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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0448%3A11

## Record

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

## Text

I I ic Susi hander sececcopecsseveccescs
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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 ....
SEITE «5566665 6b cise cncnebidwnccsvisgdivavccesse

I:

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-

1

13

14

30

39

39

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

iv
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

vi

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
v.
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
ed

* The opinion of the district court does not appear in the Ap»en-
dix filed by petitioner.

1

‘ 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

3

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).

4

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.

X

5

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

6
“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.

8

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.,

10

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

11

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.

12

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.

14

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.

15

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..

a
16

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

17

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-

18

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).

19

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

20

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.

21

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-

\

22

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

23

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).:

24

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).

25

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

26
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.

27

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.

28

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

SE

29

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-

30

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
31

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.

32

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).

33

—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
pe

™ Securities and Exchange Commission, Special Study of Securi-
ties Markets, Pt. 2, p. 344 (1963), H. Doc. No. 95, 88th Cong.,
1st Sess.

6

34

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

~

36

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

37

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).

38

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

39
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

——
41

‘¢ ¢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.

43

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

aa

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-

ee

49

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

46

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.

47

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’’

] 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}:

71

‘

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).

60

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
measure had been shaped and aff cted by the rules of ©
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. The Commission’s authority to regu-
late the conduct of exchanges concerning commission
rates is continuous and complete; it is the Commission,
therefore, and not the antitrust courts, that most
appropriately should serve as the “‘halance wheel,’’
referred to by this Court in Siler,” to insure that, in

* Stark v. New York Stock Exchange, 1¢,, supra, 346 F. Supp.
at 228.

* 373 U.S. at 367.

LL
83

evaluating the conduct of exchanges, the public interest
is fully and adequately protected.

The policy articulated by the Commission to elim-
inate fixed exchange commission rates was derived |
both from the cooperative relationship Congress in-
tended the Commission to have with the exchanges, and
from the contribution of views from interested mem-
bers of the public, the Department of Justice, and
others. Only by sustaining the decision of the court

7 below can it be insured that the ‘‘partnership between
government and private enterprise that marks the
design of the Securities Exchange Act of 1934 can
operate effectively . . . in the long run.”’™

For the foregoing reasons, the judgment of the court
of appeals should be affirmed.

Respectfully submitted,

LAWRENCE E. NERHEIM,
General Counsel,

Watrer P. Norra,

Senior Assistant General Counsel
FPrRevERIc T. SPrINvEL,

Assistant General Counsel,
THEOpoRE L, FREEDMAN,
_ Attorney,
Securities and Exchange Commission.

Maron 1975,
I authorize the filing of this brief.
Rosert H. Bork,
Solicitor General.

Silver v. New York Stock Exchange, supra, 373 U.S. at 366.

APPENDIX

The pertinent provisions of the Securities Exchange
Act of 1934, 48 Stat. 881, as amended, 15°U.S.C. 78a, .
et seq., are as follows:

NECESSITY FOR REGULATION AS PROVIDED IN THIS
TITLE

Section 2. For the reasons hereinafter enu-
merated, transactions*in securities as commonly
conducted upoh securities exchange and over-the-
counter markets are affected with a national public
interest which makes it necessary to provide for
regulation and control of such transactions and of
practices and matters related thereto,. including
transactions by officers, directors, and principal
security holders, to require appropriate reports,
and to impose requirements necessary to make such
regulation and control réasonably complete and
effective, in order to protect interstate commerce,
the national credit, the Federal taxing power, to
protect and make more effective the national bank-
ing system and Federal Reserve System, and to
insure the maintenance of fair and honest markets
in such transactions:

(1) Such transactions (a) are carried on in
large volume by the public generally and in large
part originate outside the States in which the ex-
changes and over-the-counter markets are located
and/or are effected by means of the mails and
instrumentalities of interstate commerce; (b) con-
stitute an important part of the current of inter-

84

85

state commerce; (c) involve in large part the
securities of issuers engaged in interstate com-
merce; (d) involve the use of credit, directly affect
the financing of trade, industry, and transportation
in interstate commerce, and directly affect and
influence the volume of interstate commerce; and
affect the national credit.

