Amicus Curiae Brief — Gordon v. New York Stock Exchange, Inc.

Supreme Court brief1975

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I. THE DISTRICT COURT DECISION ...........

II. THE COURT OF APPEALS DECISION ........

THE INTEREST OF THE SECURITIES AND EX-

et erty thy eee eee eee eee

INTRODUCTION AND SUMMARY OF ARGUMENT ....

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II.

The Securities Exchange Act Established a Com-

prehensive Scheme of Regulation of Securities

Markets in Which the Securities and Exchange

Commission is Vested with Jurisdiction to Engage

. in Continuous Regulation of All Important Ac-

tivities of Stock Exchanges Including the Fixing

of Commission Rates ............... acetone

A. The Legislative History of the Act Evidences

that Congress in 1934 Recogmczed that Securities

Exchanges Possessed Anti-Competitive Features

and Fashioned a Unique Scheme of Supervision

by, the Commission to Effect the Goals of the

FO Ee EEE ER Bey COOL EP yy ee Ee Ee

B. The Exchange Act on Its Face Confers Juris-

diction on the Commission to Regulate Stock

Exchanges With Respect to All Important

OS ore CER ERAT cae Chae

Application of the Antitrust Laws to Exchange

Conduct Subject To Commission Jurisdiction

Would Be Repugnant to the Scheme of Regulation

Established By the Exchange Act ...............

A. Silver and Ware Require a Determination in

the First Instance of Whether the Exchange

Act’s Regulatory Scheme Will Work if Anti-

trust Laws Are Applied To Exchange Activity

Subject To Commission Jurisdiction Under

gt Say Sole ne Say See

B. The Exchange Act’s Regulatory Scheme Will

Not Work As Congress Intended if the Ants-

ii ~

Page

trust Laws are Applied to Exchange Activity

Respecting Matters Subject to the Commission’s

Jurisdiction Under Section 19(b) ........... 46

C. Antitrust Ezemption for Exchange Conduct

Subject to the Commission’s Jurisdiction Is

Compeiled by This Court’s Pronowunceménis

Concerning Implied Repeal of the Antitrust

Laws with Respect to Other Regulatory

| Se SE REP OTe ET 7 oP eee « «661

1. Ricci v. Chicago Mercantile Exchange is

consistent with recognizing an antitrust

exemption for exchange rules subject to Com-

mission jurisdiction ..............+.+. or |

2. Each of the elements which this Court has

considered necessary in order to find an

implied repeal of the antitrust laws is present _

SS aceboy schon eee ab eed vee ahs ene 58

D. The Public Record of Commission Supervision _

Over the Exchanges’ Commission Rate Struc-. ~

ture Illustrates the Necessity of Leaving Such

Matters Solely to the Jurisdiction of the Com-

mission ..... tee pe i ee 61

CE a 5S kts e cca a cnchekadd Kescius aa ne sve 80

CITATIONS

Cases:

Bowman v. Arkansas-Best Freight System, Inc.,

eS Ng ok on sc ha ede s tech vake tees 36, 37 -

California v. Federal Power Commission, 369

MM 5 os haa yas kod ees Cees .. 80, 45, 60

California Gas Producers Association v. Fed-

eral Power Commission, 421 F. 2d 422, certio-

rari denied, 400 U.S. 819 .................. 37

Carnation Co. v. Pacific Westbound Conference, .

PU OS ek as Sa ic 6, 30, 45, 60

Chicago Board Options Exchange, Inc., Securi-

ties Exchange Act Release No. 9985, CCH

Fed. Sec. L. Rep. $79,212 ................. 36

Cities of Statesville v. Atomic Energy Commis-

Ole, GEL FH. DR GED noc cccsciccccpesewccs 37

Delta Air Lines v. Civil Aeronautics Board, 455

é Bs OE ME KokwacdceeWel sukapceecsvisseves 48%

Federal Maritime Commission v. Seatrain Lines,

Inc., 411 U.S. 726 ............... 0008. 6, 36, 59

=, Georgia v. Pennsylvania R.R. Co., 324 US.

Oe by abc V Rw nhns hci kiko cuncavevenes 30, 45, 59

Gulf States Utilities v. Federal Power Commis-

ston, 411 U.S. 147 2... cc ccc cece 36

Hughes Tool Co. v. Trans World Airlines, Inc.,

GID AE TB sO nines usiccncenccsesences 30, 45, 59

Independent Broker-Dealers’ Trade Associa-

tion v. Securities and Exchange Commission,

442 F. 2d 132, certiorari denied, 404 U.S. 828 39

J. R. Williston & Beane v. Haack, CCH Fed.

Sec. L. Rep. 94,921 ...............05. 9, 46, 50

Kaplan v. Lehman Brothers, 389 U.S. 954 ..... 38

Kaplan v. Lehman Brothers, 250 F. Supp. 562,

affirmed, 371 F, 2d 409, certiorari denied, 389

U.S. 954 ..... Re ee ks Cass seund ocadeke nex: 46

McLean Trucking Co. v. United States, 321 U.S.

OF eva evky ce arenes 4sess Serre eee Te 37

Merrill Lynch, Pierce, Fenner & Smith, Inc. v.

Ware, 414 U.S. 117 .............. 14, et passim

Northern Natural Gas Co. v. Federal Power

Commission, 399 F. 2d 953 ....... (ieeasaas 37

Page

Otter Tail Power Co. v. United States, 410U.8.

Ue Sida dallkccabbinsecetks tabudeue 6, 30, 45, 60

. Pan American World Airways, Inc. v. United

States, 371 U.S. 296 .......... 30, 45, 59, 60, 61

PBW Stock Exchange, Inc. v. Securities and .

Exchange Commission, 485 F. 2d 718, certio-

rari denied, 416 U.S. 960 ................6. 39

Port of Boston Marine Terminal Ass’n v. Rede-

riaktiabolaget Transatlantic, 400 U.S. 62... 48

Ricci v. Chicago Mercantile Exchange, 409 U.S.

fee SORE le FE re Ee 38, 51, et passim

Rules of the New York Stock Exchange, In the

po a we | ae 7 Ee ee ee ee 35

San Francisco Mining Exchange, Securities Ex-

change Act Release No. 7870, CCH Fed. Sec.

L. Rep. 977,348, affirmed sub nom. San Fran-

cisco Mining Exchange v. Securities and Ex-

change Commission, 278 F’. 2d 162 .......... 32

Silver v. New York Stock Exchange, Inc., 373

US. B41 oo eee eee e eects eee eee 5, et passim

Stark v. New York Stock Exchange, Inc., 346

F. Supp. 217, affirmed per curiam, 406 F. 2d

WO io ov a hg hws hao bas edce chose 9, 47

Thill v. New York Stock Exchange, Inc., 433

F.2d 264, certiorari denied, 401 U.S. 994 .. 4, 8, 77

United States v. Chicago Board Options Ez-

change, N.D. Ill., No. 73 C 1085 ............ 50

United States v. Philadelphia Nat’! Bank, 374

as bs Vena 6, 30, 45, 49, 60

Page

United States v. Radio Corporation of America,

DO TE OE 6 iSiiiieic ccs iccsitztees 6, 30, 45, 60

United States v. Trenton Potteries, 273 U.S.392 7

Statutes and Rules:

Administrative Procedure Act:

Section 4(d), 5 U.S.C. 553 ...........066-- 39

Section 10(a), 5 U.S.C. 702 ..............-.. 39

Section 10(d), 5 U.S.C. 706 ................ 39

Commodity Exchange Act, 42 Stat. 998, as

amended, 7 U.S.C. 1, et seq. ...........4.- 52, 53

Communications Act of 1934, 48 Stat. 1080, as

amended, 47 U.S.C. 221 ..............+4-- 29

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

amended, 15 U.S.C. 78a, eé seq.

Section 2, 15 U.S.C. 78b ............---0+-- 2, 8

Section 3(a)(3), 15 U.S.C. 78c(a)(3) ...... 33

Section 5, 15 U.S.C. 78e .............. eee 31

Section 6, 15 U.S.C. 78f ...:........... 31, 36, 39

Section 6(a), 15 U.S.C. 78f(a) .......... 31, 62

Section 6(d), 15 U.S.C. 78f(d) ...... 3, 31, 36, 56

Section 8, 15 U.S.C. 78h .......... wxnwnea 31, 43

Section 9, 15 U.S.C. 78i ............2-05+ 30, 43

Section 10, 15 U.S.C. 78] .............066- 30, 43

Beakion-27.-26-T BG, THK 20. cv cccccccces 31, 43

Section 12(£), 15 U.S.C. 781(f) ............ 27

Boction 34, 70 UO, FOR ccs ycccescccccccs 43

Section 15A, 15 U.S.C. 780-3(a)-(n) (the

Maloney Act) ..........ccccccccces »o. 27, 28

Page

Section 17, 15 U.S.C. 78q ............00000- 43 .

Section 17(a), 15 U.S.C. 78q(a) ............ 34

Section 19(a), 15 U.S.C. 78e(a) ............ 31

Section 19(a) (1), 15 U.S.C. 78s(a)(1) .... 31, 32

Section 19(a) (2), 15 U.S.C. 788(a)(2) ...... 32

Section 19(b), 15 U.S.C. 788(b) ..,. 4, et passim

Section 19(b) (9), 15 U.S.C. 788(b) (9) -. 5, 32, 33

Section 19(d), 15 U.S.C. 78s(d) ............ 62

Section 21(a), 15 U.S.C. 78u(a) ...... 34, 62, 63

Section 25(a), 15 U.S.C. 78y(a) ............ 39

Rules under the Securities Exchange Act:

Rule 17a-8, 17 CFR 240.17a-7 ..02....6...0. 34

Rule 19b-2, 17 CFR 240.19b-2 ...:.......... 78

Rule 19b-3, 17 CFR 240.19b-3 .............. 38

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

U.8.C. 1, et seq.:

ROOAONE A WA Bic ieee ccc ass 3, et passim

Section 2, 15 U.S.C.2 .............. 3, et passim

Legislative Material:

Bills:

H.R. 7852, 73d.Cong., 2d Sess. ..v........... 17

H.R. 8720, 73d Cong., 2d Sess. ............. 17

H.R. 9323, 73d Cong., 2d Sess. ........ 17, 22, 23

S> 2693, 73d Cong., 2d Sess. ............ ras |

S. 3420, 73d Cong., 2d Sess................ 17, 22

Hearings:

Hearings Before the Senate Committee on

Banking and Currency on 8S. Res. 84 (72d

Cong.) and 8S. Res. 56 and S. Res. 97

(73d Cong.) 73d — Ist Sess. and 2d

ET ERE OPE TS ELE 18, et passim

Page

Hearings Before the House Committee on

Interstate and Foreign Commerce on H.R.

7852 and H.R. 8720, 73d Cong., 2d Sess. .... 18, 19

Hearings Before the Senate Committee on

- Banking and Currency on 8. 3255, 75th Cong.,

DT, a Fis his oa ei io kes cece > 28

Hearings Before the Subcommittee on Securi- —

ties of the Senate Committee on Banking,

Housing & Urban Affairs on 8. 3169, 92d

Cen TE TR. sic ek ce ve vecg pure vdene ngs 37

Reports:

H.R. Rep. No. 1593, 62d Cong., 3d Sess. (Pujo

TRRIEG). casceeurivissacws secs 19, 20, 21, 26

H.R. Rep. No. 1383, 73d Cong, 2d Sess. . 9, 22, 23, 46

H.R. Rep. No. 1838, 73d Cong, 2d Sess. .... 22, 25

H.R. Rep. No. 2307, 75th Cong., 2d Sess. .. 28, 29

S. Rep. No. 792, 73d Cong., 2d Sess. ........ 23

S. Rep. No. 1455, 73d Cong., 2d Sess. ........ 9

S. Rep. No. 1739, 74th Cong., 2d Sess. ...... 27, 28

Debates:

TOU, TG 65 hi ie Ee 8 22, 23, 24, 25

Te SI i cc Bic Ge cence enceceees 58

Documents:

Report Relative to Stock Exchange Practices,

73d Cong., 2d Sess. (Comm. Print) (Roper

GM oe ic eociin ee 15, 16, 17, 18

Securities and Exchange Commission, Report

. of Special Study of Securities Markets,

H.R. Doe. 95, 88th Cong. .....:.....- 34, 62, 66

viii

Securities and Exchange Commission, The

- Institutional Investor Study, H.R. Doe.

No. 92-64, 92d Cong., Ist Sess. .., . 64, et passim

Subcommittee on Securities, Senate Commit-

tee on Banking, Housing and Urban Af-

fairs, 92d Cong., 2d Sess., Securities Indus-

try Study (Committee Print) .......... 37, 65 —

Walter Gellhorn, ‘‘The! Administrative

Agency—A Threat to Democracy?’ in

Separation of Powers and the Independent

Agencies: Cases and Selected Readings,

91st Cong., 8S. Doc. No. 91-49 ........ eS

Securities and Exchange Commission Documents :

Publications :

Securities and Exchange Commission, State-:

ment on the Future Structure of Securities

Marhee. 0. 665... SReeexv hye ede 64, et passim

Releases: ci

Securities Exchange Act Release No. 7253 ... 34

Securities Exchange Act Release No. 8234... 35

Securities Exchange Act Release No. 8324 . . 63, 78

Securities Exchange Act Release No. 9007 . . 67, 77

- Securities Exchange Act Release No. 9148... 67, 68

Securities Exchange Act Release No. 9315... 63

Securities Exchange Act Release No. 9351. 68

Securities Exchange Act Release No. 9950 . . 35, 78

Securities Exchange Act Release No. 9985 .. 36

Securities Exchange Act Release No. 10206 . 69

Securities Exchange Act Release No. 10383 . 70

Securities Exchange Act Release No, 10560 . 35, 70,

Securities Exchange Act Release No. 10670 . 7

Securities Exchange Act Release No. 10751 .

- Securities Exchange Act Release No. 11019 .

Securities Exchange Act Release No. 11073..

Securities Exchange Act Release No. 11093 .

Securities Exchange Act Release No. 11203

pickae oukdwase ee cece en a6 cae 38, 57, 75, et passim

Miscellaneous:

Brief for the United States as "Amicus Curiae,

Gordon v. New York Stock ect C.A. 2,

a PE os hash rn cs che Cerise ens 27

Comments of the United States Department of

Justice, Proposal to adopt Securities Ex-

change Act Rule 19b-3 and 10b-22, Securities

Exchange Act File No. 4176 (December 10,

| ER PERE nn roe yor Tree 74

Eames, The New York Stock Exchange (1894) . 19

R. De Bedts, The New Deal’s SEC ; The Forma-

WOE FO ais nk noo yd 00S Cee bbw ho 6 oka ue 45, 17

Twentieth Century Fund, Inc., The Security

I ois eG ees ss akcce 20

Twentieth Century Fund, Inc., Stock Market

I ais Ca oo an Sewn ences 20

United States Department of Treasury, Public

Policy for American Capital Markets ...... 66

seuat

In the Supreme Court of the United States

OctoBeR TERM, 1974

3 No. 74-304

RicHarpD A. GORDON, ETC., PETITIONER

New York Stock EXxcHANGE, INC., ET AL.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

J BRIEF FOR THE UNITED STATES SECURITIES AND

EXCHANGE COMMISSION AS AMICUS CURIAE

OPINIONS. BELOW

The opinion of the court of appeals (436a)* is re-

ported at 498 F. 2d 1303. The opinion of the district

court is reported at 366 F. Supp. 1261.’

JURISDICTION

The judgment of the court of appeals was entered on

June 28, 1974. The petition for a writ of certiorari was

filed on September 19, 1974, and was granted on Novem-

ber 18, 1974. The jurisdiction of this Court rests on 28

U.S.C. 1254(1).

? References to the Appendix filed by petitioner are designated

* The opinion of the district court does not appear in the Ap»en-

dix filed by petitioner.

‘ 5

The Securities Exchange Act of 1934 (the ‘‘ Exchange

Act’’) was enacted, in large measure, to provide for the ;

regulation and control of this nation’s securities mar-

kets, which were found, as noted in Section 2 of the Act,

to be ‘‘affected with a national public interest’’ which

made it ‘‘necessary to make such regulation and con-

trol reasonably complete and effective.”

The comprehensive regulatory scheme of the Act

_ placed major emphasis on the stock exchanges, which

were and are the principal markets for equity securi-

ties, providing for the regulation of such exchanges,

and securities transactions executed on them, in a

variety of ways, including direct regulation by the

Commission, and the imposition upon the exchanges

of obligations to the public, as well as self-regulatory

duties, to be carried out under the supervision and di-

rection of the Commission.

The Commission will discuss the question whether

that scheme of regulation, by which the Commission

establishes policy for the governance of this nation’s

securities markets, should be superseded and disrupted

by collateral antitrust suits against exchanges subject

to the Commission’s plenary regulatory jurisdiction,

thus calling upon federal district courts to make iso-

lated policy judgments on vital aspects of complex

regulatory issues for which the Commission has re-

sponsibility.

At issue in this case is a particular, although signifi-

cant, exchange practice—the fixing of commission rates

—which has existed for 180 years, was recognized and

subjected to Commission control by the Congress, and

is now in the last stages of being phased out as a part

of an on-going major restructuring of the securities

markets under Commission direction and Congres-

sional oversight for nearly 15 years.

STATUTES INVOLVED

- The pertinent provisions of the Securities Exchange

_ Act of 1934 and the Sherman Antitrust Act are set

forth in the appendix, infra, pp. 84-93.

STATEMENT v

Petitioner, Richard A. Gordon, instituted this private

antitrust action in 1971 against respondents New York

. Stock Exchange, Inc. (‘‘NYSE’’), American Stock

Exchange, Inc. (‘‘AMEX’’), and two ‘‘representative”’

‘member firms of these securities exchanges,’ charging

that the exchanges’ practice of requiring their mem-

bers to charge non-members a fixed minimum commis-

sion rate for the execution of transactions on the ex-

change was a price-fixing conspiracy in violation of the

Sherman Act, 15 U.S.C. 1 and 2 (10a). As pointed out

by the Department of Justice, (DOJ Br.6) the plain-

tiff made other claims which are not before this Court.

