thus clearly establishes for the first time that the district courts have jurisdiction to review Commission "action" even though it does not rise to the dignity of an "order.” In distinguishing between review in the Courts of Appeals under section 25(a) of the Exchange Aet and review in the district courts under the Administrative Procedure Act the court stated:

Section 25(a) applies in terms only to "orders," a narrower concept than that of "agency action" reviewable in district courts, and is available only to persons who were "parties” to actual agency “proceedings.” It was intended to provide direct review in cases wherein a clear, formal record of an administrative hearing would be before the reviewing court without the need for presentation to a court of evidence (or affidavit) of the agency's action. While the concept of an order subject to direct review is not frozen, and may be extended if necessary to preserve some element of judicial supervision, it is not fairly available to preclude

familiar district court review in the case at bar. 17
In addressing the specific arguments put forth by the Commission
the court stated:

The fact that an agency has not issued a command does not
mean that the step by which it initiated a procedure, or in
formal activity, leading up to its powers may be relegated 1

to the area of mere "unreviewable suggestion.” 18 1. N:SD Action

No provision of the Exchange Act confers jurisdiction upon the courts to directly review the self-regulatory activities of national se curities associations. However, the Exchange Act does authorize the Commission to review action of the National Association of Securities Dealers, Inc. ("NASD"). Section 15A(g) empowers the Commission to review any disciplinary action taken by a national securities asso ciation against any member or person associated with a member (or the denial of admission to any broker or dealer). Such review may be instituted by the Commission upon its own motion or "upon application by any person aggrieved . . . . Section 15A(j) requires national securities associations to file copies of proposed changes in their rules with the Commission and gives the Commission the power to disapprove the changes and thereby prevent them from becoming effective. Section 15A (k) empowers the Commission, after following appropriate procedures, to abrogate any rule of a national securities association and to compel amendments of the rules of associations with respect to four enumerated areas. Section 15A(1) authorizes the Commission to discipline national securities associations or their members, officers or directors for violations of the Exchange Act or the rules thereunder, failure to enforce association rules and certain other conduct.

As a consequence of the Commission's rather extensive power to review VASD action and inaction, parties aggrieved by NASD action have indirect access to the courts. When the Commission has exercised its powers under subsection (g), (i), (k) or (I) of section 15A, its order is reviewable in court. Even though the reviewing court treats the 17 442 F.2d at 143. 15 Id. at 139.

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matter under scrutiny as Commission action in its deliberations,19 the practical result is judicial review of the NASD action.

It is not clear, however, that a Commission decision not to exercise its subsection (j) powers to disapprove a proposed NASD rule may be reviewed by the courts.20 Moreover, many of the self-regulatory policies of NASD do not take the form of "rules" but of “interpretations of the board of governors." The Subcommittee is particularly concerned that while article III, section 11 of the rules, "A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade," had to be filed with the Commission, as of November 16, 1972 the NASD had issued 30 pages of "interpretations” of this "rule," 21 which under present interpretations of the Exchange Act by the Commission have not been submitted to the Commission for approval or disapproval.22

ii. Action of National Securities Exchanges

The Commission's supervisory powers over national securities exchanges are much more limited than those respecting national securities associations. The Exchange Act contains no counterpart of section 15A(j) giving the Commission power to prevent the adoption of a particular rule by an exchange.23 Nor has the Commission power to review disciplinary proceedings conducted by an exchange.24

As a result of these differences there is no convenient mechanism for affording judicial review to persons aggrieved by an exchange enforcement proceeding or the promulgation of an exchange rule. The Commission of course, does have the power to require alterations in exchange rules insofar as the rules relate to 12 enumerated (or similar) matters.25 It was the Commission's "exercise" of this so-called 19(b) power which gave rise to the Independent Broker-Dealer's case in which the Court of Appeals, for the District of Columbia Circuit ruled that the district courts do have jurisdiction to review Commission action even though the requirements of section 25(a) of the Exchange Act have not been met. Similarly, it can be expected that the courts will entertain jurisdiction, if the need should ever arise, to review Commission exercise of its disciplinary powers over exchanges and their members and officers pursuant to section 19(a) of the Exchange Act.

iv. Summary: Availability of Direct Judicial Review

Under present laws, Commission enforcement activities appear to be subject to direct judicial review in the courts of appeals and in the district courts. Commission action clothed with a lesser degree of formality (such as a request under section 19(b) that an exchange modify its rules, followed by exchange compliance) may not be reviewable in the courts of appeals under section 25(a) of the Exchange Act, but is reviewable under certain circumstances in the district courts under

19 See e.g., R. H. Johnson & Co. v. SEC, 198 F.2d 690 (2d Cir. 1952) (Commission order declining to set aside a penalty imposed by the NASD). 20 See, IIarwell v. Growth Programs, Inc., 459 F.2d 161 (5th Cir. 1971). 21 CCH, NASD Manual, Par. 2151 (1972). 22 In its memorandum amicus curiae in Harwell v. Growth Programs, Inc., 459 F.2d 461 (5th Cir. 1971), for example, the Commission stated: “Unlike the adoption of a new rule, this interpretation of an existing rule was not required first to be filed formally with the Commission prior to its promulgation." Memorandum. p. 20 fn.21.

