $150 .............. 2.60 4.35

$150 under $200 .............. 2.60 4.50

A-95

ATTACHMENT C
Regular Member Test Schedule
(Rate Per 100 Shares)
Price Range
MTIRGERE ce siscscccccecctecs .03 0S 01 .03
(.05) (.05)
WUNMIE assicticnseccssccs 0S «10 02S
(.10) (.10)
1/64 of Slunder .............. | 17 15 07 10
CT ETRE TT EE eee (.10) (.10)
fo eee ebebaed cones - 47 25 07 15
(.25) (.25)
over 2/32 of $1 under .......... 33 35 13 20
ORME Sb ceccrenassocens (.25) (.25) ‘
G/S2 of Si under .............. 55 50 22 35
REE 5 5 00505060 be ccs ns (.50). (.50)
1.00. 1.00 3S SO
1/20f$l under$1 ............ (.50) “ (.50)
1.75 1.50 .70 1.00
| ee eee eT Tee (1.25) (1.25)
205 861.78 80 §=1.10
PROEREIS S 02 ccc cinsccececes (1.40) (1.40)
3.30 2.50 1.35 1.70
Sg | Ne ere (2.10) (2.10)
SOWIE TD Se icccescccccccs 4.00 3.50 1.70 2.35
(3.10) (3.10)
$20 under $40 ........... eae 5.10 4.25 2.00 2.80
, (3.65) (3.65)
$40 under $100 ............... . 5.65 4.60 2.20 3.00
(3.85) (3.85)

$100 under $150 ....: ee 6.50 5.20 2.60 3.30

A-96

EXHIBIT “D”
LETTER FROM RALPH S. SAUL DTD. 4/24/68

April 24, 1968

The Honorable Manuel F. Cohen
Chairman

Securities and Exchange Commission
S00 North Capitol Street, N.W.
Washington, D.C. 20549

Dear Chairman Cohen:

We are writing to inform you of steps the Exchange has
been taking concerning its commission rate structure. As
we mentioned in our letter of August 17, 1967, this matter
involves nearly every important aspect of the exchange
market and therefore decisions should be made upon the
basis of careful study and analysis. We have taken a
number of steps in that direction.

Since our letter of August 17, 1967, the Board of
Governors of the Exchange has appointed a Subcommittee
on Commission Structure to study .all aspects of the Ex-
- Change’s commission rates. As a first step in its study of the
entire commission rate schedule, the Subcommittee
reviewed the intra-member commission rates of the Ex-
change. The attached memorandum, which is being cir-
culated to the membership, summarizes the Sub-
committee’s preliminary views regarding the intra-member
commission rate structure and solicits comments and
suggestions.

It should be noted that the memorandum does not cover
commissiun rates charged to. public customers. This aspect
of the commission rate structure is now under study by the
Subcomr tice.

The Exchunye has reviewed Exchange Act Release No.
8239 concerning proposed Rule 10b-10. We feel strongly

A-97

that adoption of proposed Rule 10b-10 would not be in the
public interest. It would undermine the commission rate
structure of the Exchange—a structure which involves the
elficiency of our central auction market and the ability of
the Exchange to exercise its regulatory responsibilities. In
view of these overriding considerations, and others
presented in the many comments on the proposal, we urge
the Commission to abandon a proposal which could
irreparably damage the securities markets of this country.

The Subcommittee on Commission Structure, as part of
its review of public commission rates, will consider possible
alternative methods for dealing with the problems
described in the Commission's Release.

We would like to reiterate our willingness to cooperate
with the Commission and other self-regulatory

organizations in the resolution of the difficult and complex
questions involved in the commission rate area.

Sincerely,

s/ Ralph S. Saul

Enclosure

\

=

A-98

LETTER FROM MANUEL F. COHEN
DATED MAY 28, 1968

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Office of the Chairman
May 28, 1968

Mr. Ralph S. Saul, President
American Stock Exchange

86 Trinity Place

New York, N.Y. 10006

Dear Mr. Saul:

Enclosed is a copy of a letter sent today to Mr. Robert
W. Haack, President of the New York Stock Exchange.

The Commission has not directed a similar letter to your
Exchange because of possible differences in the situation
. prevailing. However, the Commission requests that you
give immediate attention to appropriate modifications of
your commission rate structure, including any necessary
interim steps.