The suit, which was brought by petitioner on his own

behalf and on behalf of a purported class of ‘‘small

investors,’”? sought both injunctive relief and treble

damages in the amount of $1.5 billion.

L THE DISTRICT COURT DECISION

On December 4, 1973, the district court granted

respondents’ motion for summary judgment and en-

’ The two member firms named as defendants in the complaint

were respondents Merrill Lynch, Pierce, Fenner & Smith, Inc., and

Bache & Co., Inc. Respondents NYSE and AMEX are national

securities exchanges registered as such with the Commission pur-

suant to Section 6(d) of the Exchange Act, 15 U.S.C. 78f(d).

tered an order dismissing the action for lack of subject

matter jurisdiction. 366 F. Supp. at 1267.

The district court ruled it lacked jurisdiction to

entertain petitioner’s antitrust attack on the defendant

exchanges’ fixed rate systems because ‘‘the practices

complained of are within the exclusive jurisdiction of

the Securities and Exchange Commission, that the

SEC, acting pursuant to Section 19(b) of the Ex-

change Act ..., has been actively regulating these

practices, and that, consequently, the practices are

exempt from the provisions of the antitrust laws... .”’

Id. at 1262-1263. The court held that ‘‘the fixing of

commissions falls squarely within the congressional

policy of exchange self-regulation embodied in the

1934 Act’’ and that ‘‘the power to fix commission rates’’

was placed ‘‘within the exclusive jurisdiction of the

Exchange, subject to Commission supervision.’”’ Id.

The district court therefore disagreed with the decision

in Thill Securitves Corp. v. New York Stock Exchange,

433 F. 2d 264 (C.A. 7), certiorari denied, 404 U.S. 994,

insofar as Thill has been read as holding ‘‘that an anti-

trust court has concurrent jurisdiction with the SEC

over all potentially anti-competitive practices and

rules .. .’’ of a national securities exchange. Jd. at

1267.

IL THE COURT OF APPEALS DECISION

On petitioner’s appeal, ‘the Commission and the Anti-

trust Division of the Department of Justice par-

ticipated amici curiae: the Commission supporting the

trial court’s judgment, the Department of Justice

urging reversal.

The Court of Appeals for the Second Circuit af-

firmed, stating that the requisite reconciliation between

the antitrust laws and the scheme of regulation embod-

ied in the Exchange Act must begin with an analysis

of this Court’s decision in Silver v. New York Stock Ex-

change, 373 U.S. 341 (439a). It reasoned that in Silver

the enforcement of an exchange rule was held subject to

antitrust scrutiny because of the absence of Commission

authority to review the particular exchange conduct

involved, and that this Court acknowledged in Silver

that ‘‘if there were Commission jurisdiction to review

a challenged [exchange] rule, a different case would

arise concerning antitrust exemption’’ (437a-438a).

The court of appeals concluded that this case was that

“different case,’’ since under Section 19(b)(9) of the

Exchange Act, 15 U.S.C. 78s(b)(9), supervisory

authority over the fixing of commission rates is

expressly vested in the Commission (440a-441a).

_ Finding that the exercise of antitrust jurisdiction

in Silver was deemed proper because, in the absence of

Commission jurisdiction, the assertion of judicial over-

sight would not result in a conflict ‘‘between agency

and court’’ and: the denial of antitrust jurisdiction

‘would have left no governmental body to perform the

antitrust function,’’ the court of appeals held that the

existence of Commission review power supported a

‘finding of antitrust immunity for the challenged ex-

change practice of fixing commission rates (441a).

The court of appeals cited additional support for

its ruling concerning antitrust exemption. First, re-

ferring to the test enunciated in Silver that repeal of

the antitrust laws is to be implied only to the extent

“necessary to make the Securities Exchange Act

work,’’ the court construed that test as necessarily con:

templating a ‘‘core of exchange self-regulation neces-

sary to make the 1934 Act work, and thus immune from

application of the antitrust laws’’ (447a). It deter-

mined from the language of Section 19(b) of the Act,

15 U.S.C. 78s(b), that Congress had defined in that

section those matters which it considered ‘‘fundamental

to achieving ‘the aims of the Securities Exchange Act’

. . and accorded the SEC authority to make what-

ever changes respecting those matters as are ‘necessary

or appropriate’... to effectuate those aims... .”’

(442a). It therefore concluded that, if a core of ex-

change self-regulation exempt from the antitrust laws

is to have any meaning, it must necessarily ‘‘have

reference to the practices enumerated in Section 19(b)

and in this instance to the fixing of reasonable rates of

commission’’ (442a). The court reasoned that if the

exchanges were subjected to ‘‘duplicative or incon-

sistent standards announced contemporaneously by

courts and Commission’’ with respect to matters enu-

merated in Section 19(b), the ‘‘inevitable consequence’’

would be to ‘‘render ineffective the supervised self-

regulatory scheme designed to accomplish the aims of

the Exchange Act (442a).

Second, the court of appeals noted that Congress’

grant to the exchanges of ‘‘unique self-regulatory

power ... was conditioned upon the creation of the

SEC, invested with broad discretionary powers equal

to the complex and changing nature of the problems

arising in the securities industry’’ (443a). The eourt

;

of appeals stated: ‘‘[A]s to several specific matters .

inextricably linked with [the Act’s purposes] . . . the

Commission was empowered by Section 19(b) to order

exchanges to make such amendments in their rules as

the Commission found necessary to carry out the pur-

poses of the Act’’ (443a). In this framework the court

of appeals reasoned that the regulation of the practice

of fixing commission rates, which was vested in the

Commission seven years after the holding in United .

States v. Trenton Potteries, 273 U.S. 392, 398, that

price fixing is a per se violation of the Sherman Act,

evidenced Congress’ view ‘‘that the exchange commis-

sion rate system bore crucially upon achievement of

the goals of the 1934 Act’’ (444a).

In light of the Commission’s jurisdiction to regulate

exchange rate fixing and of the congressional view that

_ exchange rate fixing was important to achievement of

the Exchange Act’s goals, the court below perceived

~ “gound policy considerations governing regulation of

~the securities industry’? which mandated ‘‘exemption

“from the antitrust laws with regard to fixing of mini-

mum rates of commission’’ (445a). It recognized that

effective regulation of this important practice would

be ‘‘too hazardous with two hands on the tiller’ (445a).

And it emphasized that, in contrast to this Court’s

acknowledged inability to assess price-fixing practices

under a rule of reason standard,* the Exchange Act

‘exhibits congressional confidence that the Commis-

‘ Citing United States v. Trenton Potteries, supra, 273 U.S. at

898.

sion will be more capable of resolving problems of this

nature’’ (450a).° ‘

Finally, the court of appeals—after observing that

‘*it would be difficult to maintain”’ that the effect of the

rule challenged in the Thill case is in any significant

respect different from the practice of commission rate-

fixing—stated that ‘‘to the extent our decision today

is inconsistent with T hill, we find ourselves constrained

to disagree with the holding there announced’’ (450a-

45la).

THE INTEREST OF THE SECURITIES AND

EXOHANGE COMMISSION

The Securities Exchange Act of 1934 was enacted

to provide ‘‘reasonably complete and effective’’ regu-

lation and control of transactions in securities as...

conducted upon securities exchange . .~. markets’’ and

of ‘‘practices and matiers related thereto. . . .’’ Sec-

tion 2 of the Act, 15 U.S.C. 78b. In establishing a

scheme of regulation over the stock exchange mecha-

nism, Congress recognized that the exchange markets

were ‘‘affected with a national public interest’ and

constituted a principal cornerstone of the national

economy. Id. It sought by the Act to restore and main-

tain investor confidence in the securities markets—

confidence considered vital to the economic welfare of

the country—through the enactment of provisions

which would protect public investors, insure fair deal-

ing in securities traded on exchanges and insure fair

| Se

.* The Court below also stressed that its decision ‘‘by no means

implies that Gordon at no time may have access to the courts’’ since

judicial review of action by an administrative agency is otherwise

available (45la; 498 F. 2d 1311),

ES OS SL TE TD

7 9

administration of such exchanges. See 8. Rep. No. 1455,

73d Cong., 2d Sess., p.5; H.R. Rep. No. 1383, 73d Cong.,

2d Sess., pp. 3, 5. Congress effectuated these purposes

through a statutory scheme under which the Securities

and Exchange Commission was vested with regulatory

authority over exchange activities.

As the federal agency responsible for administering

the Exchange Act, the Securities and Exchange Com-

mission is vitally concerned that its continued ability

to administer its congressional mandate and to formu-

late and effectuate a cohesive regulatory policy for the

securities industry is not crippled through unwarranted

application of antitrust standards and ad hoc judicial

decrees affecting that regulatory program.

Resolution in this case of the question of pre-emption

of the antitrust laws in favor of the Commission’s

jurisdiction will have a material impact upon the

effective exercise by the Commission of its supervisory

authority over securities exchanges, not just with re-

spect to stock exchange commission rates, but also with

respect to the entire range of exchange activities that

are subject to the Commission’s jurisdiction under the

Exchange Act. See, e.g., Stark v. New York Stock Ex-

change, 346 F. Supp. 217 (S.D.N.Y.), affirmed per

curiam, 466 F.2d 743 (C.A.2);J.R. Williston d& Beane

vy. Haack, CCH Fed. Sec. L. Rep. [Current Binder]

494,921 (S.D.N.Y.).

INTRODUCTION AND SUMMARY OF ARGUMENT

A basic purpose of the Exchange Act is to provide

for the regulation of the securities markets with partic-

ular emphasis on stock exchanges. As this Court

pointed out in Silver v. New York Stock Exchange Inc.,

373 U.S. 341, stock exchanges ‘‘perform an important

funetion in the economic life of this country’’ in that

they serve as an indispensable mechanism through

which corporate securities can be bought and sold.

Prior to the enactment of the Exchange Act these mar-

kets were largely unregulated. As the exchanges grew in

importance, the inadequacies of this approach and the

necessity of subjecting them to a comprehensive scheme

’ of federal regulation became more and more apparent

and culminated in the enactment of the Securities Ex-

change Act of 1934. As this Court put it in Silver, 373

U.S. at 351:

“It was, therefore, the combination of the enor-

mous growth in the power and impact of ex-

changes in our economy, and their inability and

unwillingness to curb abuses which had increas-

ingly grave implications because of this growth,

that moved Congress to enact the Securities Ex-

change Act of 1934.”’

The exchanges, as membership organizations, had

traditionally engaged in regulating the activities of

their members. The Exchange Act preserved this

pattern of self-regulation, but provided to a substantial

extent for supervision by the Commission, In certain

crucial areas, the Congress did not rely primarily upon

supervised self-regulation but either. granted to the

Commission direct regulatory authority, as in the case

of manipulative and deceptive practices, short selling,

insider trading, and other matters. In other essential

areas, Congress vested in the Commission plenary au-

thority to supervise and direct the self-regulatory activ-

ities of the exchanges through | a {unique scheme of

formal and informal procedures. Commission rates

were in this latter category.

Since the Stlver case involved exchange self-regula-

tion beyond the jurisdiction of the Commission, this

Court was not faced with a need to reconcile the objec-

tives of the antitrust laws with the purposes of the

Exchange Act in those areas where Congress did pro-

vide for Commission control. This Court carefully

pointed out in that case, 373 U.S. at 360:

“Should review of exchange self-regulation be

provided through a vehicle other than the anti-

trust laws, a different case as to antitrust exemp-

tion would be presented.’’

As the court below noted, this is that different case.

(440a-441a). The exchange practice of fixing commis-

sions, which has existed since 1792, has obvious anti-

competitive implications. On the other hand, until re-

cently this practice has been deemed significant in the

functioning of the exchanges, both in attracting mem-

bers to the exchanges and in contributing to bringing

orders to the exchange floor for execution by the auction

process. Congress recognized the existence of fixed

commissions but chose neither to outlaw that practice

nor to endorse it, but rather to bring it under the com-

plete control of the Commission.

In so doing, Congress recognized that the exchanges

were dynamic and changing institutions that should

not be frozen into a static statutory mold. Rather, Con-

gress chose to grant broad discretion and authority to

_the supervisory administrative agency—the Commis-

sion—to adapt the exchange mechanism to changing

needs.

The Commission has recently concluded that the

traditional exchange mechanism, including the rigid.

rate structure, has proved ill-suited to the needs of a _—

changing market influenced by the rise of institutional

investors and modern technology. In response to these

developments, the Commission has been implementing ,

over the last decade a major restructuring of the securi-

ties markets, including, as one of its constituent: ele-

ments, the phasing out of fixed minimum commissions.

This program, along' with numerous other changes, is

designed, among other things, to prevent the elimina-

tion of fixed commissions from having the disastrous

consequences which are feared by many.

The fundamental error of the Department of Justice

is that it views this case not as one involving a unique

regulatory scheme for a market, but as merely another

in a long line of cases concerning the application of the

antitrust laws to regulated companies and public utili-

ties. The Department would therefore make the deci-

sion in this case turn upon the presence or absence of

a ‘pervasive scheme’’ of ‘‘public utility type” rate

revulation. But the principles set forth in Silver and

other decisions of this Court for the reconciliation of

the unique scheme of regulation of the securities mar-

kets and the autitrust laws cannot be so simply avoided

and displaced by resort to a factor which is largely ir-

relevant. What is relevant here is not the standards

and procedures by which the Commission considers the

reasonableness of a particular rate, but rather whether

the plenary jurisdirtion of the Commission over ex- |

change practices such as rate fixing which significantly

affect the structure.and functioning of these vital mar-

kets shall be displaced and disrupted by ad hoc anti-

trust suits.“ Silver compels a finding of implied repeal

of the antitrust laws in this case, since application of

the antitrust laws to exchange rules subject to Com-

mission supervision and review would conflict with the

Commission’s jurisdiction and render ere the

Exchange Act’s regulatory scheme.

The wisdom of Congress’ grant of exclusive sashiate-

tion to the Commission to regulate the nation’s stock

exchanges and securities markets is illustrated by the

public record of Commission regulation of the fixed

commission rate system. That record of Commission

supervision and review—which involves formulation

and implementation of Commission regulatory policies

through both the formal and informal procedures con-

templated by the Act—discloses the complex and subtle

economic issues concerning the stock exchanges’ rate

systems, and substantiates the necessity for leaving

the regulation of exchanges and markets to the con-

tinuing and exclusive jurisdiction of the Commission.

ARGUMENT

I. The Securities Exchange Act Established a Com-

prehensive Scheme of Regulation of Securities

Markets in which the Securities and Exchange Com-

mission is Vested with Jurisdiction to Engage in

Continuous Regulation of all Important Matters

Respecting Stock Exchanges Including the Fixing

of Commission Rates.

** As we point out (pp. 38-39 infra), a person aggrieved by Com-

mission action with respect to exchange rules which may be anti-

competitive is entitled to judicial review otherwise than by col-

lateral attack in an antitrust court.

A close analysis of the regulatory scheme created -

by the Exchange Act and the proper application of the

principles governing reconciliation of the Exchange

Act with other statutory regimes enunciated by this

Court in Silver v. New York Stock Exchange, Inc.,

supra, 373 U.S. 341, and Merrill Lynch, Pierce, Fenner

& Smith, Inc. v. Ware, 414 U.S. 117, establish that, in

order for that regulatory scheme to work, and thus for

the congressional goals of the Act to be achieved, ex-

change conduct subject to the Commission’s super-

visory jurisdiction under the Act must be immunized

from antitrust attack.

In Silver and Ware, as well as in ether cases where

the accommodation of the antitrust laws with a federal

regulatory statute was. to be resolved, this Court be-

gan the process of reconciliation with a searching in-

quiry into the genesis and aims of the federal regula-

tory act. Thus, in order to resolve the issue of implied

repeal of the antitrust laws presented in this case,

we first examine the legislative history and framework

of the Securities Exchange Act.

A. The Legislative History of the Aci Evidences

that Congress in 1934 Recognized that Securi-

ties Exchanges Possessed Anti-Competitive

Features and Fashioned a Unique Scheme of

Supervision by the Commission to Effect ‘the

Goals of the Act.

* See, ¢.g., Federal Maritime Commission v. Seatrain Lines, Inc.,

411 U.S. 726, 732, 786-789; Otter Tail Power Co. v. United States,

410 U.S. 366, 373-74; Carnation Co. v. Pacific Westbound Confer- .

ence, 883 U.S. 218, 218-220; United States. v. Philadelphia Nat’l

Bank, 374 U.S. 321, 350-352 ; United States v. Bodio Corporation of

America, 358 U.S. 334, 339-346.

The Exchange Act grants to the Commission

broad jurisdiction to regulate the operations of the

nation’s securities markets. The legislative history

of the Exchange Act clearly evidences that in granting

this regulatory jurisdiction to the Commission, Con-

gress intended the Commission to possess a number

of regulatory tools, including supervisory authority

over the regulation of stock exchange operations so

that its policy-making functions would be complete and

effective. One of the features of exchange opera-

tions of which Congress was specifically aware in for-

mulating the Exchange Act and which was purposely

brought within the scope of the scheme of Commission

regulation under the Act was the exchanges’ practice

of fixing minimum rates of commission.

While Congress considered regulating stock ex-

changes on several occasions during the three decades

prior to 1934," the immediate impetus to the adoption

of the Exchange Act was the disclosure of serious

instances of irresponsibility displayed by exchange

members during 1929 and the early thirties." Early

in his first administration President Franklin Roose-

velt directed the formation of a committee, under the

chairmanship of Daniel C. Roper, then Secretary of

Commerce, to study regulation of stock exchanges.’

™See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware,

supra, 414 U.S. at 128, n. 9; see generally R. De Bedts, The New

Deal’s SEC ; The Formative Years, Ch. 1 (1964) [hereinafter cited

as ‘‘ De Bedts’’)}.

® De Bedts, pp. 9-29.