(2) The prices established and offered in such
transactions are generally disseminated and

* quoted throughout the United States and foreign

countries and constitute a basis for determining
and establishing the prices at which securities are
bought and sold, the amount of certain taxes owing
to the United States and to the several States by ©
owners, buyers, and sellers of securities, and the
value of collateral for bank loans.

(3) Frequently the prices of securities on such
exchanges and markets are susceptible to manipu-
lation/and control, and the dissemination of such
prices gives rise to excessive speculation, resulting
in sudden and unreasonable fluctuations in the
prices of securities which (a) cause alternately un-
reasonable expansion and: unreasonable contrac- -
tion of,the. volume of credit available for trade,
transportation, and industry in interstate com-
merce, (b) hinder the proper appraisal of the
value of securities and thus prevent a fair cal-
culation of taxes owing to the United States and to
the several States by owners, buyers, and sellers
of securities, and (c) prevent the fair valuation
of collateral for bank loans and/or obstruct the

ices

effective operation of the national banking system
and Federal Reserve System. ;
(4) National emergencies, which produce wide-

spread unemployment and the dislocation of trade,
transportation, and industry, and which burden
interstate commerce and adversely affect the gen-
eral welfare, are precipitated, intensified, and pro-
longed by manipulation and sudden and unreason-
able fluctuations of security prices and by excessive
speculation on such exchanges and markets, and to
meet such emergencies the Federal Government is’

put to such great expense as to burden the national
credit.

* * * * *

TRANSACTIONS ON UNREGISTERED EXCHANGES

Seorron 5. It shall be unlawful for any bre-
ker, dealer, or exchange, directly or indirectly,
to make use of the mails or any means or in-
strumentality of interstate commerce for the pur-
pose of using any facility of an exchange within
or subject to the jurisdiction of the United States

_ to effect any transaction in a security, or to report
any such transaction, unless such exchange (1) is
registered as a national securities exchange under
section 6 of this title, or (2) is exempted from such
registration upon application by the exchange be-

- cause, in the opinion of the Commission, by reason
of the limited volume of transactions effected on
such exchange, it is not practicable and not neces-
‘sary or-appropriate-in the public interest or for the

87

protection of investors to require such regis-
tration. ,

REGISTRATION OF NATIONAL SECURITIES
EXCHANGES

-

\

Section 6. (a) Any exchange may be registered
with the Commission as a national securities ex-
change under the terms and conditions hereinafter
provided in this section, by ‘filing a registration
statement in such form as the Commission may
prescribe, containing the agreements, setting forth
the information, and accompanied by the docu-
ments, below specified :

(1) An agreement (which shall not be iiitltin’
as a waiver of any constitutional right or any
right to contest the validity of any rule or regu-
lation) to comply, and to enforce so far as is
within its powers compliance by its members, with
the provisions of this title, and any amendment
thereto and any rule or regulation made or to be
made thereunder ;

(2) Such data as to its organization, rules of
procedure, and membership, and such other infor-
mation as the Commission may by rules and regu-
lations require as being necessary or appropriate
in the public interest or for the ee of
investors ;

(3) Copies of its constitution, articles of incor-
poration with all amendments thereto, and of its
existing bylaws or rules or instruments correspond-
ing thereto, whatever the name, which are herein-

a

after collectively referred to as the ‘‘rules of the
exchange’’; and

(4) An agreement to furnish to the Commission
copies of any amendments to the rules of the ex-
change forthwith upon their adoption.

(b) No registration shall be granted or remain
in force unless the rules of the exchange include
provision for the expulsion, suspension, or dis-
ciplining of a member of conduct or proceeding
inconsistent with just and equitable principles of
trade, and declare that the willful violation of any
provisions of this title or any rule or regulation
thereunder shall be considered conduct or proceed-
ing inconsistent with just and equitable principles
of trade.

