ings. It is Commission review which triggers ultimate access to the courts.35

In other parts of this report 36 the Subcommittee has addressed itself to certain of the recommendations contained in the Commission's Study of Unsafe and Unsound Practices of Brokers and Dealers.37 While that Report fails to provide adequate basis for granting all of the additional powers requested by the Commission, some of the recommendations contained in the report would go far toward providing needed procedural safeguards for certain actions of national securities exchanges and associations. To the extent that they provide for formal Commission review of self-regulatory actions, they will also clarify the rights of aggrieved parties to obtain direct judicial review. Fulfillment of these recommendations of the Subcommittee will clarify the availability of direct judicial review of Commission action and assure that the self-regulatory process operates within the rule of law rather than above it. There has now been enough experience with administrative procedures under the Exchange Act to enable us to begin seeking refinements designed to assure that self-regulatory actions will always be taken in a fair and orderly manner. The decisionmaking process established by the Exchange Act should be one in which meaningful redress is available for those who feel they have been wronged.38

c. The Importance of Reasons, Findings and Conclusions

The Subcommittee's conclusions regarding the availability of direct judicial review of Commission and self-regulatory action presuppose that, in taking action, the Commission will make the reasons for its action sufficiently explicit to enable a reviewing court to properly consider the merits of the case.

Justice Frankfurter's opinion in the landmark case of SEC v. Chenery Corp.39 sets out some of the fundamental requirements of a reviewable Commission decision. In the Chenery case the officers, directors and controlling stockholders of a public utility holding company sought review under the Public Utility Holding Company Act 40 of a Commission order approving a plan of reorganization of the Company. In approving the plan the Commission purported to apply an existing judge-made rule of equity which the Supreme Court later found to be incorrect. Justice Frankfurter's opinion, remanding the case for further proceedings, established principles for review of Commission action which have permeated all federal administrative law. First, the Commission's order could be affirmed only if the grounds upon which the Commission acted were sufficient to sustain the action. Second, as the Commission's sole basis for acting had been incorrect, the action could not be sustained. Third, the fact that an alternative ground for sustaining the Commission's action might be found to exist, was irrelevant.

35 See text supra at note 26.

38 See Section III.C.1, supra.

37 Supra note 23.

38 The Subcommittee's recommendations for direct judicial review concern the Commission and not the exchanges and the NASD. The reviewing courts generally limit their inquiry to the Commission's proceedings even though a self-regulatory decision may also be involved. E.g. R. H. Johnson & Co. v. SEC, 198 F.2d 690 (2d Cir. 1952), cert. denied 344 U.S. 855 (1952). But see Section III.D.1.a.ii, supra.

39 318 U.S. 80 (1943).

40 15 U.S.C. § 79.

The duty of the Commission (and other administrative agencies) to state the grounds for its action is described in the following passage from the opinion:

The Commission's action cannot be upheld merely because
findings might have been made and considerations disclosed
which would justify its order as an appropriate safeguard for
the interests protected by the Act. There must be such a re-
sponsible finding. . . . There is no such finding here.

Congress has seen fit to subject to judicial review such
orders of the Securities and Exchange Commission as the one
before us. That the scope of such review is narrowly circum
scribed is beside the point. For the courts cannot exercise their
duty of review unless they are advised of the considerations
underlying the action under review. If the action rests upon
an administrative determination-an exercise of judgment
in an area which Congress has entrusted to the agency
of course it must not be set aside because the reviewing court
might have made a different determination were it empowered
to do so. But if the action is based upon a determination of
law as to which the reviewing authority of the courts does
come into play, an order may not stand if the agency has
misconceived the law. In either event the orderly functioning
of the process of review requires that the grounds upon which
the administrative agency acted be clearly disclosed and ade-.
quately sustained. "The administrative process will best be
vindicated by clarity in its exercise."

We merely hold that an administrative order cannot be up-
held unless the grounds upon which the agency acted in exer-
cising its powers were those upon which its action can be sus-
tained.41

The principles set out in the Chenery case are still viable administrative law. As Professor Davis has put it:

The practical reasons for requiring administrative findings are so powerful that the requirement has been imposed with remarkable uniformity by virtually all federal and state courts irrespective of a statutory requirement. The reasons have to do with facilitating judicial review, avoiding judicial usurpation of administrative functions, assuring more careful administrative consideration, helping parties plan their cases for re-hearing and judicial review and keeping agencies within their jurisdiction.42

Although the standards may not be the same with every type of administrative action, proper exercise of the function of judicial review requires some minimum statement of reasons in support of "legislative" as well as "adjudicative" actions of administrative agencies. In the course of sustaining a motor vehicle standard under the National Traffic and Motor Vehicle Safety Act the court in Automotive Parts & Accessories Association, Inc. v. Boyd 43 had

41 318 U.S. at 94. (Emphasis added).