* Letter from the President of the United States to the Chairman

of the Senate Committee on Banking and Currency with an Accom-

panying Report Relative to Stock Exchange Regulation, 73d Cong.,

ee (Committee Print) [hereinafter cited as “‘Roper..

The report of this committee, the Roper Report,

specified two major imperatives that should be ad-,

hered to in any scheme for federal regulation of the

stock exchanges. The report first concluded that since

stock exchanges ‘‘do not present a static situation

susceptible to fixed standards’’ but rather present ‘‘a

highly dynamic, ever changing picture, subject to

untold and unknown possibilities and combinations

that are today unpredictable,’’ it would be inappropri-

ate “‘to place this complex and important mechanism

in a strait jacket.’’ Roper Report, p.6. Therefore, the

committee stated, ‘*. . . while certain provisions [to

remedy abusive practices on the exchanges] might be

included in any regulations, such provisions should not

be the only power of correction left open to an adminis-

trative agency [regulating exchanges], but it should

have broad discretion to operate directly on various

abuses as the future may prove them to exist.’’ Id.

The Roper Report further concluded, however, that

. it would be undesirable to ‘‘deprive’’ the exchanges

“of initiative and responsibility’? in dealing with

their members. Jd. at p. 8. Rather, in the opinion of

the committee, it appeared ‘‘distinctly better’’ to hold

an exchange ‘‘to a high degree of accountability for

the conduct of members’”’ in order to stimulate mean-

ingful exchange regulation of its members.

’ Both of these imperatives were accorded recogni-

tion in the committee’s recommendation for a system

of federal licensing of securities exchanges whereby

“all exchanges desiring a Federal license must _

adopt and submit to the proposed Stock Exchange

Authority for its approval, rules designed to com-

ply with the regulatory requirements outlined by

the proposed statute and with such rules and

regulations as may be promulgated by the pro-

posed stock exchange authority thereunder. Fur-

thermore, as a condition of retaining a license

an exchange would be required to abide by and

enforce such regulatory requirements and such

rules and regulations. Any exchange would be

permitted to adopt any other or additional rules

and regulations not inconsistent with the regula-

tory requirements outlined by the statute or the

rules and regulations promulgated by such pro-

posed Stock Exchange Authority.”’ Roper Report,

p. 11.

. Following publication of the Roper Report, legisla-

tion was introduced in both the House and Senate,”

which provided for the licensing and disciplining of

securities exchanges, and vested broad discretionary

authority in the regulatory agency over, in effect, the

entire range of exchange operations (Doc. App.

1-8)." This grant of broad authority to the federal

10 For a description of the history of the drafting of the Exchange

Act, see De Bedts, Ch. IIT.

11 The Exchange Act was originally introduced as H.R. 7852, 73d

Cong., 2d Sess. and S. 2698, 73d Cong., 2d Sess. Following exten-

sive hearings, these bills were revised and reintroduced as H.R.

8720, 78d Cong., 2d Sess., H.R. 9323, 73d Cong., 2d Sess. and Ss.

3420, 78d Cong., 2d Sess. In amended form, H.R. 9323 and S. 3420

became the Securities Exchange Act.

12 See H.R. 7852 and S. 2693, Sections 5 and 18(c) ; H.R. 8720,

Sections 5 and 18. Pertinent sections of these bills, as well as other

relevant publicly-available materials are set forth in the Docu-

mentary Appendix accompanying this brief. References to mate-

regulating agency contained in the early drafts of the

legislation, received both support * and criticism “ dur-

ing the congressional hearings held on these bills. The

principal criticism raised was that these bills would

impose greater federal regulation of the exchanges than

had been contemplated in the Roper Report, providing

for what one critic characterized as ‘‘not regulation

but domination.’’** In fact, the drafters of the legisla-

tion acknowledged that they had struck a different

balance with respect to the extent the federal agency

would be empowered to take the regulatory initiative

than had the Roper Report, since the bills would give

the Commission power ‘‘to step in and prescribe the

rules under which the exchange shall operate in practi-

cally all particulars ... .’’*”” This regulatory scheme

was justified, it was argued, on the ground that it was

rial contained in the Documentary Appendix are cited as (‘‘Doc.

App. ="):

18 See Hearings Before the Senate Committee on Banking and

Currency on S. Res, 84 (72d Cong.) and S. Res. 56 and S. Res. 97

(73d Cong.), 73d Cong., Ist and 2d Sess. [hereinafter cited as

‘*Senate Hearings’’], pp. 6868 (Statement.of Herman Kinnicutt,

member of Investment Bankers Association, New York, N.Y.),

7256 (Statement of A. Verle Shaw).

%* See Hearing before the House Committee on Interstate and

Foreign Commerce on H.R. 7852 and H.R. 8720, 73d Cong., 2d Sess.

[hereinafter cited as ‘‘House Hearings’’], p. 227 (Statement of

Richard Whitney, President of the New York Stock Exchange) ;

Senate Hearings, pp. 6638-39 (Statement of Richard Whitney,

President of the New York Stock Exchange), 6901-6915 (State-

ment of Frank R. Hope, President of the Association of Stock

Exchange Firms).

4° See Senate Hearings, pp. 6638-39; House Hearings, p. 227.

16 See House Hearings, pp. 26-27 (Statement of Hon. H. M.

Landis, Commissioner, Federal Trade Commission).

™ Senate Hearings, p, 6566 (Statement of Thomas G. Corcoran).

necessary to empower the Commission to step in, in the

event the Commission finds the metkod of operation

being undertaken by the exchange unsatisfactory to it

and to this end the Commission should have a power

of intervention short of revoking an exchange’s

_ license.”

It was in this context—a debate on the proper bal-

ance that ought to be struck—that the Congress specifi-

cally focused on the fact that the stock exchanges had

anti-competitive features and that any federal regula-

tion of the exchanges should involve regulation of

these features, including in particular, the exchanges’

practices of fixing minimum commission rates. Thus,

the practice of fixing minimum commission rates was

described in the congressional hearings,” and the ap-

18 Senate Hearings, pp. 6566-6570 (Statement of Thomas G.

Corcoran).

18 See Senate Hearings, pp. 6075, 6080; House Hearings, pp.

320-321, 423.

The practice of fixing commission rates on stock exchanges in the

United States is generally traced back to the so-called Buttonwood

Tree Agreement of Wye. See Eames, The New York Stock Ex-

change, p. 14 (1894).

In 1912 and 1913, a subcommittee of the House Committee on

Banking and Currency, 62d Congress, made an extensive investiga-

tion of stock exchange operations. The resulting report of this

committee—H.R. Rep. No. 1593, 62d Cong., 3d Sess., known as the

Pujo Report after the Chairman of the subcommittee—specifically

dealt with the NYSE’s practice of commission rate fixing, noting

that:

‘‘The rule is rigidly enforced by suspension from one to five

years for a first violation and expulsion for a second. . . . The

acknowledged object is to prevent competition amongst the

members. ’’

Pujo Report, p. 39. The Pujo Report advised against any congres-

sional action proscribing this practice because, inter —_— the

subcommittee believed -

i742

propriateness of federal regulation of the exchanges’

fixed rate system was the subject of discussion during

those hearings.” For example, one of the leading au-

thorities of the time on stock exchange operations,

“*the present rates to be reasonable, except as to stocks, say, of

$25 or less in value, and that the exchange should be protected

in this respect . . . against a kind of competition between mem-

bers that would lower the service and threaten the responsibility

of members. A very low or competitive commission rate would

also promote speculation and destroy the value of membership.’’

Pujo Report, pp. 115-116 (emphasis added).

The conventional wisdom concerning the propriety of the fixed

commission rate system was the same at the time of the enactment

of the Securities Exchange Act. Thus, a comprehensive study of

the operations of the exchange market published in 1935 made the

following observation with respect to the fixed rate system:

‘‘ Among the provisions [of the NYSE’s rules and constitution]

specifically regulating the brokers in their relations with each —

other, there is the requirement of minimum commission charges.

This serves the double purpose of making unfair competition

among brokers punishable and of providing better and cheaper

service to the public. The prohibition against splitting commis-

sions has served to do away, in part at least, with unnecessary

middlemen who are beyond the control of the Exchange. It has

also kept the larger part of the brokerage business in the hands

of the brokers rather than permitting it to drift into the hands

of banks.’’

The Twentieth Century Fund, Inc., The Security Markets, p. 226

(1935) (emphasis added).

An earlier publication of the Twentieth Century Fund’s find-

ings, Twentieth Century Fund, Stock Market Control (1934), was

repeatedly relied upon in the drafting and consideration of the

Securities Exchange Act. See, ¢.g., Senate Hearings, p. 6467; 78

Cong. Rec. 8031-8032 (remarks of Mr. Pettengill), 8180, (remarks

of Senator Fletcher), 8395 (remarks of Senator Barkley).

*° Compare Senate Hearings, p. 6868 (where the witness recom-

mended against giving the federal regulatory agency ‘‘control over

commission charges’’ on the ground that such control ‘‘must be left

as [a matter] of self-preservation to the exchanges and their

members’’) with id., p. 7705.

Samuel Untermeyer, who was chief counsel to the Con-

gressional committee which wrote the Pujo Report

(discussed note 19 supra) made the following recom-

mendations with respect to stock exchange rate fixing:

“While section . . . [18] of your bill [S. 2693]

would give the . . . Commission the right to pre-

scribe uniform rates of commission, it does not

otherwise authorizé the Commission to fix rates,

which it seems to me it should do and would do by

striking out the word ‘uniform.’ That would per-

mit the Commission to fix rates.

“The volume of the business’ transacted on the

exchange has increased manyfold. Great fortunes

have been made by brokers through this monopoly.

The public has no access to the exchange by way

of membership except by buying a seat and paying

a very large sumfor it. Therefore it is a monop-

oly. Probably it has to be something of a monop-

oly. But after all it is essentially a public institu-

tion. It is the greatest financial agency in the

world, and should be not only controlled by the

public but it seems to me its membership and the

commission charged should either be fixed by some

governmental authority or be supervised by such

authority. As matters now stand the exchange

ean charge all that the traffic will bear, and that

is a burden upon commerce.”’

Senate Hearings, p. 7705 (emphasis added). The bill

as enacted deleted the word ‘“‘uniform”’ as Mr. Unter-

meyer suggested, and substituted the word ‘‘reasona-

ble.” See, H.R. Rep. 1838, 73d Cong., 2d Sess., p. 19

(Conference Report).

The original bills were revised in response to the

criticisms and suggestions made in the hearings so

that the legislation, as reported out of the respective

House and Senate committees,” struck a balance some-

what more akin to the position expressed in the Roper

Report than was the position contained in the initial

version of the bills by leaving with the exchangés in the

first instance the responsibility to establish rules gov-

erning their operations but nevertheless subjecting the

exchanges to ¢he continuous authority of a federal

regulatory agency.}

Nevertheless, Congress emphasized that this grant

of self-regulatory responsibility was to be subject to

the continuous plenary jurisdiction of the Com-

mission. As the; House report explained, ‘‘the bill |

gives the Commission broad powers over the exchanges

to insure their efficient and honest functioning”’ be-

cause as economic forces affecting speculation converge

‘‘ypon the exchanges, the control of the exchange

mechanism is a necessary part of any effective regula-

tion.’’? H.R. Rep. 1383, supra, at p. 14.% To aid these

powers, exchanges seeking registration were required

to agree that they would continuously furnish ‘‘the

*: H.R. 9323, 73d Cong., 2d Sess. and S. 3420, 73d Cong., 2d Sess.

*# One of the basic purposes of the Exchange Act was the estab-

lishment of ‘‘an efficient, adequate, open and free market for the

purchase and sale of securities... .’’ (78 Cong. Rec. 8162 (re-

marks of Senator Fletcher) ) and control of the exchange mecha-

nism was regarded as essential to achieving that purpose. See 78

Cong. Rec. 7862 (remarks of Mr. Lea), 7864 (remarks of Mr’

Wolverton) ,-8161; 8168 (remarks of Senator Fletcher),

{

- saaeiemeatereneememnene ements

Commission with complete information concerning

[their] . . . organization, membership, and rules.’’ S.

Rep. No. 792, 73d Cong, 2d Sess., p. 15. And, as the

House Report further explained, ‘‘if the rules of the

exchange in any important matter are not appropriate

to insure fair dealing, [the Commission is empowered]

to order such changes in the rules after due notice and

hearings, as it may deem necessary.’’ H.R. Rep. No.

1383, supra, at p. 15 (emphasis added).

‘The sponsors of the legislation pointed out that it

was necessary throughout the bill to vest ‘‘broad dis-

cretionary powers’’ in the Commission because of the

‘‘complicated nature of the problems’’ dealt with in

the bill, and because the bill regulated a ‘‘field where

practices constantly vary and where practices legiti-

mate for some purposes may be turned to illegitimate

and fraudulent means.’’ H.R. Rep. No. 1383, supra, at

pp. 6-7. And the powers specifically granted the Com-

mission over exchange rules were characterized as

‘*quasi-legislative.’’ * :

The floor debates on H.R. 9323 and S. 3420 focused

on the nature and consequences of the broad super-

visory power that these bills would, if enacted, grant

the Commission over the exchanges’ rules. In the

House, concern centered around what is now Section

19(b) of the Act (then Section 18(b), H.R. 9323),

which empowered the Commission to act by rulemaking

to amend or alter the rules of an exchange, and the

fact that the bill did not provide for direct appellate

review of such Commission action. 78 Cong. Rec.

**78 Cong. Rec. 8091 (remarks of Mr. Lea) ; see also 78 Cong.

Rec. 7696 (remarks of Mr. Rayburn), 7862 (remarks:of Mr. Lea).:

8087-8093. In arguing that a procedure should have

been provided for judicial review of Commission ac-

tion altering or amending exchange rules, certain mem-

bers of the House stressed, among other things, that

the bill as drafted gave the Commission unreviewable

authority to fix commission rates at levels which could,

for example, be set so low as to put exchange members

out of business.”

During debate in the Senate, the bill was criticized

as granting the Commission authority over exchanges

that exceeded that necessary to achieve what some.

Senators perceived as the bill’s underlying purpose of

curbing dishonest and economically harmful manipula-

tive and speculative practices in connection with trad-

ing in securities.” An amendment was offered by

Senator Hastings of Delaware on the Senate floor to

what is now Section 19(b) of the Exchange Act, that

would have struck from that section of the bill the

enumerated matters presently subject to the Com-

mission’s jurisdiction under Section 19(b), and instead

would have limited the Commission, by order, to alter

or supplement the rules of an exchange to prevent

“excessive credit for speculation and . . . unfair prac-

tices on stock exchanges.”’ 78 Cong. Rec. 8592. Senator

Hastings explained that in his view Section 19(b) went

too far in empowering the Commission ‘‘to regulate

the internal operations of exchanges in many matters

which do not bear, either directly or even remotely

™% See 78 Cong. Rec. 8091 (remarks of Mr. Pettengill and Mr.

Wadsworth), 8092 (remarks of Mr. Dondero).

* See 78 Cong. Rec. 8283 (remarks of Senator Walcott), 8591-92

(remarks of Senators Hastings and Copeland).

upon the control of credit or unfair practices in the

purchase and sale of securities.”” 78 Cong. Rec. 8592.

One of fhe matters of internal operations specifically

pointed to was the fixing of commission rates.” Id.

In support of the Hastings ‘amendment, Senator

Copeland of New York argued that ‘‘the brokerage

business is not a public utility’’ and therefore that it

would be inappropriate to regulate the exchanges like

a public utility through the fixing of commission rates.

Id. Because of a ‘“‘determination’’ in the Congress ‘‘to

turn over the stock exchange and its whole operation

to a commission of the Federal Government,” Senator

Hastings predicted that the amendment would not be

adopted and, in fact, the amendment was rejected. Id.

While various provisions of the legislation were

modified in some respects prior to passage of the Act,”

the basic regulatory scheme described above was en-

acted.

In view of the foregoing discussion, we fail to under-

stand how the Department of Justice * can contend that

* Similarly, Senator Hastings had previously observed during

the floor debates that

‘*there is the distinct and definite provision that the proposed

commission may fix the rates of commission which the ‘stock

exchange members may charge for the services they render.

They cannot by rule and regulation govern it any longer. They

cannot by rule and regulation fix it at an amount, which they

believe will return to them a fair amount of money annually, or

that will increase their business. They may not use their judg-

ment about it any longer. It passes to the commission.’’ 78, Cong.

Rec. 8490.

*” See, ¢.g., H.R. Rep. 1838, supra, at p. 37.

** References to pages of the Brief for the United States As

Amicus Curiae, which has been filed by the Solicitor General on

Mr. Untermeyer’s testimony was the ‘‘only reference

to fixed commission rates of any significance’? in the

legislative history of the Exchange Act (DOJ Br. 30)

and that there is ‘‘nothing in the history ...

[of the Exchange Act that] reflects a purpose by

Congress to endorse’’ the practice of fixing minimum

commission rates (DOJ Br. 53). The legislative history,

as the court below noted (45la), clearly reveals that

Congress in 1934 viewed the fixed rate practice as a

‘“‘keystone’’ of the exchanges’ organization. Moreover,

there is further exhibited in the Exchange Act’s history —

__the deliberate determination by the, Congress not to

leave unregulated the anti-competitive aspects of ex-

' change operations, but rather to subject all important

matters, including the practice of exchange rate-fixing,

to the jurisdiction of the Commission. Thus, Congress

adopted Mr. Untermeyer’s recommendation to provide

the Commission with plenary authority over the ex- |

change’s anti-competitive practice of fixing rates (see

pp. 21-22, supra). And it did so in the context of

_ the apparent endorsement of the exchanges’ rate fixing

practices by the Pujo Committee, to which Mr. Unter-

meyer was chief counsel, and in the context of the con-

ventional wisdom in 1934 that such practices were de-

sirable.” In addition, in rejecting the Hastings amend* |

ment, (see pp. 24-25, supra), Congress manifested

its intention that the authority granted to the Com-

mission in Section 19(b) to alter or supplement ex-'

"behalf of the Department of Justice, are cited as “DOJ Br... . . ”

neh ee ae eerie tO me Span. te”

Department of Justice.” ,

* See note 19 supra.

change rules, where ‘‘such changes are necessary or

appropriate for the protection of investors or to in-

sure fair dealing in securities traded in upon such ex-

change or to insure fair administration of such ex-

change,’”’ should go beyond the mere prevention of

fraudulent and manipulative practices on the ex-

changes and should authorize the Commission to su-

pervise the exchange mechanism with respect to all

important matters—including the fixing of commission

rates.”