23 SEC, Study of l'nsafe & Unsound Practices of Brokers & Dealers, 92d Cong. 1st Sess. II. Doc. 92-231, p. 6(1971) [hereinafter cited as “Unsafe & Insound Practices Report"). 24 Id. at 7. 23 Section 19(b) of the Exchange Act, 15 C.S.C. $ 785.


the Administrative Procedure Act or the courts' general equity jurisdiction. However, it must be pointed out that the Commission has in recent cases sought to avoid judicial review by characterizing its decisions under several sections of the Exchange Act as non-actions, viz. as the mere abstinence from exercise of its powers. And, in some instances, notably the Independent Investor Protective League case, the Commission has been successful in using this device to avoid judicial scrutiny of its action.

While there is no provision in the Exchange Act concerning "direc judicial review of self-regulatory activities, many of such activities are subject to direct Commission review which in turn generates ultimate resort to the courts. With respect to national securities associations it appears that the courts will now entertain review of Commission determinations (a) regarding disciplinary proceedings, (b) disapproving of proposed NASD “rule” changes, (c) compelling a change in existing NASD "rules”, and (d) disciplining the NASD or its members, officers or directors. At the same time the availability of judicial review is unclear with respect to Board of Governors' "interpretations” of NASD rules and with respect to those rule changes to which the Commission does not object under section 15A(j) of the Exchange Act.

Adequate judicial review is even less certain as to the actions of national securities exchanges. While aggrieved parties may obtain court review of the adoption of amendments to an exchange rule pursuant to a Commission request under section 19(b) of the Exchange Act, review of other exchange decisions is uncertain. There is suh stantial doubt that a party aggrieved by an exchange's adoption o an amendment to its rules without a Commission 19(b) request or by an exchange enforcement proceeding, can get the case into court without rescrt to the anti-trust laws or some other means of obtaining collateral review.

v. Collateral Attack of Self-Regulatory Action

The absence of a convenient mechanism for direct judicial review of NASD and exchange action has led some persons to collaterally attack such action in the courts. Challenges have been made primarily on anti-trust and due process grounds. The leading case in this area is: Silver v. New York Stock Exchange, 373 U.S. 341 (1963). 27

In Silver, the plaintiffs (non-members of the NYSE) alleged that they had been damaged by a collective refusal of the defendants to continue certain “direct-wire connections” with the plaintiffs in violation of the Sherman Act.28 The District Court granted partial summary judgment for the plaintiffs and the Exchange appealed. The Court of Appeals reversed, finding that the Exchange, as a self-regulatory body, was exempt from the restrictions of the Sherman Act. The Supreme Court granted certiorari and reversed the Court of Appeals. The Exchange Act, said the Court, affords the exchanges an exemption from the anti-trust laws only if necessary to make the Exchange Act work and even then only to the minimum extent necessary. 28 See text supra at note 11. 2The Silver case is discussed at greater length n the context of the antitrust laws in Chap. III.E.2.b., 25 15 U.S.C. $1.

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Though the Silver case is important for its anti-trust holding, it also constitutes an important statement regarding the need for procedural safeguards, including judicial review, in the self-regulatory process. Justice Goldberg's opinion demonstrates the Court's concern with the absence of an appropriate forum for review of the Exchange's action and failure to afford the plaintiffs "fair procedures:”

By providing no agency check on exchange behavior in
particular cases, Congress left the regulatory scheme subject
to "the influences of . . . [improper collective action). ..."
Some form of review of exchange self-policing, whether by
administrative agency or by the courts, is therefore not at all
incompatible with the fulfillment of the aims of the Securities

Exchange Act.29 Parties foreclosed from judicial review of NASD action have also sought relief under the anti-trust laws. In Harwell v. Growth Programs, Inc., 459 F.2d 461 (5th Cir. 1971) the plaintiffs alleged that they suffered damages when a board "interpretation" of an NASD "rule” resulted in a modification of the terms of their contracts to purchase mutual fund shares. In support of their claim the plaintiffs relied upon three theories: breach of contract, tortious interference with contract and violation of the anti-trust laws. The District Court granted summary judgment for the defendants, finding that the NASD's action was within its quasi-governmental powers. The Court of Appeals reversed the District Court, finding that the plaintiff's claims were entitled to detailed consideration on their merits. The Harwell case illustrates another situation in which the plaintiffs might have found it unnecessary to rely upon the anti-trust saws had direct review by the Commission and the courts been available. Instead, however, the plaintiffs faced Commission “concurrence" (non-disapproval) and were foreclosed from direct review.

