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but had merely "not objected to it. The SEC action, therefore, unlike the actions of other rate-setting agencies, was not subject to review in the courts.? These persons also have turned to the antitrust laws for redress.

In defending antitrust suits brought on these various grounds, the self-regulatory bodies have argued, first, that they are entirely immune from antitrust liability, because their actions are taken pursuant to self-regulatory authority specifically recognized in the Securities Exchange Act. Failing this, they have argued that their actions are immune if they are reviewable by the SEC, whether or not the SEO exercised its review power and whether or not the SEC's action (or failure to take any action) might in turn be subject to judicial scrutiny. In short, the self-regulatory bodies have argued that the mere existence in the SEC of the power to review self-regulatory action immunizes such action from any antitrust challenge.

The courts have not been sympathetic to these argument$. Although no antitrust action appears to have thus far resulted in a final judgment against a self-regulatory body, there is a constantly growing number of pending cases with an attendant threat of substantial monetary liability.11

In these circumstances, suggestions have been made that joint actions of competitors taken through the self-regulatory organizations should be specifically exempted from the antitrust laws. In support of this position, the self-regulatory organizations argue that court decisions reconciling the securities and antitrust laws are unclear, making it impossible for them to analyze their antitrust exposure for any given action, and that the threat of antitrust liability interferes with effective self-regulation 2

In this section, the Subcommittee will analyze the cases reconciling the antitrust and the securities laws and the arguments for legislation: in this area.

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2. RECONCILIATION OF THE ANTITRUST AND SECURITIES LAWS+THE

CURRENT LAW a. The Necessity For Antitrust Review

The concept of self-regulation which Congress recognized in the Securities Exchange Act of 1934 (the “1934 Act”) creates a peculiar antitrust problem for the self-regulatory bodies and their members. i The 1934 Act gives industry self-regulatory bodies quasi-governmental powers over their members, and requires these bodies to adopt and enforce rules to protect the public against certain dangers. These include abuse of the fiduciary relationship between broker-dealers and ; their customers, manipulation of the markets by "insiders”, and other forms of dishonesty. By sanctioning the concept of self-regulation, the statute also sanctions the concept of a group of competitors agreeing ? Independent Investor Protective League v. SEC, supra note 5. & See Silver v. New York Stock Exchange, supra note 3. See NYSE, Statement of Counsel Regarding

Antitrust Immunity, 7 House Hearings, supra note 1, at 3803, 3809; NYSE Supplemental Statement of Counsel Regarding Antitrust Immunity, id. st 3763.

10 See Silver v. New York Stock Exchange, supra note 3; Thill v. New York Stock Exchange, 433 F.2d 264 (7th Cir. 1970) cert. denied 401 U.S. 994 (1971). The cases are discussed at length below in Chapter III. E. 2.

11 For a summary of the cases pending in March 1970 see 7 House IIearings at 3755-3764. The Subcommittee has been advised by the several self-regulatory bodies that as of October, 1972 three additional cases have been commenced and an antitrust counterclaim has been asserted in a case brought by the NYSE against the former partners of Goodbody & Co. 12 See NYSE Statement of Counsel Regarding Antitrust Immunity, supra note 9.

to impose restrictions upon themselves, including restrictions upon how they will compete with one another and restrictions that will affect competitors who are not members of the group. The danger, however, is that the group will use this power, intentionally or otherwise, to limit competition or disadvantge non-member competitors in a manner which does not further the purposes of the 1934 Act.

To protect the public and competitors against unjustified anticompetitive restrictions, the rules and actions of the self-regulatory organizations must be subject to review under antitrust standards. In the case of the securities industry this review can come from two sources: through review by the SÈC or through judicial proceedings in the courts.

i. SEC Review

Under section 19(b) of the 1934 Act, the SEC is authorized to alter or supplement the rules of a registered stock exchange concerning twelve specific subjects and "similar matters.”. In effect, this gives the SEC the power to review exchange rules in the enumerated areas.13 Under Section 15A of the 1934 Act, the SEC has the power to abrogate any of the rules of a registered national securities association (the NASD) and to compel such an association to alter or supplement its rules in certain respects. Section 15A also authorizes the SEC to review the disciplinary proceedings of the NASD.14

While the 1934 Act sets forth broad standards to be applied by the SEC in taking action under sections 19 and 15A, the Act does not specifically require the SEC to consider antitrust or anticompetitive consequences in reviewing self-regulatory action. Nevertheless, the SEC has on certain occasions taken such questions into account in passing on proposed rules of self-regulation.