The conclusion drawn from the Exchange Act’s his-

tory, that Congress intended to superimpose a scheme

of regulation over entities it knew to have anti-com-

petitive features, is in no way mitigated by amend-

ments to the Exchange Act in 1936 and 1938, as the

Department of Justice asserts (DOJ Br. 32-35). Thus,

while the 74th Congress in 1936 did amend the Ex-

change Act by adding Section 12(f) to the Act, 15

U.S.C. 781(f), to permit trading of unlisted securities

on exchanges and thereby ‘‘create a fair field of compe-

tition among exchanges and between exchanges as a

group and the over-the-counter markets”’ (S. Rep. No.

1739, 74th Cong., 2d Sess., p. 3), Congress specifically

* The Department of Justice appears to have abandoned its

essentially unsupported assertion advanced in the court below that

the power of the Commission in Section 19(b) (9) was intended to

be limited solely to setting maximum commission rates in order to

protect investors from exhorbitant charges. Brief for the United

States as Amicus Curiae, Gordon v. New York Stock Exchange,

C.A. 2, No. 74-1048, at p. 26. Certainly, in view of the exchanges’

practice of fixing minimum commission rates, dating back to 1792,

an intention to exclude fixed minimum commissions from the

Commission’s supervisory jurisdiction would have been expressed

in clear and unequivocal terms.

explained that the purpose of the amendment was ‘‘to

allow each type of market to develop in accordance with

its natural genius and consistently with the public in-_

~ terest.’’ Id. This reference to the ‘‘natural genius’’ of

each type of market reflects Congress’ awareness of the ‘\

distinction between the competitive over-the-counter

market on the one hand and the exchange markets

which it had subjected to regulation in 1934.

Congress’ awareness of this distinction is more

clearly revealed in connection with the 1938 Maloney

Act Amendments to the Exchange Act which, contrary

to the Department of Justice’s contentions, do not

support the view that Congress intended the antitrust

laws to apply to exchange practices subject to the Com-

mission’s jurisdiction (DOJ Br. 35). The Maloney Act

provided for self-regulation of the over-the-counter

market through the establishment of associations of

over-the-counter market dealers—associations not yet

in existence when the Act was passed. In creating this

regulatory scheme, Congress recognized that self-regu-

latory associations could have an anti-competitive ef-

fect on the then existing ‘‘free and open’’ nature of the

over-the-counter market. H.R. Rep. No. 2307, 75th

Cong., 3d Sess., p. 8. The proponents of the Maloney

Act noted that, in contrast to the over-the-counter

market, stock exchanges ‘‘had certain features that

may be regarded as monopolistic because of their ex-

clusive nature,’’ and explained that the Exchange Act

represented ‘‘an attempt to bring those practices under

control.’”’ Hearings before the Senate Committee on

Banking and Currency on 8. 3255, 75th Cong., 3d Sess.,

p. 7. Since the over-the-counter market lacked any

anti-competitive aspects, Congress made clear in the

Maloney Act that the activities of registered associa-

tions were ‘‘to be consistent with the operation of free

and open markets.”” H.R. Rep. No. 2307, supra, at p. 8.

But the Exchange Act did not attempt to turn stock

exchanges into free and open markets; rather it sanc-

tioned the anti-competitive features of the exchange

markets subject to the Commission’s jurisdiction.

Finally, the Department of Justice refers to the

enactment by Congress in 1934 of the Communications

Act which provided an express antitrust exemption for

telephone company mergers approved by the Federal

Communications Commission (DOJ Br. 31, n.17). It

is contended that the inclusion of this express exemp-

tion in that act, which was being considered about

the same time as the Exchange Act, compels the con-

clusion that the absence of an express exemption in the

Exchange Act requires application of the antitrust

laws to matters subject to the Commission’s jurisdic-

tion under Section 19(b). But, as the Department of

Justice itself has asserted (DOJ Br. 47-48), it is likely

that Congress in 1934 did not think that the Sherma

Act applied to exchange practices, and thus would have

had no reason to provide for an express exemption.

Also. unfounded is the alternative assertion that, be-

cause Congress did not expressly consider the anti-

trust laws when formulating the Exchange Act, this

Court cannot now find an implied repeal of those laws

with respect to matters subject to the Commission’s

jurisdiction. The existence of antitrust immunity is

not dependent upon whether Congress specifically in-

tended to exempt exchange practices subject to Com-

mission jurisdiction from antitrust attack. Indeed,

if as the Department of Justice asserts (DOJ Br. 47),

the question of implied repeal depends simply on

finding a conscious congressional intention to exempt

regulated activity from the antitrust laws, it is diffi-

cult to understand why this Court has on so many occa-

sions engaged in exhaustive analyses of other regula-

tory schemes in determining whether to find an implied

repeal. See Georgia v. Pennsylvania R.R. Co., 324 U.S.

439; United States v. Radio Corporation of America,

358 U.S. 334; California v. Federal Power Commission,

369 U.S. 482; Pan American World Airways, Inc. v.

United States, 371 U.S. 296; United States v. Phila-

delphia Nat’l Bank, 374 U.S. 321; Carnation Co. v. -

Pacific Westbound Conference, 383 U.S. 213; Hughes

Tool Co. v. Trans World Airlines, Inc., 409 U.S. 237;

Otter Tail Power Co. v. United States, 410 U.S. 366.

As we shall show imfra, implied repeal of the antitrust

_laws arises here because the statutory scheme in the

Exchange Act simply will not work as Congress in-

tended if exchange conduct subject to the Commission’s

jurisdiction may be challenged under the antitrust laws.

B. The Exchange Act on Its Face Confers Juris-

diction on the Commission to Regulate Stock

Exchanges With Respect to all Important Mat-

ters.

The Commission was given responsibilities under the

Exchange Act with respect to numerous activities af-

fecting securities markets. Thus the Commission is

empowered to define and prohibit such matters as

manipulstion and deceptive practices (see Sections 9

and 10 of the Act, 15'U.8.0. 78i-and 78j) ; to require

1 a

brokers and dealers to meet adequate financial stand-

ards (see Sections 8 and 15(c)(3) of the Act, 15

U.S.C. 78h and 780(c)(3)); to set standards for

the utilization of exchange membership; and to regu-

late exchange specialists and floor traders (see Section

11 of the Act, 15 U.S.C. 78k). Further to implement

the Commission’s regulation of exchanges, Congress

also provided in Section 6 of the Act, 15 U.S.C. 78f,

for the registration of securities exchanges with the

Commission." Section 6(a), 15 U.S.C. 78f(a), pro-

vides, as a prerequisite to registration, that the regis-

tration statement filed by the exchange contain, inter

alia, ‘‘[a]n agreement . . . to comply, and to enforce

so far as is within its powers compliance by its members,

with the provisions of’’ the Exchange Act and the

Commission’s rules and regulations thereunder. Fur-

thermore, under Section 6(d), 15 U.S.C. 78f(d), the

Commission, before granting an application for regis-

tration, must find that an exchange is ‘‘so organized

as to be able to comply with the provisions of’’ the

Act and that its rules ‘‘are just and adequate to insure

fair dealing and to protect investors.’’ ’

Congress next provided, through Section 19(a) of

the Act, 15 U.S.C. 78s(a), that the Commission be

vested with jurisdiction to assure compliance by regis-

tered exchanges with their duties under the Act. Sec-

tion 19(a)(1), 15 U.S.C. 78s(a)(1), authorizes the

Commission to discipline an exchange within specified

limits for violating the Act or any rules thereunder, or

8 Section 5 of the Act, 15 U.S.C. 78e, makes it unlawful, except

in certain cases not relevant here, to effect any securities trans-

action on an unregistered exchange.

for failing ‘‘to enforce, so far as is within its power,

compliance therewith by a member or by an issuer of a

security registered thereon.’’* And pursuant to Sec-

tion 19(a)(2), 15 U.S.C. 78s(a)(2), the Commission

may discipline members and officers of registered ex-

changes.

Finally, and most important, in Section 19(b) of

the Act Congress conferred plenary powers upon the

Commission to supervise and oversee the nature and

structure of particular exchanges and exchanges gen-

erally. Under Section 19(b), if the Commission, after

following prescribed procedures, determines that

changes in an exchange’s rules are

‘necessary or appropriate for the protection of

investors or to insure fair dealing in securities

traded in upon such exchange or to insure fair

administration of.such exchange [it may] by rules

or regulations or by order .. . alter or supple-

ment the rules of such exchange’”’

with respect to ‘‘such matters as’’ twelve broadly enu-

merated subjects and “similar matters.’’ One of the

matters specifically enumerated—in Section 19(b) (9)

%2 The Commission has, pursuant to Section 19(a) (1), withdrawn

the registration of a national securities exchange which, among

other things, violated the Exchange Act and failed to enforce

compliance with the Act and with the exchange’s own rules by

members and issuers of listed securities. San Francisco Mining

Exchange, Securities Exchange Act Release No. 7870 (1966),

[1966-1967 Transfer Binder] CCH Fed. Sec. L. Rep. 77,343,

affirmed sub. nom. San Francisco Mining Exchange v. Securities

and Exchange Commission, 278 F. 2d 162 (C.A. 9).

—is ‘‘the fixing of reasonable rates of commission.

99 38 :

The procedures prescribed in Section 19(b) that

are to be followed in effecting changes in exchange

rules relating to rates of commission, have been aptly

summarized as follows:

“‘The first step is that an exchange adopts rules

fixing rates of commission. If changes are deemed

necessary or appropriate, the Commission is to

present an appropriate request in writing for

specified changes. Compliance by the exchange

presumably ends the matter, but if the exchange

does not accede, the Commission is empowered,

after appropriate notice and opportunity for hear-

ing, ‘by rules or regulations or by order to alter

or supplement the rules of such exchange (inso-

far as necessary or appropriate to effect such

change)...’

In order to supplement its Section 19(b) authority

to regulate the rules of registered securities exchanges

*8 Congress’ inclusion of rate-fixing in Section 19(b)(9) is con-

sistent with another indicium of Congress’ intent to fashion Com-

mission regulation of exchanges around their essentially anti-

competitive practices. Thus, Section 3(a) (3) of the Act defines an

exchange member as

‘fany person who is permitted either to effect transactions on the

exchange without the services of another person acting as broker,

or to make use of the facilities of an exchange for transactions

thereon without payment of a commission or fee or with payment

of a commission or fee which is less than that charged the general

™ Securities and Exchange Commission, Special Study of Securi-

ties Markets, Pt. 2, p. 344 (1963), H. Doc. No. 95, 88th Cong.,

1st Sess.

and because that authority would be fostered by af-

fording ‘‘an opportunity for orderly Commission con-

sideration of exchange rules before they become effec-

tive,’”? the Commission in 1964 promulgated Rule

17a-8, 17 C.F.R. 240.17a-8, pursuant to Section 17(a)

of the Exchange Act, 15 U.S.C. 78q(a), which requires

regulated entities to file reports. See Securities Ex-

change Act Release No. 7253 (1964). The Rule re-

quires an exchange to file with the Commission “copies

of ... any proposed amendment or repeal of, or any

addition to, its rules not less than three weeks...

before any action is taken [by the exchange to adopt]

. . . such amendment.”’

It can therefore be seen that the Exchange Act con-

templates Commission supervision of exchange self-

regulation through a process having both formal and

informal aspects. Thus, the procedure set forth in

Section 19(b), which authorizes the Commission to

present a written request to an exchange to effect

changes in its rules, as well as the procedure set forth

in Rule 17a-8, affording the Commission an oppor-

tunity to examine proposed rule changes prior to their

adoption, results in continuous Commission participa-

tion in the process of formulating exchange rules and

amendments to exehange rules without the institution

of a formal rulemaking or adjudicatory proceeding

pursuant to Section 19(b)." In this process the Com-

mission necessarily exercises its statutory mandate to

insure that the exchange’s rules are consistent with

*5 The Commission’s authority is further supplemented by its

power to conduct public investigatory hearings pursuant to Sec. .

tion 21(a), 15-U.8.C. 78u(a).

——a eas

35 \

the purposes of the Act. This is precisely the way in

which Congress desired the ‘‘partnership between

government and private enterprise that marks the

design of the . . . Exchange Act... .”’ to operate.

Stlver v. New York Stock Exchange, supra, 373 U.S.

at 366.

~ It is also evident that, commencing from the initial

stage of registration of an exchange with the Com-

mission, the necessity and propriety of exchange rules

regarding the matters enumerated in Section 19(b),

including the fixing of commission rates, are subject

to the continuous jurisdiction of the Commission. And

while

‘the promulgation of rules concerning exchange-

required fixed commission rates is a matter that

Congress entrusted to the exchanges in the first

instance.’’ *

any exchange’s action affecting its commission rate

structure is also a matter which must comport with

Commission policy.

Under the public interest standard in Section 19(b),

the Commission has for over three decades recognized

that the national policy favoring competition is a

highly relevant factor in determining whether rules of

an exchange are ‘“‘necessary or appropriate.” Fur-

thermore, the standard governing the Commission’s

%* Securities Exchange Act Release No. 10560 (1973), CCH Fed.

Sec. L. Rep. 779,603 at p. 83,620.

57 See, ¢.g., In the Matter of the Rules of the New York Stock

Exchange, 10 SEC 270, 287; Securities Exchange Act Release No.

8234 (January 26, 1968); Securities Exchange Act Release No.

9950 at pp. 169-70 (January 26, 1973) [185 BNA Sec. Reg. and

actions under Section 6(d) of the Act in ordering ef-

fective an exchange’s registration involves the same

public interest test found in Section 19(b) and there-

fore, contrary to the view of the Department of Justice

(DOJ Br. 42), also requires Commission consideration

of competitive factors.

Indeed, in the Commission’s most recent public pro-

ceeding involving the registration of a national securi-

ties exchange—the Chicago Board Options Exchange ™

—under Section 6, the Antitrust Division of the

Department of Justice was an active participant in

the Commission’s proceeding and urged that ‘‘it would

be plainly contrary to the broad public interest in a

competitive economy’’ for the Commission to permit

the Chicago Board Options Exchange to have a fixed

minimum commission rate system.” The Commission

did in fact consider competitive factors in determining

to order effective the Chicago Board Options Ex-

change’s rules.”

L. Rep. (January 17, 1973)}. In Silver v. New York Stock Ezx-

change, supra, 373 U.S. at 364, n.16, this Court stated that an

exchange rule adopted at the direction of the Commission pursu-

ant to Section 19(b) would have to be ‘‘consonant with the anti-

trust laws.’’ See also Bowman v. Arkansas-Best Freight System,

Inc., 95 8. Ct. 438, 448; Gulf States Utilities v. Federal Power

Commission, 411 U.S. 747; Federal Maritime Commission v. Sea-

train Lines, Inc., supra, 411 U.S. 726.

** See Chicago Board Options Exchange, Inc., Securities Ez-

change Act Release No. 9985 (February 1, 1973), CCH Fed. Sec. L.

Rep. 79,212 at p. 82,669.

** See Comments of the United States Department of Justice,

im Proposed Rules of the Chicago Board Options’ Exchange, Securities

and Exchange Commission File No. 10-54-1 ‘(January 15, 1973),

_ p. 4. (Doc. App. 162, 165).

“See Chicago Board Options: Exchange, Inc., Securities Ex-

change Act Release No. 9985, supra, CCH Fed. Sec. L. Rep,

179,212 at p. 82,671.

Naeem aS

However, competition is not the sole factor the Com-

mission must consider in regulating exchange rules.

The scheme of regulation in the Exchange Act is the

‘‘frame of reference within which the Commission

operates; and the policy expressed in [that Act] must

be the basic determinant of its action.’’ ** Accordingly,

along with the national policy favoring competition, the

Commission must also be concerned with such questions

as the liquidity of the exchange markets, the ability of

the brokerage industry to raise capital for industry and

to provide efficient and effective service to investors.”

Pee

*1 McLean Trucking Co. v. United States, 321 U.S. 67, 79-80,

’ 85-88 (Interstate Commerce Commission); Bowman v. Arkansas

Best Freight System, Inc., supra, 95 8S. Ct. at 448; cf., California

Gas Producers Association v. Federal Power Commission, 421 F. 2d

422, 428-29 (C.A. 9), certéorars denied, 400 U.S. 819; City of States-

ville v. Atomic Energy Commission, 441 F. 2d 962, 987 (C.A. D.C.)

(Leventhal J., concurring) ; Northern Natural Gas Co. v. Federal

Power Commission, 399 F. 2d 953, 961 (C.A. D.C.). The legislative

history of the Exchange Act suggests that Congress intended that

the Commission, in exercising its Section 19(b) authority over

exchanges, look to the policies of the Act generally for a standard.

See 78 Cong. Rec. 8091 (remarks of Mr. Lea).

#2 Recognition of the need to balance these competing policy con-

siderations has motivated the congressional committees’ studying

the securities industry’s rate structure to endorse the Commission’s

program for a phased elimination of fixed rates. See Regulation of

Securities Trading by Members of National Securities Exchanges

and the Sale of Investment Advisers of Registered Investment

Companies, A Report of the Senate Committee on Banking, Hous-

ing and Urban Affairs to Accompany S. 470, Sen. Doc. No. 93-187,

93d Cong., lst Sess., at 3 (1973); Report of the Subcommittee on

Secursties, Senate Committee on Banking, Housing and Urban

Affairs, Securities Industry Study, 93d Cong. 1st Sess. (February

1, 1973) at 62. See also Hearings before the Subcommittee on Securi-

ties of the Senate Committee on Banking, Housing and Urban Affairs

on S. 3169, 92d Cong., 2d Sess., pp. 8, 11, 14 (Testimony of William

J. Casey, Chairman, Securities and Exchange Commission).

Thus, to the extent that changes in an exchange’s rules,

including modification of the commission rate structure

of an exchange, may affect the ability of the exchange

to operate, the Commission must weigh the continued

viability of the exchanges against a policy considering

competition alone. Commission consideration of these

factors has been most recently illustrated in the Com-

mission’s adoption of Rule 19b-3, 17 CFR 19b-3, which

prohibits the fixing of commission rates by exchanges

after certain dates.”