(c) Nothing in this title shall be construed to
prevent any exchange from adopting and en-
forcing any rule not inconsistent with this title
and the rules and regulations thereunder and the
applicable laws of the State in which it is located.

(d) If it appears to the Commission that the
exchange applying for registration is so organized
as to be able to comply with the provisions of this
title and the rules and regulations thereunder and —
that the rules of the exchange are just and adequate
to insure fair dealing and to protect investors, the
Commission shall cause such exchange to be regis-
tered as a national securities exchange.

(e) Within thirty days after the filing of the
application, the Commission shall enter an order
either granting or, after appropriate notice and
opportunity for hearing, denying registration as

89

~ a national securities exchange, unless the exchange
applying for registration shall withdraw its appli-
cation or consent to the Commission’s deferring
‘action on its application for a stated longer period
after the date of filing. The filing with the Com-
mission of an application for registration by an
exchange shall be deemed to have taken place upon
the receipt thereof. Amendments to an application
may be made upon such terms as the Commission
may prescribe.

(f) An exchange may, upon appropriate appli-
cation in accordance with the rules and regulations
of the Commission, and upon such terms as the
Commission may deem necessary for the protection
of investors, withdraw its registration.

* * * * *

POWERS WITH RESPECT TO EXCHANGES AND
SECURITIES

SEctTion 19. (a) The Commission is authorized,
if in. its opinion such action is necessary or appro-
priate for the protection of investors—

(1) After appropriate notice and opportunity
for hearing, by order to suspend for a period not
exceeding twelve months or to withdraw the regis-
tratiom of a national securities exchange if the
Commission finds that such exchange has violated
any provision of this title or of the rules and regu-
lations thereunder or has failed to enforce, so far
as is within its power, compliance therewith by a
member or by an issuer of a security registered
thereon.

(2) After appropriate notice and opportunity
for hearing, by order to deny, to suspend the effec-
tive date of, to suspend for a period not exceeding
twelve months, or td withdraw, the registration of
a security if the Commission finds that the issuer
of such security has failed to comply with any pro-
vision of this title or the rules and regulations
thereunder.

(3) After appropriate notice and opportunity
for hearing, by order to suspend for a period not
exceeding twelve months or to expel from a na-
tional securities exchange any member or officer
thereof whom the Commission finds has violated
any provision of this title or the rules and regu-
lations thereunder, or has effected any transaction
for any other person who, he has reason to believe,
is violating in respect of such transaction any pro-
vision of this title or the rules and regulations
thereunder. —

(4) And if in its opinion the public interest so
requires, summarily to suspend trading in any
registered security on any national securities ex-
change for a period not exceeding ten days, or with
the approval of the President, summarily to sus-
pend all trading on any national securities ex-
change for a period not exceeding ninety days.

(b) The Commission is further authorized, if
after making appropriate request in writing to a
national securities exchange that such exchange
effect on its own behalf specified changes in its
rules and practices, and after appropriate notice
and opportunity for hearing, the Commission

91

determines that such exchange has not made the
changes so requested, and that such changes are
necessary or appropriate for the protection of in-
vestors or to insure fair dealing in securities traded
in upon such exchange or to insure fair adminis-
tration of such excharge, by rules or regulations
or by order to alter or supplement the rules of such
exchange (insofar as necessary or appropriate to
effect such changes) in respect of such matters as
(1) safeguards in respect of the financial responsi-
bility of members and adequate provision against
the evasion of financial responsibility through the
use of corporate forms or special partnerships;
(2) the limitation or prohibition of the registra-
tion or trading in any security within a specified
period after the issuance or primary distribution
thereof; (3) the listing or striking from listing of
any security; (4) hours of trading; (5) the man-
ner, method, and place of soliciting business; (6)
fictitious or numbered accounts; (7)’the time and
method of making settlements, payments, and
deliveries and of closing accounts; (8) the report-
ing of transactions on the exchange and upon
tickers maintained by or with the consent of the
exchange, including the method of reporting short
sales, stopped sales, sales of securities of issuers
in default, bankruptcy or receivership, and
sales involving other special circumstances; (9)
the fixing of reasonable rates of commission, in-
terest, listing, and other charges; (10) minimum
units of trading; (11) odd-lot purchases and sales;
(12) minimum deposits on margin accounts; and
(13) similar matters.