In the Multiple Trading case,15 the SEC formally used its $19(b) power over stock exchange rules for the first time, and used it to protect the competitive position of the regional stock exchanges. In 1940, the New York Stock Exchange adopted a rule prohibiting Exchange members from acting as odd-lot dealers or specialists in NYSE listed stocks on any other exchange. The SEC found that the rule limited the amount of business in NYSE-listed securities which could be done on the regional exchanges in competition with the New York Stock Exchange and reduced competition between New York Stock Exchange members and regional exchange members. The NYSE argued that the purpose of this rule was to prevent the evasion of its minimum commission rule. Taking into consideration the Congressional policy favoring competition between exchanges, the SEC abrogated this rule as anti-competitive:

At best, the rule is an attempt by the NYSE to implement its minimum commission rule. Whether or not that object might be justifiable, we are of the opinion that it cannot properly be achieved by measures such as this rule which ... would seriously impede the functioning of important instrumentalities of interstate commerce, would unreasonably restrain interstate commerce and would have other un

desirable consequences.' 13 The SEC's 19(b) power is discussed at length in Chapter III.C.1.a.iii, supra. 14 The SEC's powers under $15 A are discussed at length in Chapter III.C.1. a., su pra. 15 Matter of The Rules of the New York Stock Exchange, 10 S.E.C. 270 (1911).

16

16 Id. at 292.

Since the Multiple Trading case, the SEC has not taken formal action to apply antitrust concepts to self-regulation. Recently, however, the SEC has, on occasion, mentioned the antitrust laws in informally passing upon self-regulatory proposals. For instance, in informally reviewing the NYSE's public ownership proposals in 1970, the SEC successfully urged the NYSE to eliminate some restrictions because of their anticompetitive impact.17

i. Judicial Review

There are two avenues by which alleged antitrust violation can be reviewed by the courts: private suits and governmental enforcement. Private citizens can sue for damages or injunctions and the government itself may act through either criminal or civil proceedings.

Although the Justice Department has not yet brought suit against any self-regulatory bodies in the securities industry, private litigants have been active in the courts in the past ten years. b. The Silver Case

In Silver v. New York Stock Exchange 18 the courts considered for the first time the applicability of the antitrust laws to self-regulatory action in the securities industry.

Plaintiff Silver owned two securities firms. Neither firm was a New York Stock Exchange member. These firms established communications via private wire connections with a number of other securities firms, some of which were NYSE members. The New York Stock Exchange Rules required NYSE approval of all private wire connections between member firms and non-members. The Exchange granted "temporary approval" to the connections with one firm

After six months, the Exchange disapproved the connections between its members and Silver, and ordered its member firms to discontinue them immediately. The Exchange refused to give any reason for its action. Having no other recourse, Silver sued the Exchange, alleging, inter alia, that the Exchange had violated the Sherman Act by conspiring with its members to refuse to deal with Silver's firms. In its defense, the Exchange claimed that the 1934 Act, by imposing on the Exchange the duty to regulate its members, served as an implied repealer of the antitrust laws insofar as they might otherwise bave been applicable to self-regulatory conduct.

The Supreme Court noted that the collective action of the NYSE and its members would constitute an unlawful refusal to deal absent any justification derived from the policy of another tatute or otherwise.” 19 The Court then stated that the 1934 Act authorized actions by the self-regulatory bodies which would violate the antitrust laws if done by purely private groups. Based upon this, the Court framed the issue before it as follows:

The fundamental issue confronting us is whether the Securities Exchange Act has created a duty of exchange selfregulation so pervasive as to constitute an implied repealer of our antitrust laws, thereby exempting the Exchange

from liability in this and similar cases.20 17 See SEC Sec. Ex. Act Rel. No. 8831 (Feb. 26, 1970). 18 373 U.S. 341 (1963). 19 Id. at 348-49.

20 Id. at 347.

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Rejecting the Exchange's argument that it was immuno, the Court answered this question in the negative:

[T]he proper approach to this case, in our view, is an analysis
which reconciles the operation of both statutory schemes
with one another rather than holding one completely ousted.

The Securities Exchange Act contains no express exemp-
tion from the antitrust laws or, for that matter, from any
other statute. This means that any repealer of the antitrust
laws must be discerned as a matter or implication, and "[i]t
is a cardinal principle of construction that repeals by im-
plication are not favored.Repeal is to be regarded as implie!
only if necessary to make the Securities Exchange Act work, and
even then only to the minimum extent necessary. This is the

guiding principle to reconciliation of the two statutory schemes. 21 In finding the Exchange subject to the antitrust laws, the Court observed that "under the aegis of the rule of reason,” antitrust concepts and their application by the Courts were sufficiently flexible to allow exchanges the necessary latitude within which to perform their self-regulatory functions. 22

Having enunciated these general principles, the Court found that the particular Exchange rule before it, governing relations and transactions between members and non-members, was germane to the Exchange's statutory duties of self-regulation. However, the Court held that the Exchange's application of the rule in a manner which did not afford the aggrieved party procedural due process was not justified by any policy of the 1934 Act and that, therefore, the refusal to deal with Silver, under the circumstances present, a was violation of the antitrust laws. 23

The holding of the Silver case then is that the antitrust laws are applicable to the actions of self-regulatory organizations in the securities industry and that actions of those organizations which have anti-competitive impact are immune from antitrust attack only if such actions are shown to be necessary to make the 1934 Act work.