' The Commission’s continuing jurisdiction to super-

vise exchange rules and practices with respect to the

matters enumerated in Section 19(b) and the fact that

the Commission weighs the national policy favor-

ing competition in its administration of its mandate to

supervise exchange rules and practice demonstrates

that Congress intended the Commission’s jurisdiction

over the matters enumerated in Section 19(b) to per-

form the ‘‘antitrust function.’’ “

Moreover, as the court of appeals recognized (451a;

448 F\, 2d at 1311), implied repeal of the antitrust laws

does not preclude a sufficiently-aggrieved person from

challenging exchange rules which may be anti-com-

petitive.”

** See Securities Exchange Act Release No. 11203 (January 23,

1975) ; see also pp. 75-80, infra.

“ Silver v. New York Stock Exchange, supra, 373 U.S. at 358 ; see

also Kaplan v. Lehman Brothers, 889 U.S. 954, 956 (Warren, C. J.,

dissenting from denial of certiorari) ; Ricci v. Chicago Mercantile

Ezchange, 409 U.S. 289, 302, n.13.

“ Appropriate judicial review is not by way of collateral attack

LE SAT TS LE I a OT ST NEE TE SIDI

II. Application of the Antitrust Laws to Exchange >

Conduct Subject To Commission Jurisdiction

Would Be Repugnant to the Scheme of Regula--

tion Established By the Exchange Act.

A. Silver and Ware Require a Determination in

the First Instance of Whether the Exchange

Act’s Regulatory Scheme Will Work if Anti-

trust Laws Are Applied To Exchange Activity

Subject To. Commission Jurisdiction Under

Section 19(b). awa

With the framework and goals of the Exchange

Act presented, it is now appropriate to consider “‘the

principles of stock exchange pre-emption delineated” “

by this Court in Silver v. New York Stock Exchange, ©

Inc., supra, 373 U.S. 341, and Merrill Lynch, Pierce,

Fenner & Smith, Inc. v. Ware, supra, 414 U.S. 117. ,

judicial check on Commission action is afforded by the fact. that

Commission orders promulgated under Sections 6 and 19(b) are

reviewable in a court of appeals pursuant to Section 25(a) of

the Act, 15 U.S.C. 78j(a). And, Commission rules adopted under

Section 19(b), as well as informal exercises of the Commission ’s

supervisory authority, such as a determination not to object to

the adoption of a proposed rule, have been held to involve “agency

action’’ which, under appropriate circumstances, is reviewable ‘in

a district court. See Independent Broker-Dealers’ Trade Associa-

tion v. Securities and Exchange Commission 442 F.2d 132, 141-143,

certiorari denied, 404 U.S. 482; cf., PBW Stock Exchange, Inc.

vy. Seourities and Exchange Commission, 485 F.2d 718, 726, 733

(C.A. 3), certiorari denied, 416 U.S. 964. See generally Sections

4(d), 10(a) and 10(d) of the Administrative Procedure Act, 5

U.S.C. 553(e), 702(a), (d). Thus, it cannot be said that implied

repeal of the antitrust laws in this area would leave the Com-

mission with unreviewable authority over exchange rules.

“ Merrill Lynch, Pierce, Fenner & Smith, Inc, v. Ware, supra,’

414 US. at 125.

“

In’ Silwer, the petitioners, who were not members of

the NYSE, brought an action under the Sherman Act

alleging that the NYSE ‘‘conspired with its member

firms to deprive petitioners of their private wire con-

nections and stock ticker service’’ provided to them by

members of the NYSE. 373 U.S. at 345. This Court

initially noted that since the NYSE’s action, in causing

member firms to disconnect petitioners’ wire connec-

tions and stock ticker, constituted a group boycott, |

“absent any justification derived from the policy of

another statute or otherwise, the Exchange acted. in

violation of the Sherman Act.” Id. at 347-349. Be-

cause the NYSE had taken action under color of

enforcing ‘‘its rules governing members’ transac-

tions and relationships with non-members,’’ purport-

edly ‘‘germane to performance of... [its] duty”

of self-regulation embodied in the Exchange Act (id.

at 356), the existence of a prima facie violation of the —

antitrust laws was found by the Court to be only “‘the

beginning, not the end, of inquiry.”” Id. at 349. As

this Court stated, the ‘‘antitrust aim of eliminating

restraints on competition’’ must be reconciled ‘‘with |

the effective operation of a public policy [embodied in

‘ the Exchange Act] contemplating that securities ex-

changes will engage in self-regulation which may well

have anti-competitive effects in general and in specific

applications.’’ Id. |

In effecting this recon¢iliation between the public

policy of the Exchange Act and ‘the aims of the anti- :

trust laws, this Court enunciated the “eniding princi-

ple’’ that, since:the Exchange Act “contains no ex- |

press exemption of the antitrust. laws,” and since

——

‘¢ ¢7i]t is a cardinal principle of construction that re-

peals by implication are not favored,’’’ an implied

repeal would be found ‘‘only if necessary to make the ,

Securities Exchange Act work, and even then only

to the minimum extent necessary.’’ Id. at 357. This

Court then distinguished between two aspects of the

' self-regulatory scheme embodied in the Exchange Act:

~ those self-regulatory activities of registered exchanges

over which the Commission has jurisdiction; and those

self-regulatory activities which are not within the Com-

mission’s jurisdiction. Jd. In this regard, the Court

observed that while the Commission has the ‘‘power

to request exchanges to make changes in their rules’’

and ‘‘to disapprove any rules adopted by an exchange,”’

it does not have ‘‘jurisdiction to review particular in-

stances of enforcement of exchange rules.’’ 373 U.S.

at 357. Accordingly, the particular exchange action

before this Court in Silver was believed by the Court

not to be subject to the Commission’s jurisdiction and

therefore the question of reconciliation in that case

* did ‘‘not involve any problem of conflict or coexten-

siveness of coverage with the agency’s regulatory

‘ power.”’ Id. at 358.

This Court further observed that the Exchange Act

contains no ‘‘form of review of exchange self-polic-

ing’’ as to its rules and therefore ‘‘[t]here is nothing

built into the regulatory scheme wiich performs the

antitrust function of insuring that an exchange will

not in some cases apply its rules so as to do injury to

competition which cannot be justified as furthering

legitimate self-regulative ends.’’ Id. at 358-359 (em-

phasis added). Furthermore, this Court ruled that ap-

plication of the antitrust laws to particular instances

of exchange enforcement of exchange rules was ‘‘not

at all incompatible with the fulfillment of the aims of

the Securities Exchange Act,’’ since ‘“‘under the aegis

of the rule of reason, traditional antitrust concepts

are flexible enough to permit the Exchange sufficient

breathing space within which to carry out the man-

date”’ of the Act. Id. at 359-360. This Court stated:

‘‘Applicability of the antitrust laws, therefore,

[rested in Silver] on the need for vindication of

their positive aim of insuring competitive free-

dom. Denial of their applicability [to the Silver

facts] would defeat the congressional policy re-

flected in the antitrust laws without serving the

policy of the Securities Exchange Act. Should

review of exchange self-regulation be provided

through a vehicle other than the antitrust laws, a —

different case as to antitrust exemption would be

presented.”’

Id, at 360 (emphasis added).“

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v.

Ware, supra, 414 U.S. 117 this Court recently reaf-

firmed and elaborated upon the principles of stock ex-

change pre-emption expressed in Silver. In Ware, this

* Finally, this Court concluded that the manner in which the

NYSE and its members acted to disconnect the wire connections

‘and stock ticker service to petitioners deprived the petitioners of

stich basic procedural safeguards that ‘“‘the Exchange [had] .. .

not even reached the threshold of justification under [the Exchange

Act] . . . for what would otherwise be an antitrust ‘violation.’’

The Court therefore sustained the petitioners’ antitrust challenge.

$73 U.S. at 861-365.

Court considered whether a NYSE rule requiring arbi-

tration of controversies arising out of the termination

by an individual of his employment with an exchange

member pre-empted California state law which afforded

an employee the right to litigate wage disputes arising

out of his employment. In its analysis, this Court

stressed that the.Exchange Act established a scheme

of supervised self-regulation in which the Commission

is provided with ‘‘direct supervisory’’ authority over

exchange regulation and exchange rules relating to

**12 designated ;subject areas and ‘similar matters’ ’’

. enumerated in Section 19(b). Id. at 129-30.“ These

matters, this Court reasoned, are germane to ‘‘the con-

gressional aim in supervised self-regulation . . . to

insure fair dealing and [the] . . . protection of in-

vestors from harmful or unfair trading practices’’

(ed. at 130), and ‘‘[a]s a consequence, some exchange

rules [i.e., those not within the scope of Section 19(b) ]

are not subject to direct Commission scrutiny.’’ Id.

at 129.° Such an exchange rule which is not ‘‘directly

** In addition to its Section 19(b) authority, it was also noted in

Ware that the Commission is given rulemaking authority in a num-

ber of other sections of the Act to promulgate rules which will

affect the conduct of exchange members. 414 U.S. at 129, n. 10. See

Sections 8, 9, 10, 11, 14 and 17 of the Exchange Act, 15 U.S.C. 78h,

78i, 78}, 78k, 78n and 7&q.

** Indeed, the Commission. urged this position in Ware in its

brief amicus curiae to this Court where it stated at pages 11-12:

‘*Exchange rules that are not substantially related to the statu-

tory objectives should not be considered paramount to otherwise

conflicting statutes. Compare Silver v. New York: Stock Ezx-

change, 373 U.S. 341. Rule 347(b), as applied here, cannot be

said to be related to the regulatory objectives of the statute in

any but the most indirect manrer, and therefore it is not the

type of exchange self-regulation within the scope and purposes

related to the Act’s purposes’’ because it is not ‘‘de-

signed to insure fair dealing and to protect investors,’*

this Court stated, ‘‘would not appear to fall under the

shadow of the federal umbrella: [of stock exchange

pre-emption]; it is instead, subject to applicable state

law.’”’ Id. at 131." .

Unlike the instant case, where the challenged con-

duct—the fixing of minimum rates of commission—is

directly within the scope of the Commission’s regula-

tory authority under Section 19(b), the self-regulatory

conduct at issue in both Silver and Ware was consid-

ered as not subject t6 the supervisory jurisdiction of

the Commission. This Court explained in Silver, how-

" ever, that the antitrust laws are repealed to the extent

necessary to make the Exchange Act work and stated

that ‘‘[s]hould review of exchange self-regulation be

provided through a vehicle other than the antitrust

laws, a different case as to antitrust exemption would

be presented.’’ 373 U.S. at 360."

of the Securities Exchange Act that might oust conflicting

provisions of state law. If the exchange rule in issue before this

Court did involve a matter sufficiently important to the Act’s

objectives to be within the ambit of the Commission’s pervasive

regulatory’ oversight as délineated by the Act, state law in con-

flict with the rule would be preempted’’ (footnote omitted.).

5 Since none of the subject matter categories of Section 19(b)

was found to suggest ‘‘that the Commission has review authority

with respect to a rule requiring arbitration of employer-employee

disputes’’ (414 U.S. at 135, n. 14), and since the relationship

between compulsory employer-employee arbitration and the mat-

ters enumerated in Section 19(b) was determined to be ‘“‘ ‘ex-

tremely attenuated and peripheral, if it exists at all,’ ’’ this Court

held that the exchange’s arbitration rule did ‘‘not require

pre-emption of contrary state law.’’ Id. at 185-137.

*! This Court’s application of the antitrust laws in Silver, in

spite of its observation that the Commission may have had au-

Furthermore, in limiting its inquiry in Silver to the

question of whether the NYSE’s action could in fact

be justified as effectuating a self-regulatory goal under

the Exchange Act, because Silver did “‘not involve any

problem of conflict or coextensiveness of coverage with

the [Commission’s] . . . regulatory power’’ (373 U.S.

at 358), this Court contrasted the inquiry it was making

- with the inquiry it had made in other antitrust exemp-

tion cases in which the antitrust laws potentially con-

flicted with an agency’s regulatory powers. Georgia v.

Pennsylvania RR: €o.,.supra,, 324 U8..439; United. eee

States v. Radio Corporation of America, 358 U.S. 334; ?

California v. Federal Power Commission, supra, 369

U.S. 482; Pan American World Airways, Inc. v. United

States, supra, 371 U.S. 296. In those cases this Court

did not resolve the question of implied repeal of the

antitrust Jaws on the basis of whether the challenged

conduet of the regulated entity, which was subject to

the agency's jurisdiction, was, as a matter of fact,

necessary to make the regulatory act work. Rather this

Court exarnined whether or not, as a matter of law, it

would be repugnant to the operation of the regulatory

scheme intended by Congress to apply the antitrust

laws to matters arguably subject to the agency ’s juris-

diction.”

thority to order the NYSE to adopt a rule ‘‘providing a hearing

and attendant procedures to non-members,’’ 373 U.S. 364 n.16, does

not establish, #8 the Department of Justize argues (DOJ Br. 19-20),

that the antitrust laws are to be applied to existing exchange rules

* gubject to the Commission’s jurisdiction. For, as explained above,

Silver involved @ particular instance of exchange conduct which

was not pursuant to any existing exchange rule; it did not involve

the validity of an exchange rule.

8 Accord, Otter Tail Power Co. v. United States, supra, 410

B. The Exchange Act’s Regulatory Scheme Will Not |

Work As Congress Intended if the Antitrust Laws

are Applied to Exchange Activity Respecting Mat-

‘ters Subject to the Commission’s Jurisdiction Un-

der Section 19(b).

It is the Commission’s position that reconciliation

of the antitrust laws with the regulatory scheme estab-

lished in the Exchange Act requires that where ex-

change rules are clearly subject to the Commission’s

jurisdiction the antitrust laws must be found to be

inapplicable. The Commission’s view is that in ordez

to make its regulatory jurisdiction over exchange rules

work in the manner intended by Congress, it is neces-

sary to pre-empt the antitrust laws.”

The regulatory scheme established in the Exchange.

Act was designed to provide regulation in an area

where ‘‘the complicated nature of the problems justi-

fied leaving much greater latitude of discretion with

the administrative agencies than would otherwise be

the case’’; ‘‘a field where practices constantly vary

and where practices legitimate for some purposes may

be turned to illegitimate and fraudulent means.’’ H.R.

Rep. No. 1383, supra, pp. 6-7. Congress thus felt justi-

fied in vesting in the Commission, ‘‘within constitu-

tional limitations, that measure of flexibility required

US. 366; Hughes Tool Co. v. Trans World Airlines, Inc., supra,

409 U.S..363; Carnation Co. v. Pacific Westbound Conference,

supra, 383 U.S. 213; United States v. Philadelphia National Bank,

supra, 374 U.8. 321. |

’** See Kaplan v. Lehman Brothers, 250 F. Supp. 562 (N.D. IIL,

1966), affirmed, 871 F. 2d 409 (C.A.7), certiorari denied, 389 U.S.

954. J. R,. Williston & Beane, Inc. v.. Haack, supra, (Current

Binder] CCH Fed. Sec. L. Rep. $94,921.

——E ss.

in dealing with so intricate a subject matter’’ (id.), and

accordingly granted to the Commission ‘‘broad discre-

tionary powers’”’ (id.)—powers to investigate the op-

eration of the exchange market, to review existing

exchange rules and to initiate prospective rules of

general or particular application. This authority to

formulate policy for the securities industry, and

thereby in effect to legislate, cannot be exercised

‘‘in a cursory or incomplete manner or without

having extensive hearings and examinations into

the subject matter, and without permitting those

interested, representing the public and groups

in the securities industry an opportunity for a

full expression of views.”’

Stark v. New York Stock Exchange, Inc., supra, 346

F. Supp. at 227.

Yet, if as the Department of J ustice argues, district

courts possessed jurisdiction under the antitrust laws

over exchange operations concurrent with that of the

Commission, the -whole regulatory structure of the

securities exchanges would be impaired. Enforcement

of the antitrust laws involves no question of regulatory

policy but merely application of existing standards to

adduced facts.* A district court ‘‘acting on a single,

isolated case-and-controversy record in a private suit’’

<< (T]he judicial function is traditionally to weigh the merits

general and continuing problem.’’ Walter Gellhorn, “The Ad-

ministrative Agency—A Threat to Democracy ?’’ at 517 in Separa-

tion of Powers and the Independent Agencies: Cases and Selected

Readings, prepared for the Subcommittee on the Judiciary of the

Senate Committee on the Judiciary, 91st Cong., 8. Doe. No: 91-49.

is simply not equipped to consider the broad economic

policies involved—the interrelationship of a particular

rule to the structure of the regulated industry, and the

implications of abandoning that rule. Cf., Port of

Boston Marine Terminal Ass’n v. Redsriaktiabolaget

Transatlantic, 400 U.S. 62, 69.

Moreover, were a district court to apply the neces-

sary-to-make-the-Act work standard to exchange rules

subject to Commission jurisdiction—in the manner

nei by Silver to operate with respect to exchange

conduct| dutside the scope of Commission authority—

the very purposes of Congress in vesting the Commis-

sion with supervisory authority would be frustrated.

What is necessary to make the Act work today may be

unnecessary or even coun‘er-productive tomorrow. A

period of experimentation may be required in order to

resolve whether an exchange’s rules aré appropriate

for present purposes,” even though there may be no

present answer to the question of appropriateness in

the long run. |

This inability of the district courts to perform the

regulatory function which Congress intended to impose

over exchange operations, requires the conclusion that

application of the antitrust laws to exchange rules

specifically subject to the Commission’s jurisdiction

would be repugnant to the Exchange Act. To make the -

Securities Exchange Act work, it is necessary, at the

minimum, that the Commisgion be able to perform the

policy-making functions expressly assigned to it by

that Act, in the application of standards set forth in

5° Cf. Delta Air Lines, Inc. v. Civil Aeronautics Board, 455 F. 2d

1340, 1845 (C.A. D.C.)