Sincerely,

s/Manuel F. Cohen
Chairman

Enclosure

A-99
LETTER FROM MANUEL F. COHEN

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Office of the Chairman

Mr. Robert W. Haack
President

New York Stock Exchange
Eleven Wall Street

New York, N.Y. 10005

Dear Mr. Haack:

As you are aware, the commission rate structure of
national securities exchanges has been the subject of ex-
tensive and continuing study by the Commission. It has
become apparent in the course of that study that the
present minimum rate structure has led to the development
of practices designed to avoid the purported restrictions
against the negotiation and the reduction of commission
rates. We believe it is now generally recognized that
changes in the present commission rate structure are
required to benefit the investing public.

The Commission will hold public hearings under Section
21(a) of the Securities Exchange Act of 1934 commencing
July 1, 1968, on the question of the commission rate
structure of national securities exchanges. A copy of the
order for public hearings is enclosed. One subject of those
hearings will be whether, in view of present practices, a
minimum exchange commission rate structure is necessary,
and if so to what extent, in order to achieve the objectives of
the Securities Exchange Act of 1934.

The Commission hereby makes written request pursuant
to Section 19(b) of the Securities Exchange Act that your
Exchange effect on its own behalf changes, to become

G

A-100

effective on or before September 15, 1968, in its rules,
policies and practices in respect of its commission rate by
modifying Article XV, Section 2(a)(1) and appropriate
other sections of the exchange constitution and rules either
(a) in accordance-with the revised minimum commission
rates as set forth in Attachment A, or alternatively, (b) by
eliminating. with respect to orders in excess of $50,000,

uirements for minimum rates of commission. You
should also implement appropriate reductions in the
current intra-member rate for non-executing firms or
eliminate requirements for minimum _ intra-member
charges to such non-executing firms.

We wish to emphasize that this request is intended as an
interim step and that the Commission has reached no
definitive conclusion on whether the particular rates
described in Exhibit A would reflect the optimum form of
rate structure for your exchange or that any schedule of
specified rates would provide a complete answer to the
problems raised in Release No. 8239 and the comments
thereon. Additional measures with respect to other mat-
ters, including give-ups are under continuing consideration
and will be examined in the course of the hearing com-
mencing July 1, 1968.

The request that your exchange take the foregoing steps
is made in the context of the Commission's responsibilities
to consider the national policies embodied both in the
securities laws and in-the antitrust laws. It is based upon
the deficiencies in the present exchange rate structure |]

- _which-fails-to_provide_appropriate discounts but permits— |
give-ups direct by institutional managers,-with consequent
departures from the purported minimum rate structure on
an arbitrary and discriminatory basis.

Sincerely,

s/ Manuel F. Cohen
Enclosures Chairman

A-101
ATTACHMENT A

Commissions to Non-Members on Stocks, Rights and
\
Warrants

On stocks selling at 1.00 per share and above the
commission on cach order shall be not less than the rates
hereinaftcr specified:

(i) On each unit of trading up to and inctudine
four units of trading the commission shall be:
2% of first $400 of money involved plus

1% on next $2,000 of money involved plus

1/2% on money involved above $2,400 plus
$2.00.

(ii) On all units of trading above four units the
commission shall be 1/2% of money involved plus
$2.00 per unit of trading.

(iti) On odd lots (less than a unit of trading)
same rates as that under (i) above, less $1.00.

(iv) Notwithstanding the foregoing:

a) when the amount involved in a transaction is
less than $100, the commission shall be as
mutually -agreed;

b) the minimum commission charge ni any event
shall not be less than $6 per order.

In respect of stocks selling at $1.00 and above, an order
shall be deemed to include all round lot or odd lot pur-
chases or sales for one account, of a single security,
executed on one business day, provided, however, that
Leisan order for five or more units of trading is executed
on one business day, all round lot purchases or sales of that
security for that account executed in the next nine business

days shall be deemed part of that order.