422 K. Davis, Administrative Law Treatise 444 (1958). See also Wood County Bank v. Camp. U.S. Dist. Ct., D.C. Civ. Action no. 1277-72 (Oct. 3, 1972) wherein the court held that the Comptroller of the Currency had acted unlawfully in failing to issue findings of fact and a reasoned opinion disclosing the legal and factual basis for his grant of a bank charter. The court stated: ". . . we now live in an age where the public has a right to know why, by whom, and for whose benefit, the public's business is being conducted." 43 407 F.2d 330 (D.C. Cir. 1968).

occasion to review the meaning of section 4(b) of the Administrative Procedure Act. That section provides, in part: "After consideration of the relevant matter presented, the agency shall incorporate in the rules adopted a concise general statement of their basis and purpose." The court noted that the "concise general statement" required in rule-making proceedings is quite different from the detailed findings of fact and conclusions of law required in adjudicatory proceedings. However, in order to facilitate appropriate judicial review, some minimum standards are required:

We do not expect the agency to discuss every item of fact or opinion included in the submissions made to it in informal rulemaking. We do expect that, if the judicial review which Congress has thought it important to provide is to be meaningful, the "concise general statement of . . . basis and purpose" mandated by Section 4 will enable us to see what major issues of policy were ventilated by the informal proceedings and why the agency reacted to them as it did. In view of the fact that effective judicial review is to a considerable degree dependent upon an adequate statement of reasons having been made by the administrative agency, the Subcommittee was disappointed to discover in the most recent case dealing with the subject that the Commission has apparently adopted policies and procedures which tend to obscure rather than clarify the reasons for its actions. The case of Medical Committee for Human Rights vs. SEC has already been discussed.45 However, the statement of the court of appeals regarding the nature of the record certified by the Commission is also relevant in connection with this question:

Perhaps the most serious charge against the Commission's
secretive decision-making, however, is all too clearly illus-
trated by the record in the present case: the lack of articulated
bases for past decisions encourages management to file shot-
gun objections to a shareholder proposal, urging every mildly
plausible legal argument that inventive counsel can contrive,
in the hope that the Commission will accept one of them. If
the Commission does agree with one of management's argu-
ments, or if it determines not to act against the company for
other reasons, the shareholder often has no idea why his
proposal was deemed unworthy or what he can do to cure
its defects for subsequent proxy solicitations. Viewed in this
light, "discretion" can be merely another manifestation of
the venerable bureaucratic technique of exclusion by attri-
tion, of disposing of controversies through calculated non-
decisions that will eventually cause eager supplicants to give
up in frustration and stop "bothering" the agency.46

The Subcommittee's observations from its case studies of the selfregulatory system indicate that the above example of poor articulation of the basis for Commission action is not an isolated one.

The NASD's initial decision to include listed securities in its NASDAQ quotation system reflected Commission disapproval of the

44 5 U.S.C. § 553 (c).

45 See text at note 10, supra.

46 432 F.2d at 674. See also Note, Informal Bargaining Process: An Analysis of the SEC's Regulation of The New York Stock Exchange, 80 Yale L. Journ. 811, 833 (1971).

88-033-73-15

exclusion of listed stocks. The Commission suddenly reversed its position and dropped the objection in October of 1970, stating that the previous objection had only been voiced by its staff. Neither of the two Commission positions was supported by an articulation of the reasons upon which it was based. Litigation is now pending.

The Commission's review of the NYSE's decision to permit its member organizations to sell life insurance was also characterized by a lack of policy articulation. After nearly four and one-half months of non-public negotiations, the exchange of eight letters and at least one meeting, the Commission merely stated that it had "no objection" to the NYSE's proposal. The Commission did not address itself to the impact of life insurance sales by member firms on the protection of investors or the public interest or to other issues presented by the proposal.48

The Subcommittee feels that, if its recommendations regarding the availability of direct judicial review are to be meaningfully implemented, they must be accompanied by legislation requiring the Commission, when making significant regulatory decisions, to state its findings and the reasons for its actions. In another section of this report the Subcommittee has outlined its recommendation in this regard in greater detail.49 Implementation of these recommendations will complement the Subcommittee's recommendations regarding the availability of judicial review.