—E ss

that Act, through the procedures prescribed by that =

Act. The Exchange Act cannot be expected toworkas _

Congress intended if district courts may render ad hoc

decisions applying antitrust standards to matters in- ~

volving the very structure of the securities industry and

thereby pre-empt the Commission’s policy-making

functions. Antitrust jurisdiction would both (1) result

in the fashioning of national policy respecting securi-

ties exchanges in part by entities which are nut equipped

to perform that function as Congress intended it to be

performed and~(2) inevitably lead to conflicts and in-

consistencies in judgment between the Commission’s

determinations and the holdings of numerous antitrust

courts. Because of this ‘‘plain repugnancy between the

antitrust and regulatory provisions” (United States v.

Philadelphia National Bank, supra, 374 U.S. at 350-

351), the antitrust laws must be held to have been

impliedly repealed with respect to matters within the

Commission’s jurisdiction under the Act, and in par-

ticular with respect to the commission rate structure.

Similarly, as this Court observed in Silver, supra,

373 U.S. at 352, Congress intended, through the Ex-

change Act to leave with the exchanges ‘‘the initiative

and responsibility for promulgating regulations per-

taining to the administration of their... affairs’’ sub-

ject to Commission jurisdiction. See S. Rep. No. 792,

supra, at p. 13. Notwithstanding this congressional in-

tent, this Court felt, in Silver, that application of the

antitrust laws te exchange conduct not within the scope

of Commission supervisory jurisdiction would not

inhibit effective self-regulation because ‘‘under the

aegis of the rule of reason, traditional antitrust con-

cepts are flexible enough to permit the Exchange suffi-

cient breathing space within which to carry out the

mandate of the Securities Exchange Act.’’ 373 U.S. at

360. Application of the antitrust laws to conduct clearly

within the Commission’s ‘supervisory jurisdiction,

however, would inhibit the scheme of supervised self-

regulation.

Any meaningful exercise of self-regulation will, as

this Court recognized in Silver, 373 U.S. at 360,. likely

have some anti-competitive implications.” Thus, if, as

asserted by the Department of Justice (DOJ Br. 48),

the only antitrust umbrella afforded by Commission

jurisdiction occurs when the Commission affirmatively

promulgates a rule or order pursuant to Section 19(b)”

then the exchange could be expected, contrary to con-

gressional intent, to abdicate all but the most innocuous

of their self-regulatory responsibilities and leave aH

initiative to the Commission in order to avoid the risk

of substantial antitrust liability for engaging in self-

regulation outside the umbrella of a Commission direc-

tive.- Moreover, this risk of antitrust liability would

almost certainly result in the exchange’s resistance to

informal Commission requests and directions which,

in the Department of Justice’s view, would not pro-

vide any umbrella against antitrust attack for anti-

* See also J. R. Williston & Beane v. Haack, supra, CCH Fed.

Sec. L. Rep. 194,921.

®t Indeed, the Department of Justice does not, apparently, even

regard a formal Commission order registering an exchange and

approving its rules pursuant to Section 6, as providing immunity

from antitrust attack. See United States v. Chicago Board Options

Exchange, No. 73 C 1085 (N.D. Iil., complaint filed April 26, 1973) ;

DOT Br. 42.

competitive action. In consequence, the congressional

scheme which specifically contemplated that self-regu-

latory judgments would be made by the exchanges in

the first instance would be abrogated and the coopera-

tive partnership between public and private regulation

established in the Act would be seriously eroded.

C. Antitrust Exemption for Exchange Conduct Sub-

ject to the Commission’s Jurisdiction Is Compelled

by This Court’s Pronouncements Concerning Im-

plied Repeal of the Antitrust Laws with Respect to

Other Regulatory Schemes

1. Ricci v. Chicago Mercantile Exchange is con-

sistent with recognizing an antitrust exemption

for exchange rules subject to Commission juris-

diction

The Department of Justice recognizes that this Court

in Silver did not reach the question of antitrust im-

munity with respect to exchange rules and practices

subject to the Commission’s jurisdiction, but rather

noted that this question would present ‘‘a different

case.’’ 373 U.S. 360. The Department of Justice, how-

ever, says that Ricci v. Chicago Merchantile Exchange,

409 U.S. 289, is that ‘‘different case’? and relies

heavily upon that decision. This reliance is misplaced.

As the Chief Justice pointed out in his concurring

opinion in Ricci, this Court in that case did not resolve

the issue left open in Silver. As he said: ‘‘Indeed, the

Silver problem is not before us.”’ 409 U.S. at 308.

Ricci, like Silver, involved a private dispute between

the petitioner Ricci and an exchange, in that case the

% DOJ Br. 20.

Chicago Merchantile Exchange. Ricci, contending that

the exchange had improperly terminated his member-

ship in violation of the rules of the exchange, the

Commodity Exchange Act, 7 U.S.C. 1 et seq., and the

anti-trust laws, filed an action in the district court. The

district court dismissed the complaint, and on appeal

the court of appeals directed the district court to stay

further proceedings to permit administrative action by

the Commodity Exchange Commission. This Court af-

firmed. In so doing, this Court, like the court of appeals,

did not reach the question of antitrust immunity. All

that was involved was an issue of primary jurisdiction

over the particular dispute. This Court, 409 U.S. at 304,

said the issue in Ricci<‘seems to depend in the first in-

stance on whether the transfer of Ricci’s membership

was in violation of the Act for failure to follow ex-

change rules. That issue in turn appears to pose issues

of fact. . .’’” Insofar as Ricci is relevant at all to this

case, it tends to support not reject antitrust immunity

in the case at bar. ;

Essentially, this Court in Ricci affirmed reference to

the Commodity Exchange Commission because it be-

lieved that factual findings of the administrative

agency would ‘‘be of material aid in resolving the im-

” This Court, 409 U.S. at 305 n. 15 elaborated on these factual

issues as follows:

‘*Likely issues for the fact-finder are whether Ricci revoked the

transfer authorization before or after he was informed that his

membership was transferred ; whether the transfer authorization

was valid; whether Siegel had a lien against Ricci’s membership

because of its loan to Ricci for the purchase of a membership;

whether Siegel owed brokerage fees to Ricci; and if so, whether

ae en ee

bership purchase.’’

munity question.’’ 409 U.S. at 302. This was true he-

cause, if the agency detérmined that the action of the

exchange in terminating Ricci’s membership was a

violation of the rules of the exchange and therefore of

the Commodity Exchange Act” then ‘‘the immunity

issue will dissolve.’’? 409 U.S. at 306. If, on the other

hand, the agency were to find that the action of ‘the

exchange was in conformity with its rules, there would

then be presented a question as to antitrust immunity

which was “plainly substantial’’ 409 U.S. at 303,, and

the administrative decision would assist the court in

arriving “‘at the essential accommodation between the

antitrust and the regulatory regimes.’’ 409 U.S. at 307.

This Court concluded in Ricci that the question of

whether the Chicago Merchantile Exchange could ter-

rinate Ricci’s membership as a result of a dispute

concerning indebtedness, without incurring antitrust

liability, presented a ‘‘substantial’’ question as to im-

munity. In the light of this conclusion, the present

case involving, as it does, the viability of the Securities

and Exchange Commission’s authority to regulate the

structure and operations of the securities exchanges

pursuant to express statutory mandate, would seem to

present a clear case for such immunity.

The Commodity Exchange Act, 7 U.S.C. 1, et seq., requires a

‘‘eontract market,’’ such as the Merchantile Exchange, to have

rules, which must be filed with the Secretary of Agriculture, and

imposes a statutory duty upon such an exchange to enforce its own

rules. That Act also empowers the Commodity, Exchange Com-

mission to conduct administrative pioceedings for the purpose of

determining whether or not a commodity exchange is enforcing its —

rules and to impose sanctions if such a failure of enforcement is

found. It was for this type of determination that this Court re-

ferred Ricci’s dispute tothe agency. ;

The Department of Justice relies on Ricci for two

principal propositions. First, that the antitrust courts ~

rather than the administrative agency have authority

to decide whether antitrust immunity exists (DOJ Br.

17)” and secondly, that the issue of antitrust immunity

.ean be resolved only upon a ‘‘full record’’ because what

is involved is ‘‘an aspect of the rule of reason.’’”

(DOJ Br. 17, 24).

iicdiiahidsstailbvaiblich dee:ido aah: delidand*thed this

- Commission has exclusive authority to determine

whether there is antitrust immunity, but, on the con-

trary, we recognize that this question is properly before

this Court. Our position, of course, is that this Court

should decide—as have the courts below—that on the

circumstances relevant to this case immunity does exist.

_As to the second point, this Court did conclude in

Ricci that an administrative record as to the facts in-

volved in Ricci’s dispute with the exchange would be

“The Department of Justice relies particularly upon a foot-

. note in the Ricci opinion in which this Court referred to the fact

agg that there was no express grant of antitrust immunity in the

Commodity Exchange Act and concludes that Congress did not

intend the adjudscative authority given the Commodity Exchange

Commission to be a complete substitute for judicial enforcement

of the antitrust laws. (DOJ Br. 22) That proposition does not

support the contention that the Commission’s regulatory jurisdic-

tion over stock exchanges is to be superseded by the antitrust laws.

* The suggestion of the Department that under Silver the issue

now before this Court is ‘‘an aspect of the rule of reason’’ misé

reads the Silver decision (DOJ Br. 24). This Court indicated in —

Silver tliat, while no antitrust immunity existed ith the absence

of Commission power to review a particular exchangé exercise of

self-regulation, even in that situation, and only after that finding,

the rule of reason could be applied’ to permit the exchange ‘‘suf-

ficient breathing ‘space within which to carry out the mandate |

of the Securities Exchange Act.’’ 373 U.S. 360.

helpful to the antitrust court, although it did not sug-

gest that such a record was essential. In the case at —

bar, however, we believe that both of the courts below

by summary judgment properly disposed of the issue

as to whether the Commission’s express statutory au-

thority to regulate and supervise the stock exchanges

should be superseded and disrupted by antitrust chal-

lenge. There is not any real dispute as to the facts.

The exchanges do fix commission rates and have done

so for over 180 years, and there is no doubt as to the

Commission’s authority over that practice. The ques-

tion before this Court is not, as the Department of

Justice seems to suggest, whether the rates prevailing

at any particular time were reasonable or even whether”

it was necessary to have fixed rates at all under the

conditions prevailing at the time this plaintiff com-

menced his action. Rather, the issue is whether the

Commission’s jurisdiction over the subject of eommis-

sion rates should be preserved as a part of the compre-

hensive scheme for Commission regulation of the secu-

rities markets.

This point is vividly illustrated by the concession of

the Department of Justice that ‘‘If the SEC were to

order the exchanges to adhere to a fixed commission

rate system of some kind, uv antitrust liability could

arise.’”’ (DOJ Br. 48). A fixed rate system existed when

the Exchange Act was adopted, and Congress, as well

as the Commission, recognized its existence. No Com-

mission order was required to create such a system, but

the continuance of a fixed rate system was predicated

upon a formal order of the Commission issued in 1934

registering the defendant exchanges as national securi-

ties exchanges under Section 6 of the Exchange Act. As

we have observed earlier, any exchange seeking to be

registered as a national securities exchange in 1934

was required to file with the Commission copies of its

articles of incorporation, bylaws and all rules and regu-

lations—which included its rules requiring its members

to charge fixed commission rates on all transactions

effected on the exchange. The Commission, then, in

1934, after finding that the rules and regulations of

the defendant exchanges (including rules relating to

a fixed commission rate system) were*‘‘just and ade-

quate to insure fair dealing and to protect investors’’

exercised its jurisdiction under Section 6(d) of the

Exchange Act to register the exchanges by the issuance

of a formal ‘‘order.’’* 7

As we observe at some length in Part II D infra, the

Commission has exercised its jurisdiction over the fixed

rate system ever since. The Commission has conducted

studies and held hearings over the years to study the

fixed rate system as conditions changed in the securities

markets. The Commission initially responded to chang-

ing conditions in the securities markets by taking vari-

ous steps—including the informal procedures included

in its package of regulatory tools under the Exchange

Act—designed to modify the commission rate structure

without, at the same time, unnecessarily disrupting ex-

change operations or impairing investor protection.

Ultimately concluding that a fixed commission rate

system was no longer necessary or appropriate, the

Commission in 1975, by rule directed the exchanges to

** See Order of Commission issued to NYSE, (September 28,

1934) (A-238). In its order the Commission also specifically made

reference to its power ‘‘under Section 19 and other sections of said

Act’’ to alter or supplement rules of the exchange (A-239),

terminate that system, thus in effect ordering them not

to adhere to such a system, a result which the Depart-

ment of Justice now applauds. Securities Exchange

Act Release No. 11203 (January 23, 1975) (Doc. App.

109).

Thus, it is clear that the fixed commission rate system

of the defendant exchanges was initially approved by

the Commission by formal ‘‘order”’ in 1934, has been

consistently approved, modified and altered by the

Commission through its less formal regulatory tools

during the intervening 41 years, and has culminated in

1975 through the issuance of another formal ‘‘order’’

by the Commission. In view of this history of the

Commission’s exercise of its statutory jurisdiction over

the practice of fixed commission rates, it is particularly

difficult to comprehend how the Department of Justice

can now urge application of the antitrust laws to this

practice and at the same time concede that ‘“‘no anti-

trust liability could arise’’ if the SEC ‘‘were to order

the exchanges to adhere to a fixed commission ratc

system.’’ DOJ Br 48.

The foregoing demonstrates the Department of Jus-

tice’s misplaced reliance on Ricci. In this case there

exists specific statutory jurisdiction by an administra-

tive agency over an important aspect of a regulatory

scheme, which is to be, and has been, exercised through |

formal orders and other regulatory means specifically

-eontemplated by the Act. There simply are no facts

needing resolution by a trier of fact. What we have

here is a question of law—whether there is a plain re-

pugnancy between the antitrust laws and the regulatory

scheme embodied in the Exchange Act—precisely the

issue of implied repealer this Court said in Ricci would

be reached after the factual issues were resolved.“

2. Each of the elements which this Court has con-

sidered necessary in order to find an implied

repeal of the antitrust laws is present here.

The Commission’s position, that exchange rules spe-

cifically subject to its jurisdiction are immune from

antitrust attack, is in harmony with this Court’s past

precedents. An examination of this Court’s decisions

regarding implied repeal of the antitrust laws with

respect to other regulatory schemes makes plain that

repugnancy between the antitrust laws and the regu-

latory scheme turns upon the existence of two elements

attendant to the regulatory scheme; both of these ele-

ments are present in the Exchange Act.

First, this Court has required that the conduct chal-

lenged under the antitrust laws be subject to the juris-

“Both the majority and dissent suggested in Ricci that the

jurisdiction of the agencies established under the Commodities

Exchange Act was so limited that that regulatory scheme could

not be viewed as a substitute for the application of the antitrust

laws. 409 U.S. at 302, n. 13, 312-313. As we have shown above,

the jurisdiction of the Commission established under the Securities

Exchange Act to supervise the rules of securities exchanges is

plenary and therefore markedly different from the regulatory

scheme respecting commodities exchanges existing at the time of

the Rices dispute. Indeed, because it viewed the regulatory scheme

over commodities exchanges, which operated at the time of the

Ricci dispute, as inadequate, Congress has recently created ‘‘an

agency comparable in stature and responsibility to the Securities

and Exchange Commission’ to regulate more completely com-

modities exchanges. Senate Committee on Agriculture and Fores-

try, The Commodittes Futures Tradtny Commission Act of 1974,

98d Cong., 2d Seas} p. 2 (Committee Print); see also 120 Cong.

Rec. 2924, 2928.

diction of the regulatory agency to supervise and

review. Thus, in Pan American World Airways, Inc. v.

United States, supra, 371 U.S. at 305, in finding an

implied repeal, this.Court specifically noted that the

“facts charged ... are precise ingredients’’ of the

administrative agency’s authority. On the other hand,

where this Court has found that the regulated entity’s

anti-competitive conduct is outside the scope of agency

supervisory jurisdiction vested by a regulatory statute,

it has refused to recognize an implied repeal of the

antitrust laws. See Georgia v. Pennsylvania R.R. Co.,

supra, 324 U.S. at 456-457; Silver v. New York Stock

Exchange, supra, 373 U.S. 341; see also Federal Mari-

tune Commission v. Seatrain Lines, Inc., supra, 411

U.S. 726 (where a one-time rate fixing agreement was

found to be outside the scope of the Federal Maritime

Commission’s express authority to grant antitrust im-

munity to ongoing rate fixing agreements between ship-

pers, and hence subject to antitrust attack) ; compare

Hughes Tool Co. v. Transworld Airlines, Inc., supra,

409 U.S. 363 (finding an exemption from the antitrust

laws with respect to conduct subject to the jurisdiction

of the Civil Aeronautics Board) with id. at 389 (dis-

senting opinion urging that the challenged conduct in

that case was outside of the CAB’s ‘‘substantive man-

date’? to review). As the preceding analysis of the

structure and policy of the Exchange Act makes clear,

the Commission was expressly granted continuing su-

pervisory jurisdiction over any important matters re-

lating to stock exchanges including, specifically, the

fixing of commission rates.