A-102
LETTER FROM RALPH S. SAUL DTD. 6/26/68

The Honorable Manuel F. Cohen
Chairman

Securities and Exchange Commission
S00 North Capitol Street, N.W.
Washington, D.C. 20549

Dear Chairman Cohen:

This letter is in response to your May 28, 1968 letter in
which you ask that, the American Stock Exchange give
immediate attentio# to appropriate modifications of its
commission rate structure, including any necessary interim
steps. You also dircvied the Exchange's attention to an
enclosed copy of your letter to Mr. Robert W. Haack,
President of the New York Stock Exchange. In the
Commission’s letter to Mr. Haack, it was stated that the
present minimum rate structure has led to the development
of practices designed to avoid the purported restrictions
against the negotiation and the reduction of commission
rates. In addition, the letter requested the New York Stock
Exchange to make specified changes in its commission
rates. Moreover, the letter stated that the Commission will
hold public hearings on the commission rate structure of
national securities exchanges.

Your letter and the proposals contained in your letter to
Mr. Haack have been presented oe

A-116
EXHIBIT Ill

American Stock Excharige

Present and Proposed Regular
Member Clearance Rates

Security Price ews Pe
Range |S] (5] (5)
$lunder$2 ...... HER is RE 2.75 2.45
MUI foo si he seeks enue 3.20 2.75
OE oo oe pea ckseceees 4.90 4.05
SO under SA .......5...000., 6.05 5.65
rere re re 7.75 6.90
$40 under $100 ............... 8.60 7.45
i |. ne 9.75 8.30
$150 under $200 .............. 9.75 | 8.50

$200 and over ......... Sbedees 9.75 9.05

A-117

EXHIBIT IV

American Stock Exchange

Present and Proposed Specialist

Rates
Present Proposed
Security Price Specialist Rates Specialist Rates
Range [3] [S] [5]
og: Bee re er ey .70 .90
OP eee ee Tee .80 | 1.05
ee 1.35 : ee
Sg Be ee 1.70 2.30
INO ohn SS sees ese 2.00 2.70
eee 2.20 2.90
eee 2.60 3.25
$150 under $200 .............. 2.60 3.35
er ee Peres 2.60 3.70

Ze SURF NR RAIN Ra Os SIERRA da A

"indirect request of a nonmember or by direct or indirect

A-118
ee _ EXHIBIT V

American Stock Exchange
Constitutional Amendment

The following additional language is to be added to the
first paragraph of Article VI, Section 1, of the Con-
stitution:

‘No member, member firm or member corporation
shall, in consideration of the receipt of busingss in
securities dealt in on the Exchange and at the direct or

arrangement with a nonmember, make any, payment or

give up any work or give up all or any part of any com-

mission or other property to which such member, member

firm or member corporation is or will be entitled.”
%

SATE SAEED Oger EX

ARDY

A-119

.ETTER,FROM RALPH S. SAUL
DATED MARCH 26, 1970

The Honoraki!e ltamer H. Budge
Chairman

Securities and Exchange Commission
Washington. D.C. 20549 -

Dear Chairman Budge:

I am enclosing a statement by the Exchange urging
prompt action by the Commission on an interim change in
commission rates. We believe that the need for an interim
change in prescnt commission rates has been demon-
strated.

Our@tatement also describes a procedure proposed for
the future for determining and monitoring subsequent
revisions in commission rates to make those rates more
responsive to changing conditions in light of the objectives
of the Exchange Act. We feel that it would be helpful to
make an oral presentation of the proposed procedure
described in thy statement and, accordingly, request an
opportunity to be heard on a date. convenient for the
Commission. We believe that the Exchange’s presen-

tation—directed to future changes in the rate-making

process—will be of interest and of help to the Commission. |

We respectfully request that the enclosed statement be
included in the record of the commission rate hearings.

Sincerely,

s/Ralph S. Saul
Enclosure

A-1.20
LETTER. FROM RALPH S. SAUL DTD. 3/26/70

Securities and Exchange ‘Commission
SO North Capitol Street, N.W.
Washington, D.C. 20549.

Dear Sirs:

The American Stock Exchange wishes to express its
views to the Commission concerning the urgent need for an
increase in financial revenue for member organizations,
and to urge prompt action on the proposal of the New York

Stock Exchange to impose a service charge on each
transaction.

The Board of Governors of this Exchange has given
extensive consideration to this matter and has concluded
that in view of the serious need to provide immediate
additional income, particularly to firms engaged primarily
in the retail commission business, the imposition of such a
service charge is the most appropriate means under the
circumstances to accomplish the desired objective. The
Board is, therefore, prepared to adopt a rule imposing a
service charge of $15.00 on each transaction involving
1,000 shares or less, limited, however, to ‘not more than

0% of the existing commission applicable to such tran-
saction.

