be immune from antitrust liability. In support of this suggestion they have argued (1) that the court decisions reconciling the antitrust and securities laws are unclear and it is therefore impossible for them to analyze the antitrust consequences of any given self-regulatory action, and (2) that the threat of antitrust liability inhibits the self-regulatory organizations from fulfilling their statutory duties. To assess the merits of these arguments, the Subcommittee has examined the cases decided and pending under the antitrust laws, and has concluded that the basic substantive principles for reconciling the antitrust and securities laws emerge with sufficient clarity to enable self-regulatory organizations to make rational analyses of the legality of their actions. From these cases, it is clear that anticompetitive conduct of self-regulatory organizations is immune from antitrust attack only if the conduct is necessary to make the statutory scheme of regulation work and then only to the minimum extent necessary. This immunity is not increased or broadened by the fact that the action is subject to review by the SEC or even if it is in fact approved by the SEC. These principles derive additional support from decisions reconciling the antitrust laws with regulatory schemes in other regulated industries, such as banking, communications, power, and shipping. With respect to the second question, an examination of the actions of self-regulatory organizations discloses no evidence that they have been prevented from taking actions necessary to protect the public interest by the fear of antitrust exposure. Indeed, the evidence indicates that in many instances consideration of antitrust questions has produced affirmative benefits by preventing unjustified anticompetitive actions. The SEC, while not advocating complete antitrust immunity for the actions of self-regulatory organizations, argues that it should have jurisdiction to determine whether a particular anticompetitive action is necessary to make the Exchange Act work, and that its approval of such action should immunize it against antitrust attack in the courts. It argues that this power is necessary to prevent judicial interference that would upset the regulatory scheme of the Exchange Act. The Subcommittee's analysis of this argument leads to the conclusion that it is inconsistent with the decided cases involving the securities industry and other regulated industries, which have consistently upheld the power of the courts to re-examine the antitrust consequences of actions approved by government regulatory agencies, even where the agency is specifically authorized to consider antitrust questions. There is also no evidence that judicial consideration of the antitrust aspects of self-regulatory decisions has disrupted or will disrupt the regulatory scheme of the Exchange Act. While the SEC may have expert knowledge in the area of securities regulation, the courts are the traditional repositories of antitrust expertise and are also experienced in reconciling competing public policies. The SEC may make its views known to the courts in a particular case either as an intervenor or as amicus curiae and can assist the court in framing decisions and decrees which will not disrupt the regulatory system. On the basis of this analysis, the Subcommittee does not believe that any legislation is needed in this area at the present time. This conclusion is reinforced by an examination of the antitrust cases brought against the self-regulatory organizations in recent years. Most of these cases involve either (1) attacks on the fixed commission rate system and its ancillary restrictions on non-member access or (2) collateral attacks on disciplinary proceedings for which there is no direct avenue of judicial review. The first category of cases should diminish in significance as fixed commission rates are phased out. The second category should similarly diminish with the implementation of the Subcommittee's recommendations, discussed above, for more direct judicial review of exchange and NÁSD disciplinary actions. The pendency of these significant changes further strengthens the Subcommittee's belief that no legislative modification of the applicability of the antitrust laws should be undertaken at this time. CHAPTER I. THE STRUCTURE OF THE INDUSTRY A. REGULATION OF FINANCIAL AND OPERATIONAL ASPECTS OF THE SECURITIES BUSINESS During the hearings which led to enactment of the Securities Investor Protection Act of 19701 the Subcommittee discovered major deficiencies in the regulatory structure of the securities industry which required more comprehensive study than was possible under the emergency conditions which then prevailed. To give proper consideration to these longer range problems, the Committee on Banking, Housing and Urban Affairs directed the Subcommittee to undertake a broad study of the operation of the Securities Exchange Act of 19342 (the "Exchange Act").2 3 In its initial report in February 1972, the Subcommittee made specific recommendations regarding the operational or "back office" side of the securities business. Legislation closely following these recommendations passed the Senate on August 4 but died when Congress adjourned on October 18. In this final report the Subcommittee reaffirms its earlier recommendations regarding the operational aspects of the securities business and sets forth its further conclusions regarding the financial responsibilities of brokers and dealers. 