Second, this Court has refused to find an implied

repeal of the antitrust laws, even where a regulatory

agency has jurisdiction to supervise the challenged

conduct and even when in the course of exercising that

jurisdiction the agency is required to consider com-

petitive factors, if in the context of the regulatory

scheme the agency’s jurisdiction is not intended to be

a substitute for the antitrust function. See California

v. Federal Power Commission, supra, 369 U.S. 482;

United States v. Philadelphia National Bank, supra,

374 U.S. 321; Otter Tatil Power Co. v. United States,

supra, 410 U.S. 366. But where it has found that the

question of whether the challenged conduct ‘‘meet([s]

the standards of competition and monopol¥ provided

by the [regulatory] Act is peculiarly a question for

the administrative agency,’’ then in order to attoid the

collision of two regimes which might result ‘‘fi]f the

courts were to intrude independently with their con-

struction of the antitrust laws,’’ this Court has recog-

nized an implied repeal. Pan American World Airways

v. United States, supra, 371 U.S. at 309-310. Reeogni-

tion of an implied repeal in such circumstances is

consistent with this Court’s repeated concern to

avoid ‘sporadic action by federal courts [which]

would disrupt an agency’s delicate regulatory scheme.

. . -” United States v. Radio Corporation of America,

supra, 358 U.S. at 348; see also Carnation Co. v. Pacific

Westbound Conference, supra, 383 U.S. at 220-221.

While the Commission must, and does, consider com-

petitive factors in supervising exchange rules, it must

balance those factors against other policies of the Ex-

change Act in order to formulate a complete regulatory

policy which it finds to be ‘‘necessary or appropriate.”’

Moreover, as we have demonstrated, the Commission’s

exercise of its regulatory mandate will not work if the

courts independently subject matters within the Com-

mission’s Section 19(b) jurisdiction to ‘‘their con-

struction of the antitrust laws.’’ Pan American World

Airways v. United States, supra, 371 U.S. at 310.

D. The Public Record of Commission Supervision

Over the Exchanges’ Commission Rate Structure

Illustrates the Necessity of Leaving Such Matters

Solely to the Jurisdiction of the Commission.

Since application of the antitrust laws to exchange

rules concerning the fixing of minimum commission

rates as well as to all other exchange practices that are

within the scope of the Commission’s supervisory juris-

diction would be inimical to and would frustrate the

regulatory scheme of the Exchange Act, such rules and

practices must be considered to be immune from anti-

trust attack even where they have not been specifically

mandated by a formal rule or order of the Commission

under Section 19(b). The necessity for pre-emption of

the antitrust laws is fully supportcd by the public rec-

ord of the Commission’s active exercise of its jurisdic-

tion over the commission rate structure of the ex-

changes. This record illustrates the effectiveness of the

formal and informal processes contemplated by the Act

for dealing with the complex and subtle issues posed in

formulating policy with respect to exchange rules. It

also substantiates the necessity for leaving exchange

self-regulatory conduct, with respect to matters which

Congress brought within the scope of the Commission’s

authority, to the exclusive jurisdiction of the Com-

mission.

The respective fixed commission rate structures of

the NYSE and the AMEX were approved by the Com- *

mission in 1934 when the Commission granted the ap-

plications of those exchanges for registration as ‘‘na-

tional securities exchanges’’ pursuant to Section 6 of

the Exchange Act (43a-44a, 217a, 229a-239a). There-

after, the defendant exchanges amended their rules —

respecting commission rates from time to time, sub-

mitting copies of these amendments upon their adop-

tion to the Commission for its review in accordance

with Section 6(a) of the Act (44a, 218a).

Pursuant to a congressional mandate in 1961, 15

U.S.C. 78s(d), the Commission published in 1963 4

six-volume Special Study of Securities Markets, H.R.

Doc. 95, 88th Cong., Ist Sess. (hereinafter cited as

**Special Study’’), which contained the results of a

detailed investigation by the Commission’s staff of the

operation of the securities industry. Commencing in

1964, the Commission’s staff ani the exchanges initi-

ated discussions to implement the recommendations of

the Special Study (44a, 219a-220a). Then, in 1968, in

order to examine fully certain practices pertaining to

fixed stock-exchange-commission rates, the Commission

held investigatory hearings, pursuant to Section 21(a)

' of the Exchange Act, 15 U.S.C. 78u(a),” on the corr-

mission rate structure of securities exchanges and the

** Section 21(a) of the Exchange Act authorizes the Commission

‘in its discretion, . . . to investigate any facts, conditions, prac-

tices, or matters which it may deem necessary or proper to aid . . .

in the prescribing of rules and regulations. . . [under the Ex-

change Act], or in securing information to serve as a basis for

recommending further legislation concerning the matters to which

this title relatés”*

Nes

securities industry (99a, 284a-240a). Again, coin-

mencing on October 12, 1971, also pursuant to Section

21(a) of the Exchange Act, the Commission held fur-

ther public hearings on the structure of the securities

markets. Interested persons appeared and presented

their views ws with respect to various interrelated matters

concerning the appropriateness of modifications to the

structure of the securities markets.” Upon conclusion

66 The Commission announced the commencement of these hear-

ings on May 28, 1968. See Securities Exchange Act Release No.

8324 (1968) (286a-287a). These hearings, which were conducted

through the summer of 1971, were intended to elicit information

on, among other things, how the securities industry worked and

whether ‘‘a minimum exchange commission rate structure is neces-

sary’’ to the operation of the securities industry. Id.

*TIn Securities Exchange Act Release No. 9315 (August 26,

1971) the Commission announced that the following matters were

to be considered during the hearings:

‘‘(1) The desirability, structure and means of developing a

national system of securities exchanges and the relationship of

such a system to other securities markets ;

‘<(2) So-called ‘institutional membership’ on exchanges includ-

ing (i) exchange membership by financial institutions (such as

insurance companies, trust companies, foundations, investment

companies and pension funds); (ii) exchange membership by

affiliates of financial institutions such as their investment ad-

visers, managers, parents, subsidiaries or other affiliates, who

may utilize such memberships either to execute portfolio trans-

actions for an institutional affiliate or in yne way or another to

facilitate the recapture of commissions by institution or to

conduct a general securities business as an exchange member,

or any combination of the foregoing; (iii) exchange membership

by other organizations whose primary business may not be that

of a broker or dealer or their affiliates; (iv) whether and the

conditions under which any of the foregoing persons should be

permitted to engage in the business of a broker or dealer in

securities (aside from acting as underwriters for the shares-

of one or more investment companies) ;

asienndhaan aaa

of these hearings, and following publication in 1971 of

a second Congressionally-mandated study of the securi-

ties markets by the Commission—The Institutional

Investor Study, H.R. Doc. No. 92-64, 92d Cong., 1st

Sess.—the Commission issued a Statement on the Fu-

ture Structure of the Securities Markets (February 2,

1972) (hereinafter cited as ‘‘Policy Statement’’), in

which it enunciated its commitment to the creation of

a central market system in listed securities (239a).

In the Policy Statement, the Commission noted that

one of the major barriers to the central market system

was the fixed minimum brokerage commissions. Policy

Statement, p. 15 (385a-386a).° Nevertheless, the Com-

‘*(3) Restrictions on access of non-members to exchange markets

and of exchange members to the third markets ;

*“(4) The reasons for differing regulation of securities markets

and the kind of additional or modified regulation, if any, which

may be needed ;

**(5) The need for additional disclosure of information on

prices, volume and quotations in all markets, and the nature

thereof through a composite tape or otherwise, and

‘*(6) Competition among exchange and between and

other markets.’’ =

** The Commission observed that fixed minimums may not only

have been at an unreasonable level, but also may have caused the

serious side effects of

**(a) Dispersion of trading in listed securities

(b) Reciprocal practices of various kinds.

(ec) Increasing pressure for exchange membership by institu-

tions.’’

Policy Statement, p. 15 (385a). These side effects, the Commission

stated, were obstacles to the central market system in that they

cause

‘‘certain markets and market makers . . . to choose to stay out-

side the system in order to compete in service charges as well as in

execution, as the third market does, or in order to compete, as

certain regional exchange do, for institutional business by

directly or indirectly providing institutions with rebates of

commissions.’’ Jd.

. de ies ———

mission observed that ‘“‘we are dealing with an industry

which has operated under fixed commission rates for a

very long time.”’ Id. (386a). Consequently, while the

Commission expected that the goals of ‘*ceompetitive

rates and the creation of a centralized market system’’

would have desirable incidents, it was at the same time

concerned that competitive 1ates might result in

‘‘ deterioration in standards of service and respon-

sibility ov . . . higher transaction costs owing to

increased spreads and fluctuations, or [the possi-

bility that] . . . investment managers [ will make]

. . visible commission cost an exclusive criterion

in deciding where to place their executions and

[thus ignore] . . . through carelessness or fear of

eriticism, the elements of skill, knowledge, judg-

ment and advice.’’

Td. at p. 14 (384a).

In the Commission’s view, ‘‘[a]ny changes in the

commission structure should not reverse’’ the ongoing

process of upgrading broker-dealer ‘‘standards of serv-

ice to the public inchiding the provisioa of adequate

information, advice, care and responsibility.” Id. at

pp. 15-16 (386a). Thus, the Commission concluded that

‘‘Tijt is necessary to measure the effect of competitively

determined commissions very carefully on a step-by-

step basis.”’ Id. at p. 15 (386a). While ‘‘[t]he principal

argument in favor [o]f fixed minimum commis-

sions is the severe decline in the revenue of the securi-

ties industry predicted to result if competitive rates

were suddenly introduced on all institutional busi-

ness,” it was the Commission’s opinion that the indus-

try should be able to adjust to the introduction of

competitive ‘rates, ‘‘at least on large orders, at a»

measured deliberate pace.’’ Id. at p. 16 (387a).” :

These views reflected a reaffirmation of conclusions

that the Commission had earlier reached ‘‘that fixed

minimum commissions on institutional size orders are

neither necessary nor appropriate’ (35la, 353a).”

* The Commission’s letter, transmitting the Institutional Investor

Study to the Congress, stated :

‘We have . . . taken initial steps to require competitive rates

. which we believe will have ameliorating effects on future

developments in a number of the areas studied. Assuming that

the’step called for is timely implemented by the . . . [NYSE],

the Commission’s subsequent steps in this and related areas must

necessarily be guided to a considerable extent by its experience

with the initial step... . In this situation we believe the sound

regulatory course is to proceed with caution on any further con-

crete recommendations concerning the structure of the securities

markets’’ (footnote omitted).

Securities and Exchange Commission, Institutional Investor Study,

oe see

The Commission’s approach of a phased introduction of com-—

petitive rates has been endorsed in Subcommittee on Securities,

Senate Committee on Banking, Housing and Urban Affairs, 92d

Cong., 2d Sess., Securities Industry Study, p. 60 (Committee Print),

in Subcommittee on Securities, Senate Committee on Banking,

Housing and Urban Affairs, 93d Cong., Ist Sess., Securities In-

dustry Study, at p. 62. (Committee Print) ; and in United States -

Department of the Treasury, Public Policy for American Capital

Markets, p. 6 (1974).

The Commission’s reservation concerning the exchanges’'

fixed minimum commission rate system as it related to large trades

dates ‘back to the Special Study of 1963. See Special Study, pp. 328-

351. In the Special Study it was noted that since the commission

rate structure of the exchanges allowed no discount for large volume

trades, although the cost per share to the broker effecting such trans-

actions was significantly less than for smaller volume trades, cer-

tain practices occurred. Id. Among these were the execution of

large trades off the exchanges in order to take advantage of

EE ———————————

Thus, on October 22, 1970, the Commission had taken a ;

position in a letter to the NYSE that fixed minimum :

commission rates ‘‘for that portion of orders in excess

of $100,000”’ were unreasonable. Securities Exchange

Act Release No. 9007 (1970) (384a).” The Commission

later determined ‘‘not [to] object to the... [NYSE’s]

commencing competitive rates on portions of orders

above a level not higher than $500,000 rather than the

$100,000 figure . . . ,”’ but’insisted that this be done

by April 10, 1971 (353a-354a). Most exchanges had

implemented competitive commission rates above that |

level by April 5, 1971. Securities Exchange Act Re- °

lease No. 9148 (April 14,1971). ’

Thereafter, the Commission observed the effect of

negotiated rates above $500,000." Having done so, the

discounts derived from the economies of size and the practice by

exchange members of making unauthorized reciprocal: payments

at the direction of persons who channeled large trades to the

exchange member. Id. See also 219a-220a.

For a period after the Special Study, the Commission’s staff and

representatives of the exchanges met to discuss implementing the

recommendation of the Special Study that these practices be curbed

(44a-45a). Then, in 1968, the Commission took direct steps to

relieve the problems by requesting the exchanges to integrate into’

their commission rate system a volume discount or alternatively to

eliminate minimum commissions on portions of orders above $50,000

(46a). é

™ The Commission’s conclusion that it was unreasonable for

securities exchanges to prescribe fixed rates on portions of orders

above $100,000 was conveyed to the exchanges as part of a letter to

the NYSE. The letter was intended to advise the NYSE of those

aspects of a new increased commission rate schedule prepared by

the NYSE which the Commission found not to be reasonable. The

NYSE’s new schedule originated as an interim surcharge that the

NYSE sought to place on small orders in order to compensate for

severe financial conditions which its members suffered in 1969-1970.

In its letter of October 22, 1970 to the NYSE (see p. 67

Comnititahen witetad in its February 1972. Policy

Statement that while

“further reductions in the breakpoint [i.e., the

transaction size above which rates must be negoti-

ated] might have a more severe impact on the

income of certain kinds of member firms, on the

_ services they provide, on their role in the capital

markets, including the distribution of securities,

supra) the Commission had requested the exchange to submit no

later than June 30, 1971, a ‘‘new rate schedule of scaled percentage

charges based upon the amount involved in an order’’ (352a). On

April 14, 1971, the Commission informed the securities industry

that any further reduction of the negotiated rate breakpoint would

be deferred pending the submission expected from the NYSE on

June 30, 1971, Securities Exchange Act Release No. 9148 (April 14,

1971). The Commission intended :

‘“*to observe the workings of competitive commission rates on

| orders in excess of $500,000 to consider carefully all questions

which arise as a result thereof.’’ ,

Id.

In September 1971, ‘after receipt and analysis of the submissions

and the public comments thereon, the Commission announced that

it was not disposed at that time to lower further the breakpoint

to a level below $500,000, but would continue to — :

“‘study the economic and regulatory impact on the investing

public, the securities markets and the securities industry of com-

ee ee ee ot

$500, 7?

Securities Exchange Act Release No. 9351 (September 24, 1971).

continue to ‘‘review its commission rate structure,’’ ‘‘gather neces-

OF ee een a meastons of

in its commission rate structure to the Commission ‘‘to

and on the desires of institutions and their man-

agers to recapture commissions or otherwise use

them for their benefit,’’

it would nevertheless be appropriate for a $300,000

breakpoint to take effect in April of 1972. Policy

Statement, p. 16 (387a, 401a).

On May 31, 1973, in response to severe financial con-

ditions in the securities brokerage industry, the NYSE

submitted to the Commission proposed amendments to

its constitution and rules which would result in an in-

crease in the commissions charged by NYSE members

(Doc. App. 24). Shortly thereafter—on June 6, 1973—

the Commission commenced ‘‘a public investigatory

hearing . . . to consider whether any changes should

be made in the rules, policies, practices and procedures

of one or more registered national securities exchanges

respecting commission rate schedules’’ Securities Ex-

change Act Release No. 10206. (Doc. App. 24). On

September 11, 1973, the Commission publicly an-

nounced its “‘conclusions concerning the commission

rate proposals of the... [NYSE]. ...’’ (Doc. App.

27). The Commission concluded that it would not object

if the NYSE should immediately adopt its proposed

commission rate increases, effective through March 31,

1974. The Commission further concluded that it would

not object to the continuation of those increases from

April 1, 1974, through April 30, 1975, subject to the

condition that the NYSE first adopt certain other rules

to become effective by or before April 1, 1974." The

"* Specifically, the Commission’s conclusion not to object to the

continuation of the increase after April 1, was conditioned upon the

adoption of rules to ‘‘(«) eliminate that portion of NYSE Rule 383

Commission stated in its announcement, however, that _

**it will act promptly to terminate the fixing of commis-

sion rates by stock exchanges after April 30, 1975, if

the stock exchanges do not adopt rule changes achieving

that result.”’ (Doc. App. 28). The Commission further

concluded that it would ‘‘not initiate in April 1974, a

breakpoint reduction below $300,000 respecting the

portion of orders above which rates may be competi-

tively determined,’’ Securities Exchange Act Release

No. 10383 (Doc. App. 28).

Subsequently, in a letter from the Commission to

the NYSE, dated December 14, 1973 (Securities Ex-

change Act Release No. 10560; Doc. App. 29), the Com-

mission explained that in view of the fact that in the

Exchange Act ‘“‘rules concerning exchange-required

fixed commission rates [were matters] that Congress

entrusted to the exchanges in the first instance, at least

as long as the fixing of commission rates should be per-

mitted, the Commission after having considered a num-

ber of factors, ‘‘could not conclude that the NYSE’s

rate proposal was unreasonable’’ (Doc. App. 32-33).

Accordingly, the Commission was ‘‘motivated . . . to

raise no objection to the NYSE’s rate increase for the

period ending March 31, 1974’’ (Doc. App. 36).

The Commission also explained that its -

sion rates exceeding the NYSE’s commission rate schedules and

(b) [>] permit, But . . . not require, member firms to provide less

than a full range of brokerage services presently furnished cus-

tomers in return for a discount of upto 10.p from the com-

mission rate schedule . . . [that had by the NYSS)]”’

(Doe. App. 28}:

‘<eonclusion that it would be appropriate to require

exchanges to eliminate fixed rates effective by

April 30, 1975, of course, also had some influence —

on its conclusion not to object to the specific rate

proposed by the NYSE”’ (Doc. App. 36).

The Commission reasserted that

“the long history of fixed rates argues against a

precipitous elimination of the fixed rate system.