The Exchange is aware of the submission by the New
York Stock, Exchange of an extensive study prepared by
_ National Economic Research Associates, Inc. recom-

mending major revisions in the entire structure and level of
commission rates. The Exchange appreciates that review
‘and analysis of this study and underlying data by the staff
of the Commission is expected to be time-consuming. In
addition the Commission has invited comments i
‘the study from all interested parties.

The Board of Governors of this Exchange has concluded
that it would be extremely dangerous to postpone any

A-121

action concerning commission rates until such review and
analysis has been completed. It believes there is a pressing
and overriding need for immediate adjustments in the level
of income derived from commissions on certain types of
transactions in order to preserve the depth and liquidity of
Exchange markets, to assure continued, direct access to
the Exchange marketplace by the general public, to bolster
the financial condition of member organizations, and thus
{o protect the interests of all investors. The proposal to
impose a service charge involves only such limited revision
to the commission rate structure as the Board believes
absolutely essential at this time to help achieve these ob-
jectives and to stem certain trends which, if unchecked,
may seriously undermine Exchange markets and impair
sthe ability of public investors to freely buy and sell listed
securities in a regulated exchange auction market.

We recognize that a great deal of work remains to be
done in connection with resolving all of the issues relating
to commission rates. The American Exchange, as more
fully described below, is devoting a considerable effort to
the development of procecures for establishing commission
rates in the future. We believe these procedures will prove
much more meaningful than those available in the past for
determining rates. However, the current need for an ad-
justment is so urgent that neither the Exchange nor the
Commission, in carrying out their statutorily imposed

_ duties, should delay in implementing an interim change.

Need for Direct Public Participation in the Securities
Markets.

" The evidence presented in the Commission’s rate inquiry
demonstrates clearly the fundamental changes that are
taking place in the public securities markets. The growth in
institutional trading is progressing at a much more rapid
rate than that of individual public investors. Transactions
originating with institutions as a percentage of total public
share volume on the New York Stock Exchange have in-

A-122

creased from 29.4% in 1959 to 54.4% in 1969. Studies of
trading on the American Exchange indicate a similar
growth pattern even though institutional trading as yet
represents a smaller portion of total volume. During a two-
year period—from 1967 to 1969—institution trading on
this Exchange as a percentage of total public ; share volume
increased from 15.6% to 22.9%. ~~

The annual growth rate in institutional trading on this
Exchange between 1967 and 1969 (as a percentage of total
public share volume) was 47.5% whereas trading by in-
dividuals grew at an annual rate of only approximately
16.5%. If these growth patterns are sustained by both
individuals and institutions in the future, institutional
share volume on the Exchange will attain the level ex-
perienced on the NYSE in 1969—approximately 54% of
public share volume—in about six years. In short, our
market, which in the past has principally served individual
investors, is likely in less than six years to become weighted
on the side of institutional investors if current trends
continue unabated—and the NYSE will be primarily an
institutional market by that time. Attached as Exhibits A
and B are the results of studies for 1967 and 1969
respectively, comparing transactions, shares and dollar
volume on this Exchange for individuals and various
categories of institutional investors.

The growing influence of institutional participation on
the Exchange is illustrated further by the growth of block
transactions—trades involving 10,000 shares or more.
Block trading as a percentage of total share volume has
grown at the rate of 92% per annum between mid-1966 and
1969, a rate 3.7 times faster than the growth of total share
volume during this period. The 1969 study indicates that
approximately 73% ll block transactions on the Ex-
change are traded by institutional customers. The growth
in block trading has continued despite the decline in overall
volume during the past few months. Although detailed

A-123

analysis of current data is not yet available, a preliminary
review of January 1970 trading indicates that share volume -
represented by blocks is up 20% over January 1969
although total trading volume has declined more than one-
third.

The significance of these trends, must not be un-
derestimated in terms of the impact which in-
stitutionalization is having on Exchange markets. The
ability of the Exchange to accommodate the growth of
institutional trading is to a very large extent dependent
upon a corresponding growth in the flow of orders from
individual investors. Without the individual investor the
market tends to lose the benefits of a public pricing
mechanism and is likely to become largely a negotiated
market with more and more trades being converted from
agency transactions to dealer transactions. It is readily
apparent that any significant decline in participation by
individual investors will seriously affect the depth and
liquidity of the public auction market—a result which
nearly every participant in the pending commission rate
hearings has conceded would be inimical to the interests of
all inyestors. individuals and institutions alike.