(c) The Commission is authorized and directed
to make a study and investigation of the rules of
national securities exchanges with respect to the
classification of members, the methods of election
of officers and comm*‘ttees to insure a fair represen-
tation of the membership, and the suspension, ex-
pulsion, and disciplining of members of such
exchanges. The Commission shall report to the
Congress on or before January 3, 1935, the results
of its investigation, together with its recommen-
dations.

& * * * *

The pertinent provisions of the Sherman Act, 26

Stat. 209, as amended, 15 U.S.C. 1, et. seg. are as
follows:

Src. 1. Every contract, combination in the form
of trust or otherwise, or conspiracy, in restraint
of trade or commerce among the several States, or
with foreign nations, is hereby declared to be
illegal: * * * Every person who shall make any
such contract or-engage in any such combination
or conspiracy, be deemed guilty of a mis-
demeanor, and, on conviction thereof, shall be
punished by fine not exceeding fifty thousand
dollars, cr by imprisonment: not exceeding one
year, or by both said punishments, in the discre-
tion of the court.

Src. 2. Every person who shall monopolize, or
attempt to monopolize, or combine or conspire
with any other person or persons, to monopolize
any part of the trade or commerce among the
several States, or with foreign nations, shall be

93

deemed guilty of a misdemeanor, and, pn convic-
tion thereof, shall be punished by fine not exceed-
ing fifty thousand dollars, or by imprisonment not
exceeding one year, or by both said punishments, in
the discretion of the court.

The pertinent provisions of the Clayton Act, 38
Stat. 731, 737, 15 U.S.C. 15, 26, are as follows:

Src. 4. That any person who shall be injured in
his business or property by reason of anything
forbidden in the antitrust laws may sue therefor
in any district court of the United States in the
district in which the defendant resides or is found
‘or has an agent, without respect to the amount in
controversy, and shall recover threefold the dam-
,. ages by him sustained, and the cost of suit, includ-
ing a reasonable attorney’s fee.

Src. 16. That any person, firm, corporation, or
association shall be entitled to sue for and have
injunctive relief, in any court of the United States
paving jurisdiction over the_pgrties, against
threatened loss or damage by a Violation of the
‘antitrust laws, including sections two, three,
‘seven, and eight of this Act, when and under the
‘game conditions and principles as injunctive relief
against threatened conduct that will cause loss or
.damage is granted by courts of equity, under the
rules governing such proceedings, and upon the
execution of proper bond against damages for an
‘injunction improvidently granted and a showing
that the danger of irreparable loss or damage is
immediate, a preliminary injunction may issue:
# % &

tx U.S. Government Prifting Office: 1975—569-839/114

TABLE OF CONTENTS

AS. 2693, 73d Congress, 2d session: meee
Section 5... .......--...--.-------- 2k 1
Section 18(c)_--..------------------_--__- 3

H.R. 7852, 73d Congress, 2d session:
Section §..........------.-----2- 2 eee 5
Section 18(¢)__-.-_-----_---_--_---- 2 7
H.R. 8720, 73d Congress, 2d session:
Section 5_____-_---_----------- eee 9
ON Ci ise cece een este ces 11
S. 3420, 73d Congress, 2d session:
Section 6____------------------------_ Lee 14
Section 19______. ee 16
H.R. 9323, 73d Congress, 2d session:
Section 5______-_-------------- eee 19
ee ee 21
Securities Exchange Act Release No. 10206______ 24
Securities Exchange Act Release No. 10383 ______ 27
Securities Exchange Act Release No. 10560______ 29
Securities Exchange Act Release No. 10670______ 42
Securities Exchange Act Release No. 10751______ 45
Securities Exchange Act Release No. 10986______ 57
Securities Exchange Act Release No. 11019______ 60
Securities Exchange Act Release No. 11073______ 65
Securities Exchange Act Release No. 11093______ 81
Securities Exchange Act Release No. 11203 ______ 109
Securities Exchange Act Release No. 9351______- 157
Comments of the United States Department of
Justice, Proposed Rules of the Chicago Board
Options Exchange, Securities and Exchange
Commission File No. 10-54-1_______________- 162
Securities Exchange Act Release No. 9985_______ 167