It is appropriate, for the protection of investors

and in the public interest, that stock exchange

firms be given an opportunity to develop business

strategies and adjust their operations to a com-

petitive-rate environment. It is not appropriate to

risk the possibility that undue haste might threaten

the ability of the industry to fulfill its essential

function of serving the needs of investors and

corporations seeking capital from the public. The

severe financial experience of the member firm

community in’ the last half of 1972 and the first

seven months of 1973 indicated that, without some

form of rate increase, the ability of the industry to

. function would be impaired at the very time that:

it was expected to accomplish a transition to a

competitive rate system (in a relatively short pe-

riod of time), as well as the implementation of an

extremely large number of other regulatory initia-

tives of a significant nature.’’ (Doc. App. 37). »

The Commission further stated that, while it would not

necessarily require the NYSE, as a condition to

continuing the rate increase after April 1, 1974, to

adopt a rule allowing customers a 10% discount from

arse

the fixed rate for reduced services from their broker," —

it adhered to the objective reflected in its September 11,

1973 conclusions ‘‘that the exchanges take steps to

effect a meaningful experimental period prior to the

introduction of completely unfixed rates. . . .’’ (Doc.

App. 39). The Commission explained that with the

‘limited price competition [it expected] . . . allex-

changes will effect,’’ a broader range of investors would

‘‘have the opportunity to react to’? competitive rates

‘than would result from simply lowering the competi-

tive-rate breakpoint below $300,000. (Doc. App. 40)

Accordingly, the Commission determined that it would

not be necessary to lower the breakpoint in April of

1974.

In response to the Commission’s reaffirmation of its

objective to provide for a meaningful experimental

period, the NYSE submitted to the Commission pro-

posed amendments to its constitution and rules to allow

for competitively-determined commission rates on pub-

lic orders of $2,000 or less commencing on April 1, 1974

(Becurities Exchange Act Release No. 10670. Doc.

App. 42). The NYSE’s proposed rule changes did

not provide, however, that intra-members rates on

portions of orders of $2,000 or less be competitively

determined. The Commission decided not to raise any

objection to these rule changes but conditioned its non-

objection on the expectation that the exchanges will

“promptly . . . implement any necessary rule and con-

stitution changes’’ if ‘‘the Commission determines, as

a result of its study of the matter, that’exchange ex-

™ See note 73, supra.

periments with limited price competition should be

broadened to encompass intra-member rates’’ (Doc.

App. 44)."

Following the Commission’s hearings on intra-mem-

ber rates, the Commission announced on September 19,

"1974, that it had written to the presidents of each regis-

tered securities exchange stating (1) that in its view

ample opportunity had been provided exchange mem-

bers ‘‘to develop business strategies for, and to adjust

their operations to, an unfixed rate environment’’;

(2) that it was ‘“‘not persuaded, on the basis of the data

and views obtained as a result of [the intra-member

rate hearings] that its policy conclusions of Septem-

ber 11, 1973, should not also be applicable to intra-

member rates,’’ and (3) that the exchanges were

formally requested, pursuant to the Commission’s au-

thority vested ‘“‘under the Securities Exchange Act and

particulatly Sections 2, 6, 10, 11, 19 and 23 thereunder”’,

to ‘‘effect necessary changes in their constitution, rules,

and practices”’ to eliminate fixed rates ‘‘effective on or

before May 1, 1975.’’ Securities Exchange Act Release

No. 11019 (September 19, 1974) (Doc. App. 60-64).

In ord2t to aid its study of the matter, the Commission, on

April 23, 1974, announced the commencement of public investiga-

tory hearings beginning on May 29, 1974

“‘to gather comments, views and data concerning whether the

initiation in the near future of a limited experiment in com-

petitive intra-member rates of commissions on orders not ¢x-

ceeding $2,000 would cause substantial and irreparable harm to

floor brckers or to the market-making function of specialists,

and wheher it is necessary or appropriate in the public interest

or for the protection of investors for exchanges to maintain any

prescribed schedules of intra-member rates of commission’’ Se-

curities Exchange Act Release No. 10751 (Doc. App. 49).

As a result of responses received by the Commission.

with respect to its September 19 request, the Commis-

sion determined to publish for comment, on October 24,

1974, proposed Rules 19b-3 and 10b-22 which would

prohibit exchange rules fixing commission rates and

establish procedures to regulate agreements to fix com-

missions on exchanges. Securities Exchange Act Re-

lease No. 11073 (October 24, 1974) (Doc. App. 65).

The Commission also announced that it would hold

hearings, beginning on November 19, 1974 with respect

to its proposed rules. Jd."

' Following hearings on its proposed rules ™ the Com-

mission announced on January 23, 1975, adoption of

Rule 19b-3, proscribing exchange rules or practices

fixing commission rates as of May 1, 1975." Securities

In Securities Exchange Act Release No. 11093 (November 8,

1974), the Commission provided, in anticipation of its hearings, a

synopsis of the Commission’s extensive regulation of fixed rates

since 1963, (Doc. App. 81).

™ The Antitrust Division of the Justice Department submitted a

memorandum in these hearings in which it asserted that ‘‘the thrust

of the [Exchange Act] is to authorize the Commission to take such

remedial or reform actions with respect to exchange practices as the

Commission deemed necessary or appropriate to effectuate the

purposes of the Act”’; and as a result, the Commission may ‘‘pro-

hibit the exchanges and their members from fixing commission

rates.’’ Comniénts of the United States Department of Justice,

Proposal to Adopt Securities Exchange Act Rules 19b-3 and

10b-22, Securities Exchange Act File No. 4-176 (December 10,

1974), pp. 6-7. Apparently the Department of Justice believes that

the powers granted to the Commission in Séction 19(b) (9) to

regulate the fixing of ‘‘reasonable rates of comiinission’’ gives the

Commission the authority to abolish fixed commission rates but no

power to authorize any level of fixed rates.

(a) ‘No national securities exchange (‘‘exchange’’) shall adopt

or fetain any‘rule of the exchange that requires, or shall

Exchange Act Release No. 11203 (January 23, 1975)

(Doe. App. 109).. In its release announcing adoption of

Rule 19b-3 the Commission explained :

‘*The basic reason for the Commission’s decision

to adopt Rule 19b-3 was the conclusion that, under

present circumstances, the free play of competi-

tion can provide a level and structure of commis-

sion rates which will better serve the interests of

the investing public, the securities markets, the

securities industry, the national economy and the

otherwise, directly or indirectly, require its members, or any

person associated with its members, to charge any person

any fixed rate of commission for transactions effected on, or

effeeted by the use of the facilities of, such exchange.

(b) Each exchange shall provide in its rules of the exchange that

nothing therein or in its practices shall be construed to re-

quire or authorize its members, or any person associated with

its members, to agree or arrange, directly or indirectly, for

the charging of fixed rates of commission for transactions

effected on, or effected by the use of the facilities of, such

exchange. ;

member, shall be required to comply with, or may rely on,

the provisions of any rule of the exchange covered by para-

graph (a) of this rule.

(d) As used in this rule, the term ‘‘rule of the exchange”’ refers

to any provision of the constitution, articles of incorporation,

bylaws or rules or instruments corresponding thereto, what-

ever the name, of the exchange, and ihe term ‘‘floor broker-

age commissions’’ refers to commissions applicable to the

execution of transactions for members or associate members

of an exchange but does not include commissions for clear-

ance services or commissions for combinations of floor

brokerage and clearance services.

(e) The provisions of this rule shall become effective on May 2

1975, except as to any rule of the exchange relating to floor

brokerage commissions as to whi the provisions of this.

rule shall become effective on May 1, 1976.

public interest than any uystem of price fixing —

which can reasonably be devised. . . . It should be

emphasized, however, that the Commission’s con-

clusions are not based upon any simplistic notion

that competition is a ‘‘good thing”’ in all lines of

endeavor, including a regulated industry, and that,

therefore, competitive rates should be substituted

regardless of experience and circumstances.

Rather, this conclusion is based upon the entire

experience of the Commission and the securities

industry with fixed rates, particularly during the

last decade and more, and the intensive studies

which have been made of that subject by so many

competent persons.’’ Id. at pp. 24-25 (Footnote

omitted) (Doe. App. 133-134).

The Commission specifically cautioned, however,

that its adoption of Rule 19b-3

“does not reflect any judgment by the Commission

that the fixed commission rate always was bad or

that it was, or now is, illegal, or that fixed com-

missions could never be appropriate.in the future.

Rather, it simply reflects a conclusion, based upon

the Commission’s experience and the abundant

data alluded to [in] its release that, under the

conditions now existing, fixed minimum commis-

sions should terminate at the times specified in the

rule. It is not possible to predict future develop-

ments or future conditions, and it. is conceivable

that unforeseen developments could require the

Commission to reinstitute some form of fixed rates,

although the Commission does not anticipate or~

believe that this will become necessary.”

Id. at p. 26 (Doc. App. 136-137).”

The Commission’s program since 1968 of modifying

the exchanges’ fixed rate structure has been paralleled

by related Commission initiatives which affected the |

exchanges’ commission rate structure as it related to

the proposed central market system. One of these initi-

atives was a program to provide non-member broker-

dealers with greater access to the exchange market

while fixed rates continued on the exchanges.”

7 Because the Commission recognized (1) ‘‘that the transition

to competitive public rates will create problems of adjustment

and accommodation for the exchanges and a deferral of the change

as to floor brokerage rates may facilitate the ability of the ex-

changes to accomplish a smooth transition to a new environment’’ ;

(2) that certain exchange members apparently did not realize

that the Commission’s September 11, 1973 conclusions were ap-

plicable to floor brokerage rates as well as non-member rates, and

thus ‘‘may not have had the benefit of the advance notice and

time for planning with respect to floor brokerage rates which the

September 11th notite was intended to provide’’; and (3) that

‘‘floor brokerage rates have considerably less impact on public -

investors than do public rates,’’ it concluded that the date for

elimination of floor brokerage rates should be May 1, 1976, instead

of May 1, 1975. Id. at pp. 1-2 (Doc. App. 110).

8° The NYSE, until the implementation of the Commission’s pro-

gram in this area, prohibited its members from splitting com-

missions for transactions executed on the NYSE. The AMEX had

a similar prohibition. These prohibitions, known as anti-rebate

rules, were intended to preserve the integrity of the exchanges’

fixed minimum commission rate system. See Thill v. New York

Stock Exchange, Inc., supra, 433 F. 2d 267.

The October 22, 1970, letter in which the Commission first re-

quested that the NYSE adopt competitively-established commis-

tions above certain levels (see supra, p. 67) (352a), also instructed

the NYSE to submit, no later than June 30, 1971, a plan that

would, provide ‘‘for reasonable economic access to the New York

Stock Exchange for non-member broker-dealers.’’ Such a program

would of course, provide non-members with a means of participating

in the exchange market at rates below the otherwise applicable

A second action taken by the Commission, which re-.

lates to the fixed minimum commission rate system,

was the Commission’s promulgation on January 16,

1973, of Rule 19b-2 under the Exchange Act, 17 CFR

240.19b-2.. The rule is intended to limit the use of

exchange memberships for other than public purposes.

Securities Exchange Act Release No. 9950 aawned

16, 1973)."

minimum commission rates. Thus, the Commission’s request for a

plan of non-member access, like its decision to implement negotiated

rates at certain levels, reflected its conclusion that the commission

rate structure, as it had been applied, was no longer necessary or

appropriate under the standards contained in Section 19(b). But

just as the Commission had been concerned that a precipitous leap

to fully negotiated rates might have a calamitous impact upon the

securities markets, it took steps to assure that changes in access

for brokers would provide meaningful profits from stock exchange

transactions executed for their customers, and that such changes

would not oceur at the expense of the stock-exchange-member sector

of the securities industry. Consequently, when the NYSE in mid-

1971, submitted a proposal allowing non-members a discount of 30

percent from the public rate (Doc. App. 159), the Commission

insisted that

“the discount afforded non-member broker-dealers should not be

less than 40% to allow for a minimum meaningful test of this

proposal’’ Securities a Act Release No. 8324, (Doe. App.

149).

A 40 percent discount for non-members went into effect in late

March of 1972.

*:In announcing Rule 19b-2’s adoption, the Commission noted

that the rule satisfied several objectives, including

‘*The need to structure a central market system, the need to

eliminate unfair trading advantages, the need to restore and

insure investor confidence in our trading markets, the need to

foster meaningful competition in the securities industry, and the

need to promote the orderly introduction of sompetitive com-

mission rates on large-size securities transactions. .

Id. at p. 188. ‘hideliihas, sb the ihs od abdhiieen maabieibine ees

fonnd to be necessary to implement the Commission’s program of

Finally, in its recent release announcing the adoption

of Rule 19b-3 the Commission addressed itself to

another problem related to the problems of non-member

access to exchanges and institutional membership on

exchanges—namely, the question of whether the elim-

ination of fixed rates would reduce economic incen-

tives to retaining exchange membership.”

The foregoing makes clear that the Commission has

since 1961 been engaged in a continuing regulatory pro-

gram which has sought to examine fully the nature and

effect of the national securities exchanges’ fixed rate

system, and which has sought to structure the ex-

changes’ operations not only with respect to the com-

mission rates themselves but also with respect to a

myriad of interrelated and interdependent matters. It

introduction of competitive rates because the use of exchange

membership by institutions for the purpose of recapturing broker-

age commissions ‘‘would be tantamount to competitive rates (or no

commissions at all) on all size orders for those institutions imme-

diately’’ as a result of which ‘‘the Commission’s phase-in-program

would . . . become an academic exercise, at best.’’ Id. at p. 107.

*? The Commission stated that while ‘‘these concerns appear

exaggerated’’ and do ‘‘not provide an adequate basis for deferring

competitive rates’’ since they can be dealt with in other ways, never-

theless :

‘*[i)f£ it should appear that member firms are proposing to leave

the exchanges in order to execute customers’ transactions by

making markets off the exchange, various steps could be taken to

restrict this practice to the extent necessary or appropriate in

the public interest or for the protection of investors.’’

Securities Exchange Act Release No. 11203, p. 43 (Doc. App. 154).

In this connection, however, the Commission specifically cautioned

that while it intended to receive comments on this problem

‘proposals which appear on their face to be anticompetitive can

hardly be acted upon in the absence of experience under com- .

petitive rates which demoustrates that they are, nevertheless,

necessary or appropriate’’ Id. (Doc. App. 155).

is hard to conceive of a better example to demonstrate

the necessity for entrusting exchange operations to an .

administrative agency with continuous supervisory

jurisdiction, rather than to the ad hoc jurisdiction of

antitrust courts.”

CONCLUSION :

In adopting the Securities Exchange Act of 1934,

Congress intended to establish a national policy for the

regulation of transactions on securities exchan

accomplish this goal, the Commission was ves

**In order to carry out its broad regulato

the exchange markets the Commission has an entire“division con-

sisting of 117 full time employees, its Division of Market Regula-

tion, devoted to the development and implementation of regulatory

policies and programs, as well as dozens of other staff personnel

employed in other offices and divisions.

Not only does the record of Commission action with respect to

commission rates illustrate the wisdom of Congress in delegating to

the Commission quasi-legislative jurisdiction over the exchanges’

rate structure, byt the history of active exercise of Commission

authority also requires that the exchanges’ present rate structur:

be found immune from antitrust attack, even if this Court were to

hold that the fact of jurisdiction by the Commission over the

exchanges’ fixed commission rate system alone does not afford such

immunity.

The commission rate system existing at the time of the institution

of this action, as well as the present system, is the product of the

Commission’s ongoing supervision. In the course of exercising this

authority, the Commission determined that any precipitous move

toward fully negotiated rates was not appropriate, but rather that

the elimination of fixed rates at various levels should be the product

of a deliberate, considered administrative program. It is just this

type of action by a regulatory agency which this Court has held

displaces the antitrust laws. See Hughes Tool Co. v. Trans World

Airlines, Inc., supra, 409 U.S. 237. To allow an antitrust attack

in this case ‘‘would disrupt’’ the Commission’s delicate regulatory

scheme, and would throw existing rate structures out of balance.’’

United States v. Radio Corporation of America, supra, 358 US,

at 348,

81 |

“broad powers over the exchanges to insure their

efficient and honest functioning.’’ ™

But, creation of a scheme of regulation embodied in

the Exchange Act did not take place in a vacuum.

Rather, Congress appropriately took into consideration

practices that had evolved over nearly 150 years .of

exchange operations without government regulation.

As a result, in order to preserve the initiative and

imagination of the exchanges already in existence, as

well as to spur the exchanges to develop ethical and

legal standards for the governanee of the daily business

conduct of their members, the Exchange Act explicitly

contemplated that registered exchanges would be able

to propose new regulatory standards and reevaluate

their existing requirements. To oversee this ‘‘statu-

torily imposed duty of self-regulation’’ * the Commis-

sion was provided with continuous and complete regu-

latory control of the exchange mechanism through

direct authority to adopt its own rules concerning

specific areas of conduct.of exchanges and their mem-

bers and by the sweeping provisions of Section 19(b)

empowering the Commission to alter, modify, repeal

or amend exchange rules governing ‘‘any important

matter.’’ ” |

For nearly fifteen years the Commission has used

its assortment of regulatory tools, whether formal, in-

formal, or a mixture of both, to develop a cohesive

policy with respect to the structure and functioning of

the securities markets, a structure which in large

Bret aries cette '

* H.R. Rep. No. 1383, supra, p. 14.

85 Silver v. New York Stock Exchange, supra, 373 US. at 353.

8 H.R. Rep. No. 1383, supra, at p. 15.

exchanges requiring their members to charge the public

fixed rates on exchange transactions.

What is at stake in the instant case, however, is not

the Commission’s substantive decision to eliminate the

practice of fixed rates. None of the parties to this law-

suit formally disputes the propriety of such a conclu-

sion under present circumstances. What is at stake is

whether the governmental agency vested with con-

tinuing policy-making jurisdiction shall be permitted

to establish national policy for the regulation of our

nation’s securities markets—‘‘regulatory work for

which [the Commission] was constituted ... [and]

which cries out for some rational plan’’ "—or whether

that complex and delicate task shall be exercised

through ad hoc decisions by the hundreds of district

courts across this country.

But for the fact that not al): ef the determinations

made by the Commission took the form of formal or-

ders, the Department of Justice apparently would con-

eur (DOJ Br. p. 48) that it is the Commission that

should perform that policy-making function. The De-

partment’s limited concession, however, exalts form

over substance.

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.