The Subcommittee's analysis of the proper role of anti-trust principles in the securities markets is contained in another section of this report.30 But it is important to note that, foreclosed under the Exchange Act from any avenue of direct appeal to the Commission (and ultimately to the courts), aggrieved parties have increasingly resorted to the anti-trust laws to obtain collateral review of exchange action. This has in turn created pressures for a reexamination of the antitrust laws themselves. The Subcommittee has concluded that application of anti-trust principles to the securities markets has had and will continue to have a wholesome effect. It is so aware, however, that excessive reliance upon anti-trust remedies may have developed as a natural response to administrative efforts to foreclose affected parties from judicial review. The Subcommittee believes that the problem would be largely eliminated by the creation of a more convenient mechanism for direct review of self-regulatory conduct. b. Conclusions and Recommendations: Availability of Judicial Review

A fundamental assumption of the Exchange Act's broad delegation of powers to the Commission, the exchanges and the NASD is that the decisions of those agencies will be subject to appropriate review by the courts upon petition by aggrieved persons. Absent such review there is no way to assure that the regulatory and self-regulatory bodies are subject to the rule of law. Yet, the Subcommittee's case studies reveal that the Commission has relied upon a process of informal bargaining with the self-regulatory agencies which has operated in effect often to deprive affected parties of judicial review. The fact that Commission oversight is the catalyst which creates jurisdiction in the courts to review exchange and NASD decisions makes this approach all the more troublesome.

2 8373 U.S. at 358. 3 (See Chap. III.E. below.

The Subcommittee believes that, in those situations in which it is available, judicial review has a wholesome, constructive effect upon the regulatory agencies (and self-regulatory agencies) by requiring them to articulate the reasons for their decisions in a manner tha makes possible a reasoned analysis of the merits. In the words of Professor Davis, "a limited judicial review does not weaken the administrative process but strengthens it.” 31 Because of the important role played by judicial review in preserving the integrity of the regula tory system established by the Exchange Act, the Subcommittee views with some concern the Commission's attempts to avoid review by resort to procedural technicalities such as its position in the Inilependent Investor Protective League case that its failure to object to a proposed NYSE commission rate change constituted a mere. "interlocutory non-objection." 32 The Commission should welcome the opportunity to have its views subjected to judicial scrutiny from time to time. Only through such periodic reappraisals will the selfregulatory system operate at an acceptable level.

In order to assure that procedural devices do not stand in the way of effective judicial review of Commission and self-regulatory action, the Subcommittee recommends that the Exchange Act be amended. In reviewing self-regulatory actions, the Commission, where practical, should be required to enter a formal order approving or disapproving of such actions. In those areas where the frequency of activity or other practical considerations make it necessary for the statute to permit automatic effectiveness of self-regulatory action, the statute should provide that when the Commission allows an action of a self-regulatory agency to stand or to become automatically effective, such action shall be subject to judicial review, under section 25(a) of the Exchange Act or other applicable provisions to the same extent as if it had been formally approved by the Commission.34

As noted, it is not entirely clear that direct judicial review of exchange enforcement and voluntary rule-making activity is available. This is so because, unlike the provisions of the Exchange Act applicable to national securities associations, the sections governing national securities exchanges do not provide for direct Commission review of exchange initiated rule changes and exchange enforcement proceed

31 K. Davis, Administrative Law Treatise 112 (1958). 32 See text supra at 9. In considering legislation to deal with the processing of securities transfers the full Committee on Banking, Housing, and Urban Affairs included provisions designed to force the Commission to take specific actions rather than allowing regulation to proceed automatically, without objection. The Committee stated: “The Committee feels this procedure to be preferable to allowing the registration statement to become effective automatically or by 'interlocutory non-objection.'” S. Rept. No. 92-1009, 92d Cong., 2d Sess. (1972) at page 10.

See also Securities Industry Study, Report of the Subcomm. on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs for the Period Ended February 4, 1972, 92d Cong., 2d Sess. at 76 (1972) wherein the Subcommittee initially questioned the propriety of the Commission's position. 34 The Subcommittee's further recommendations concerning the Commission's

review of self-regulatory rules are in Section III.C.3, supra! As noted in Section E. below, the fact that the Commission has reviewed a particular action of a self-regulatory agency does not and should not preclude a court from considering allegations that the action violates the antitrust laws. The availability of direct judicial review, however, should reduce the number of instances in which the antitrust laws are invoked where the real ground of complaint is failure of the agency to comply with applicable substantive or procedural requirements.

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