1. FINANCIAL RESPONSIBILITY OF BROKERS AND DEALERS In the course of their business, securities brokers often accept and hold funds and securities on behalf of their customers and other brokers and dealers. Subject to certain limitations these funds and securities may be used in the brokers' business. Record-keeping errors and other violations sometimes result in improper use of such funds and securities. Because such assets are not "specifically identifiable," * customers may not be able to reclaim them in the event of the broker's insolvency. Even when they are specifically identifiable, serious loss can occur due to market fluctuation during a period of receivership. In 1970 it was estimated that some $50 billion in such cash and securities was in the custody of brokers. If public confidence in the American securities markets is to be maintained, it is necessary to assure that brokers and dealers are subject to rules of financial responsibility which are adequate to protect public customers. To accomplish this goal the Exchange Act empowers the Securities and Exchange Commission to promulgate rules of financial responsibility for all brokers and dealers and to oversee additional rules and the enforcement activities of the self-regulatory bodies. 1 Pub. L. 91-598, 84 Stat. 1636. 2 48 Stat. 881 et seq. 3 S. 3876, 92d Cong., 2d Sess. P ior to enactment of SIPC, § 60e of the Bankruptcy Act provided for the return to customers of their fully paid securities which were "specifically identifiable." Section 6 of SIPC embodies this same concept. (23) a. The Legal Framework The Securities and Exchange Commission's power to make rules and regulations concerning the financial responsibility of brokers and dealers is found in sections 8(b) and 15(c)(3) of the Exchange Act." Section 8(b) makes it unlawful for any exchange member, or any broker or dealer who transacts a business in securities through the medium of a member, directly or indirectly: To permit in the ordinary course of business as a broker Section 8(b), however, applies only to broker-dealers who transact business through the medium of a stock exchange member. Furthermore, the section relates only to a broker-dealer's business as a broker, making it difficult at times to determine whether a violation has occurred. Because of these and other technical difficulties, the Securities and Exchange Commission has chosen to rely primarily on section 15(c)(3) of the Exchange Act to assure financial responsibility of brokers and dealers. Section 15(c) (3), which was added in 1938, prohibits any broker or dealer from making use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce tne purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances or commercial bills) in contravention of such rules and regulations as the Com- Pursuant to section 15(c)(3) of the Exchange Act the Commission adopted the forerunner of its present net capital rule on October 29, 1942. Since that time rule 15c3-1 has been "one of the most important weapons in the Commission's arsenal to protect investors." The Commission's rule, as recently amended, imposes a minimum net capital requirement of $25,000 on most brokers and dealers and borrows from the theory of section 8(b) of the Exchange Act in imposing a $15 U.S.C. §§ 78(b), 780(c) (3) (1970). As to other technical problems with section 8(b) see 2 L. LOSS, SECURITIES REGULATION 1350 (2d ed. 1961). 7 Despite these problems, however, section 8(b) of the Exchange Act is and has been treated as self-executs ing. The Commission has proceeded against broker-dealers for violation of the statute even though no rule. have been promulgated thereunder. See 1 Special Study of the Securities Markets 407 n. 377, HR. Doc No. 95, 88th Cong., 1st Sess. (1963) (hereinafter cited as "Special Study"). See also H.R. Rep. No. 1383, 73d Cong.. 2d Sess. p. 20 (1934). Moreover, the absence of definitions for the terms "aggregate indebtedness" and "net capital" in section 8(b) has not stopped the Commission from excluding securities having no ready market from net capital. See, e.g. Guy D. Marianette, 11 S.E.C. 967 (1942). SEC. Securities Exchange Act Release Nos. 3323 (Oct. 29, 1942) & 3602 (Aug. 11, 1944). See Blaise d'Antoni & Associates, Inc. v. SEC, 289 F. 2d 276, 277 (5th Cir. 1961), rehearing denied, 290 F.2d 688 (5th Cir. 1961), cert. denied, 368 U.S. 899 (1961). |