Circumstances Threatening Continued Public Par-
ticipation. —

At the time the Commission initiated its present com-
mission rate inquiry in 1968 the securities industry was
reaching the peak of an unprecedented period of growth.
The volume of trading in all markets had multiplied at a
rate previously unknown and had far outdistanced the most
optimistic -projections made only a few years earlier.
Securities prices had maintained a general upward trend
for several ycars with only sporadic interruptions. All
classes of investors were anxious to see their capital fully
invested. ‘Ihe emphasis of many portfolio managers
changed from conservation of capital to performance
measured by gains from rapid turnover of securities

A-124

holdings. Brokerage firms were operating at a profitable
level and were expanding their facilities to meet the in-
creased volume. Although this growth was not spread
evenly over the entire spectrum of public investors, the
sheer magnitude of trading volume tended to assuage any
fears concerning the liquidity of securities markets.

Events of the past year have evidenced a dramatic
reversal in many of these trends. Trading volume has
subsided to a marked degree. The general level of securities
prices has declined substantially. Many member firms have
either reported losses or drastically reduced profit margins.
These developments have occurred at a time when there
has been increasing pressure on member firms to improve
their operating procedures and to make additional in-
vestments in facilities and highly skilled personnel so as to
meet the needs of their customers. There have been a
number of mergers by member organizations in an effort to
improve overall capital positions. Some have been forced to
liquidate and have required financial assistance to protect
the funds and securities of their customers. Many firms
have found that they have excess capacity as a result of
expansion during earlier years to meet increased volume
and to solve lingering back-office problems, but they have
also found that high fixed costs in connection with such
expansion cannot be promptly reduced or eliminated. The
climate in the securities industry in 1970 is substantially
different from that in early 1968, and we see major changes
taking place in terms of the allocation of capital and
resources of member organizations which may permanently
reshape the securities markets—changes which as a result
of economic pressure are designed primarily to improve the
servicing of institutional customers and largely ignore
individual investors.

The most immediate impact of these changed conditions
has been a decline in the profits of member organizations
oriented to serving individual public customers. It is these

A-125

have found the greatest difficulty in generating
firms that "¢ome to meet ever increasing costs. The rising
adequate "ducting a brokerage business have been well
costs of ced and can be measured by any number of in-
documenth increased costs must be considered in light of
dices. Suciat there has been no increase of any kind in
the fact tnmission rates for more than a decade. Under
public coumstances, a significant consideration is the way
these ciremember organizations have reacted to the cost-
in which eeze.
Profit SQUttort to obtain current information concerning
In an «rm reaction to declining profit margins, we have —
member td a number of member organizations during the
interviewde of months and we feel that the results of these
past Coup indicate that measures are being taken which
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“ to ‘‘first-
round” effects of the application of the alternative rate
schedule assumed:

1. Firms that experienced a decline greater than
25% in their AMEX and NYSE commission in-
come as a result of the proposed change would go
out of business.

2. Firms that experienced a loss between 5% and
25% in gross income:

a. if their ASE commission income from
institutional (non-individual) customers had
been greater than 30%, would terminate any
research and safekeeping in which they were
currently engaged;

'b. if their ASE commission income from
individuals had been greater than 70%, would
retain any research and safekeeping activities
in which they were currently engaged.

3. Firms that experienced a gain of less than
10% in income or a loss of less than 5%, would
make no changes in their safekeeping and research
activities. ."

—

A-151

4. Firms that experienced an increase of more
than 10% would introduce® research and
safekeeping activities if they do not already provide
these services.

Using our hypothetical commission rate schedule and
our arbitrary decisions rules, and attaching them to
existing data on firms’ facilities and services, one was led to
certain explicit conclusions; that 22 firms (all of them
explicitly identifiable), would go out of business; that Yh
firms, also identifiable, would add research services to the
facilities available to the public; and that 17 more would
offer safe-keeping services.