(1)

73D CONGRESS, 2D SESSION

S. 2693

* * * * *

REGISTRATION OF NATIONAL SECURITIES EXCHANGES

Sec. 5. (a) Any exchange may be registered with ,
the Commission as a national securities exchange
under terms and conditions hereafter provided by fil-
ing a registration statement in such form as the Com-
mission may prescribe containing the undertakings,
setting forth the information, and aecompanied by the
documents here below set forth:

(1) An undertaking to comply with, and to enforce
so far as is within its powers compliance by its mem-
bers and by issuers whose securities are registered
thereon with any provision of this Act and any
amendment thereto and any rule or regulation made
or to be made by the Commission thereunder.

(2) Such data as to its organization, rules of pro-
cedure and membership, and other information as the
Commission may by rules and regulations require as
being necessary or appropriate in the public interest
or for the protection of investors.

(3) Copies of its constitution, articles of incorpora-
tion with all amendments thereto, and of its existing
bylaws or rules or instruments corresponding thereto,
whatever the name, which are hereinafter collectively
referred to as the “rules of the exchange.”

(4) An undertaking to furnish to the Commission
copies of any amendments to the documents or in-
struments mentioned in- clause (3) of this subsection
forthwith upon their adoption.

(1)

web Rte oes ene DOS LEE EN EARN NEE Rest SATS

houbtmememmnnneiieninmintnitintes one

2

(b) If it appears to the Commission that the ex-
change applying for registration is so organized as to
be able to comply with the provisions of this Act and
the rules and regulations made by the Commission
thereunder and that the rules of the exchange are
just and adequate to ensure fair dealing and to pro-
tect investors, the Commission shall cause such ex-
change te be registered as a national securities
exchange.

(ec) The Commission shall enter an order either
granting or, after appropriate notice and opportunity
for hearing, denying an application for registration
as a national securities exchange within thirty. days
after the filing of the application, unless the exchange
applying for registration shall withdraw its applica-
tion or consent to the Commission’s deferring action
on its application for a stated longer period after the
date of its filing. The filing with the Commission, of
an application for registration by an exchange shall
be deemed to have taken place upon the .receipt
thereof. Amendments to an application may be. made
upon such terms as, the Commission may prescribe.

(d) No registration shall be granted unless. the
rules of the exchange provide for the expulsion and
suspension of a member for conduct or proceeding
ineonsistent with just and equitable prineiples of
trade and declare that the violation of any previ-
‘sions of this Act or any rule or regulation made by
the Commission thereunder shall be considered con-
duet or proceeding inconsistent with just and equi-
table principles of trade.

(e) Nothing in this Act shall be construed to oeenent
any exchange from adopting and enforcing any rule
not inconsistent with this Act and the rules and regu-
lations of the Commission made thereunder and the
applicable laws of the State in which it is located.

8

(f) An exchange may, upon appropriate application
in aceordance with the rules and regulations of the
Commission and upon such terms as the Commission
may fix, withdraw its registration.

a, SAE oe + * _ # *

‘Seo. 18. * * *

-(¢) ‘The authority above given the Commission shall
include, among other things, authority to prescribe
such rules and regulations for national securities. ex-
changes, their members and persons transacting a busi-
ness in securities through such members, in adition to
thosé specifically provided in this Act, as it may deem
necessary or appropriate in the public interest 0” for
thé protection of investors, and may by its rules and
regulations more specifically define the form and pro-
‘cedpre to be followed in carrying the provisions of this
Act into effect. The Commi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0448%3A11. Public record. Not legal advice.