In the Silver case, the plaintiff was not attacking self-regulatory conduct which was subject to review by the SEC, but the application of an exchange rule. Under the 1934 Act the SEC does not have any jurisdiction to review the manner in which exchanges apply their rules. Accordingly, the Court expressly left unanswered the question of the extent to which the antitrust laws would apply to self-regulatory actions which were directly reviewable by the SEČ:

Were there Commission jurisdiction and ensuing judicial
review for scrutiny of a particular exchange ruling, as there
is under the 1938 Maloney Act amendments to the Exchange
Act to examine disciplinary action by a registered securities
association ... a different case would arise concerning
exemption from the operation of laws designed to prevent

anticompetitive activity, an issue we do not decide today.24 21 Id. at 357 (emphasis added) (citations omitted).

22 Id. at 360.
23 Id. at 361-2.
24 Id. at 358 fn. 12 (citations omitted).

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c. The Judicial Amplification of the Silver Case

The question of the impact of SEC review jurisdiction was subsequently presented in the case of Kaplan v. Lehman Brothers.25 In Kaplan, plaintiffs, who owned shares in five mutual funds, sued the NYSE and several member firms on behalf of the funds alleging that the fixed minimum commission rate structure of the NYSE violated the antitrust laws and was an unlawful price-fixing conspiracy. Commission rates are subject to SEC review under § 19(b) (9) of the 1934 Act. The district court dismissed the complaint on the grounds that it alleged that the fixed commission structure was a per se 28 violation and the "[r]ules adopted by an Exchange under the authority of the (1934) Act are not illegal per se." 27 This holding merely recognized the principle enunciated in Silver that conduct which would automatically be an antitrust violation in the absence of the Exchange Act is exempted from antitrust liability if it can be shown to be neces sary to make the Exchange Act work.28 The district court also noted the Supreme Court's reservation of the question of antitrust liability for actions which were subject to SEC review, and held that because the commission rate structure was subject to review by the SEC, the need for judicial review, which was the only source of review available in Silver, was absent.29

The Court of Appeals for the Seventh Circuit affirmed the dismissal of the complaint. In a short opinion which did not consider whether or not the fixed minimum commission schedule was necessary to make the 1934 Act work, the Court of Appeals merely asserted that $ 19(b) of the 1934 Act authorized the NYSE to fix minimum rates of commission because "the fixing of minimum commissions is one method of regulating commission rates.” 30 The Court also noted that the SEC had the power to deal with commission rates under $19(b) It is possible, therefore, to read the Court of Appeals opinion in the Kaplán case broadly enough to make it stand for the proposition that self-regulatory conduct which is subject to SEC review is immune from antitrust attack, regardless of whether or not the SEC actually reviewed the particular exchange action in question.

The Supreme Court denied certiorari. However, Chief Justice Warren dissented from this denial, noting that the Seventh Circuit decision fell “far short of the close analysis and delicate weighing process mandated by this Court's opinion in Silver." 31

In Thill Securities Corporation 0. New York Stock Exchange, 32 a different panel of the Court of Appeals for the Seventh Circuit backed: away from, if it did not repudiate entirely,33 the broader implications of the Seventh Circuit decision in Kaplan. Plaintiff in the Thill case was a broker-dealer who was not a member of the New York Stock Exchange. An Exchange rule forbade member firms from executing

25 250 F. Supp. 562 (N.D. III., 1966), a ffirmed 371 F.2d 409 (7th Cir.), cert. denied 389 U.S. 951 (1967) (Warren C.J., dissenting).

26 Under the antitrust laws some conduct is deemed to be inherently unlawful. Such conduct cannot be, justified as being reasonable and is therefore considered a per se violation. Purely private price fixing agree ments fall within this classification. See, e.g., United States v. Socony-Vacuum Oil Co., Inc., 310 U.S. 150 27 250 F. Supp. at 565. 28 Ibid. 20 Id. at 566. 30 371 F.2d at 411. 31 389 U.S. at 957. 32 433 F. 2d 264 (7th Cir. 1970), cert. denied, 401 U.S. 994 (1971). 33 See Securities Industry Study, Report of the Subcomm. on Commerce & Finance of the House Comm. on Interstate & Foreign Commerce, 92d Cong. 2d Sess. (1972) at 160.

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