With a different schedule and a different set of decision
rules, of course, the results generated by the process could
have been quite different. But repetition and experiment
with the process could begin to provide a deeper un-
derstanding of the different variables to which members
and customers portrayed by the data are especially sen-
sitive.

In the end, of course, AMEX and the SEC would still
have to face up to some hard ‘‘public interest’’ questions.
On some indicia, a proposed rate change may appear to
contribu to certain aspects of the “‘public interest” while,
according to other indicia, it appears to have an opposite
effect. When different elements of the public interest point
in different directions, a problem of balance or weighting
exists. Nothing in the CRI EXCHANGE DATA SYSTEM
can solve that difficult problem. That is a problem that will
have to be faced under any approach. But the CRI EX-
CHANGE DATA SYSTEM can help analysts estimate the
impact of different rate structures on each of several
specified aspects of the public interest. With data like these
in hand, the policymakers should be in a better position to
perceive the public policy implications of any rate structure
they are interested in, and to pick out that one which gives
a “package” of effects upon the public interest—item by

A-152

item, and overall—that is preferable, in their pecgment, to
any other.

V. Next Steps

With.. the CRI EXCHANGE -DATA SYSTEM
operational, AMEX is in a greatly improved position for
making reasonable, detailed judgments on the effects of
any proposed commission rate change. There is a con-
siderably more solid basis, for instance, for estimating such
effects as: changes in revenue to member firms; changes in
cost to the trading public; changes in member firm
facilities and services; changes in the attractiveness of
_ exchange markets relative to competing markets. Just how
much light the system contributes to each of these points
and others like them depends on how much the system is
elaborated. Some points will always be intrinsically more
difficult to explore than others; and judgment will continue
to be required for all of them. But the continued use and
improvement of the system cannot fail to enhance its utility
and its credibility.

What is especially needed for increasing the utility of the
approach is the following:

1. First and foremost, applying the analytical
approach soon and often;

2. Second, extending the body of trading data
that can be subjected to analysis, perhaps by
updating the transactions data collected by AMEX
in past periods from its members, perhaps by
incorporating the parallel NYSE transactions data
in the analytical system;

3. Third, extending the DATA SYSTEM itself
so that a more efficient computerized link is forged
between the transaction data on the one hand, and
data describing the member firms and their
facilities on the other. Especially important in the
second category are data that describe the financial
situation of such firms.

——_

A-153

If. these steps are taken, it is not hard to envisage a
process by which the capacity of the éxchanges and SEC to
monitor the exchanges’ , development will be greatly
enlarged. The possibility for regular rather than sporadic
reviews can be envisaged. And the possibility of moving the
rate-making process from the field of armchair speculation
into the area of objective analysis will be greatly enhanced.

A-154

Append

ixA

PUBLIC INTEREST CRITERIA
AND THEIR
RELATED MEASURES

Criteria

Preservation of a Central
Auction Market.

2. Improvement of Self-regulation

Measures

la.

Ib.

Ic.

id.

2b.

Place to place price dif-
ferences for individual
securities at a point in time.
Proportion of the trading in
listed stocks that takes place
at a single stock exchange.

Absolute number of stocks
and proportion of stocks that
are listed on the central stock
exchanges.

Number of broker-dealers
with access to and interest in
the central stock exchanges,
the geographic distribution of
their offices and the size of
their staffs.

. Number of instances of

misconduct, manipulation,
fraud and other abuses that
occur and that are reported.

Proportion of security
transactions that are publicly

reported.

. Regulatory programs of the

central exchanges;
disciplinary actions, com-
plaints resolved, records
maintained, training
provided, personnel involved,
expenditure.

. Regulatory programs of

broker-dealers; disciplinary
actions, complaints resolved,
records maintained, training

A-355

provided, personnel involved,
level of expenditures.

3. Maintenance of Public Pricing 3a. Number of buyers and sellers
in the market.
3b. Proportion of a stock out-
standing in the hands of the
few largest holders.

3c. Speed, extent and accutacy
with which price information
is disseminated.

4. Maintenance of Incentives to 4a. Income opportunities

Exchange Membership. associated with exchange
membership.

5. Maintenance of the Quality of Sa. The average size and

Central Markets. distribution of the price

change (as a percent of price)

in a security from one time
period to the next.

Sb. The number of transactions
in a security per period of
time. |

Sc. The length of time from
placing an order until its
execution.