47 3 Study Hearings at 3.

48 3 Study Hearings 91-92.
49 See Section III.C.3.b, supra.

E. APPLICATION OF THE ANTITRUST LAWS TO THE SECURITIES INDUSTRY

2

1. INTRODUCTION

As noted in the preceding section, persons aggrieved by actions of securities exchanges have no avenue for obtaining review of those actions under the securities laws, either by the SEC or by the courts. This unavailability of review affects persons who are excluded from exchange membership for any reason, who are disciplined or expelled by an exchange, or who are denied access to valuable exchange services, such as the NYSE ticker service or private wire connections with NYSE members. As a consequence, persons aggrieved by such action have increasingly turned to the antitrust laws for redress of their grievances: usually by alleging group refusals to deal in violation of sections 1 and 2 of the Sherman Act.1

Similarly, persons who are dissatisfied with economic decisions of the exchanges, on such questions as fixed commission rates or nonmember access, cannot obtain direct judicial review of those actions under the securities laws. Because the SEC often passes on exchange rules through a process of informal bargaining and acquiesience, rather than by making a definitive determination of approval or disapproval after a formal proceeding, those rules cannot be subjected to judicial review through the avenue of review of SEC action. For instance, investors disatisfied with the NYSE's new commission rate schedule were told, when they sought to challenge the SEC acceptance of the new schedule in the courts, that the SEC had not "approved" the schedule

1 See, e.g., Zuckerman v. Yount, Docket No. 71 C 1770 (U.S.D.C.N.D. Ill. filed July 21, 1971). In this pending case plaintiff sought to be admitted as a specialist on the Midwest Stock Exchange. His application was approved, subject to a six-month probationary period. Plaintiff did not accept this condition and has brought suit under the antitrust laws. The complaint is summarized in 7 Study of the Securities Industry, Hearings Before the Subcomm. on Commerce and Finance of the House Comm. on Interstate and Foreign Commerce, 92d Cong. 2d Sess. (1972) at 3756 (hereinafter cited as "House Hearings"). Parts 1-5 of these hearings were held in the 1st Session of the 92d Congress; Parts 6-9 were held in the 2d Session.

2 See, e.g., J. R. Williston & Beane v. Haack, 67 Civ. 4556 (U.S.D.C.S.D.N.Y. filed Nov. 27, 1967). In this case plaintiff alleges that its suspension as a member firm violated the antitrust laws. The complaint is summarized in 7 House Hearings at 3761.

3 See, e.g., Silver v. New York Stock Exchange, 373 U.S. 341 (1963). The Silver case is discussed at length below in the text at fns. 18 to 24.

4 §1 of the Sherman Act (15 U.S.C. §1) provides:

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 declared to be illegal. . . . §2 of the Sherman Act (15 U.S.C. §2) provides:

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 deemed guilty of a misdeameanor. ...

§4 of the Clayton Act (15 U.S.C. § 15) provides that treble damages shall be awarded to any person injured by conduct prohibited by the antitrust laws.

Group refusals to deal, or boycotts, can violate both §§1 and 2. The Antitrust Division of the Department of Justice describes the general principle applicable to self-regulatory bodies as follows:

It is a basic rule of antitrust law that those who jointly control an essential resource must grant access to it, on equal and non-discriminatory terms, to all in the trade. This rule of law was developed to prevent those holding a unique economic position from using that lawful position to foreclose competition in other related activities which should be competitive.

Statement of the United States Department of Justice, SEC, Hearings on the Structure, Operation and Regulation of the Securities Markets, File No. 4-147 (1971) reprinted in 1 Securities Industry Study, Hearings Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing and Urban Affairs, 92d Cong. 1st Sess. (1971) at 80 (hereinafter cited as "Study Hearings"). Parts 1-2 of these hearings were held in the 1st Session of the 92d Congress; Parts 3-4 were held in the 2d Session.

5 See, e.g., Independent Investor Protective League v. SEC, Docket No. 71-1921 (2d Cir., filed Sept. 28, 1971) discussed in Chapter III.D.1.a., supra.

This practice is discussed in Chapter III.D.1., supra. See also Note Informal Bargaining Process: An Analysis of the SEC's Regulation of the New York Stock Exchange, 80 Yale L. J. 811 (1971).