6. Maintenance of Adequate 6a. The number of reports

Information and Related prepared, providing basic

Services to Investors. information, the consistency

of reports on particular

companies and the number of

/ ’ copies of each report made
available.

6b. Labor and other inputs
devoted to research.

6c. Number of registered

representatives.
7, Avoidance of Destructive 7a. Entry and exit rates of
Competition. broker-dealers into the in-
dustry.

8. Maintenance of Opportunities

9.

A-156
To. Number of broker-dealers

for Smaller Brokerage Firms.

Maintenance of Extra

Capacity.

Tc.

7d.

Te.

8b.

. Cost

offering services to each
group of customers (small
individual investors, large
individual investors and
institutions) and the degree of
concentration among broker-
dealers serving each group.

Differences among service
offerings of broker-dealers
serving each group of
customers.

Change in cost with each
additional unit of business in
the short-run and in the long

run. t

Cost of training and other
expenditures associated with
specializing resources for

entry.

‘ Number of small firms in the

industry and their geographic
distribution.

Variety of services provided
by small firms in the industry.
and convenience of
access to central markets by
small firms.

8d. Profitability of smaller

9a.

brokerage firms.

. Change in the population of

smaller brokerage firms.
Variation with market

volume of customer access
time to registered

representatives.

. Variation with market

volume in the execution time
of orders received by
registered representatives.

A-157

9c. Variation with market
volume in the reporting of
executed transactions.

9d. Variation with volume of the

~\
number of operational
failures.
10. Fair Treatment of Both Large '0#- Quantity and quality of
and Small Investors. services Offered large and

small investors.

10b. Commissions paid by large
and small investors.

11. Establishment of Lowest lla. Member firm profits on all
Commission Charges Con- business.

sistent with Other Public lib. Member firm profits on
each type of business.

Interest Criteria.

ee A-158

LETTER FROM HAMER H. BUDGE
DATED APRIL 2, 1970

Mr. Robert W. Haack, President
New York Stock Exchange

11 Wall Street

New York, New York 10005

Dear Mr. Haack:

In your letter of March 19, 1970 you submitted for our
review pursuant to Securities Exchange Act Rule 17a-8, a
proposed rule which would require member organizations
to impose a surcharge in the form of a service fee of $15 or
530% of the applicable commission, whichever is the lesser,
on orders of 1,000 shares or less. The Exchange states that
this service charge is needed to give interim financial relief
to the industry while the Commission considers the
proposals for longer term revisions in the existing rate
structure submitted by the Exchange on February 13,
1970.

In support of the proposed interim increase, the Ex-
change represents that a large number of its member
organizations which do a public business sustained sub-
stantial Ic in 1969 and that the situation has further
deteriorated \during the first quarter of 1970. Data ob-
_ tained by the Commission confirms the loss experience of
these firms. Past losses and the prospect of continued
financial drain have influenced many member firms to
impose limitations on their services to small investors.
Based on studies prepared by National Economic Research
Associates, Inc. as supplemented by more recent samplings
of member organizations, the Exchange estimates that a.
surcharge of $15 limited to 50% is required to provide
adequate brokerage services for small investors and to
retain needed capital within the securities business.

seneieeenesil

EOE OOO OL

—

A-159

The Commission is aware of the contribution of small
investors to the depth and liquidity of our trading markets
and considers it to be vital to the public interest that such
investors continue to be able to participate directly in
equity investment. We are also concerned with the
financial problems of the industry and the losses sustained
in the past year and during the first quarter of 1970. Ac-
cordingly, we will not object to the Exchange imposing an
interim surcharge on rates to provide emergency financial
relief while more fundamental alterations of the existing
rate structure can be considered. However, we believe such
action can be viewed as justifiable only if the service fee is -
to be imposed for a 90 day period only and will expire
thereafter. This self-liquidating factor would assure that
the increase will, in fact, be an interim measure. Its
continuance for more than one quarter will require a review
of the economic conditions, including transactions volume
levels, existing at that future time.

The Commission expressly predicates its non-objection
to the interim increase in charges upon its expectations that
the Exchange will take all steps necessary to assure that full
brokerage services for small investors are restored and that
transactions size and other limitations on such accounts
imposed in the last year by the Exchange’s membership will
be removed. We also expect that the Exchange will un-
dertake to make certain that the additional revenue
produced by the interim surcharge will be received by the
member firms obtaining the customer's order and will be
prudently employed by its member organizations to im-
prove their operations and financial position.

Lastly, we wish to emphasize that the Commission's
action is based on our understanding that immediate
financial relief is required. Our study of the existing
commission rate structure will continue and we shall also
monitor the operations of the interim fee arrangement. A
full examination of the proposals for longer term revisions

a

A-160

in the rate structure will be made as expeditiously as
possible. In this regard, the Commission expects that the
Exchange will promptly comply with our request to make
available all underlying data and materials required for

Sincerely,
_s/Hamer H, Budge

Dictated over the telephone by
Sheldon Rappaport, SEC - 4/2/70.

A-161

LETTER FROM RALPH S. SAUL DATED APRIL 2, 1970

Mr. Irving M. Pollack, Director
Division of Trading and Markets
Securities and Exchange Commission
Washington, D. C. 20549

Dear Mr. Pollack:

Enclosed for filing pursuant to Exchange Act Rule 17a-8
are three copies of new Rule 39 adopted by the Board
today, requiring member firms to impose a service charge
on all transactions executed on the Exchange for non-
members or allied members. This charge is to equal $15 for
each order but in no instance to exceed 50% of the present
non-member commission. :

On March 26, 1970, the Exchange submitted a
statement supporting the need for an increase in financial
revenue for its member organizations. The Exchange
wishes to make this rule effective on April 6, 1970 if the
Commission accelerates the filing period required by Rule
17a-8. ‘

The Exchange understands that if Commission approval
is granted, it is conditioned upon Exchange acceptance of
the conditions outlined in the letter of April 2, 1970 from
Chairman Budge to Mr. Robert Haack, President of the
New York Stock Exchange and as discussed with tle
Commission's staff.

If you have any questions, please call me.
Sincerely,

Ralph S. Saul

enclosures (3)
Dictated over telephone to
Mr. Sheldon Rappaport 4/3/70

RSS:rd

» A-162

Rule 396—Service Charge

In addition to the commission computed in accordance
with the provisions of paragraph (a)(1) of Section 2, Article
VI, of the Constitution each member or member
organization shall charge and collect upon the execution on
the Floor of the Exchange of any order for the purchase or
- sale for the account of a non-member or an allied member
of 1,000 shares or less, a service charge equal to not less
than the lesser of $15 or 50% of such commission. For the
purposes of this Rule, an order shall be deemed to include
all purchases or sales for one account of round lots or odd
lots or both of a single security, on the same day, pursuant
to a single order.

A-163

LETTER FROM SECURITIES AND
EXCHANGE COMMISSION DTD. 4/10/70

Mr. Ralph S. Saul, President
American Stock Exchange
86 Trinity Place

‘New York, New York 10006

Dear Mr. Saul:

This is to advese that the Commission does not object to
adoption by your Exchange of Rule 39 imposing on
customers’ orders in one stock on one day of up to 1,000
shares, including odd-lots which may be part of the order,
a service charge amounting to the lesser of $15 or 50% of
the minimum commission whichever is less. The Com-
mission’s non-objection and acceleration of the 21-day
period provided in Exchange Act Rule 17a-8 is conditioned
on the understanding that no member firm which
traditionally has accepted small customer accounts will
impose or continue any limitation on the size of a
customer's order or account and that on orders of 1,000
shares or less no customer will be charged fees in excess of
the minimum commission plus a service charge of the lesser
of $15 or 50% of the minimum commission. A further
condition is that any member firm which has charged
customers more than these amounts since the initial
operative date of your rule will refund such excess to its
customers.

The Commission’s non-objection also is conditioned on
the understanding that the firm obtaining the customer's
order (the “‘forwarder’’) is entitled to receive the entire
service charge but that it may share the service charge with
the member firm which executes and clears orders for it
either on an omnibus account basis or on a fully introduced
account basis; and that in no event shall the clearing or

carrying firm obtain a proportionate share of the service

A-164

charge exceeding the percentage of commissions obtained
by such firm pursuant to arrangements with the forwarder
which existed prior to the adoption of this rule.

Sincerely,
s/Ipving M. Pollack

Irving M. Polla

[Text truncated at 120,000 characters. The full text is on the page linked above.]

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0448%3A02. Public record. Not legal advice.