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FREDRICKSON v. MERRILL LYNCH

September 9, 1974

J. KENNETH FREDRICKSON AND ALAN SURGAL, INDIVIDUALLY, AND ON BEHALF OF A CLASS OF PERSONS SIMILARLY SITUATED, PLAINTIFFS,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Parsons, District Judge.

  MEMORANDUM OPINION AND ORDER

This action was commenced on January 26, 1973. Plaintiffs have brought this action both individually and on behalf of a class of persons similarly situated; the class includes all nonmembers of three named stock exchanges who have paid or became liable to pay commissions for the purchase or sale of any securities to members of various stock exchanges during a particular four year period. The defendants are three national securities exchanges, who are named individually and as representatives of an alleged class of securities exchanges, and several brokerage houses belonging to the exchanges, who are named individually and as representatives of an alleged class of securities exchange members. Plaintiffs claim that defendants have violated Section One of the Sherman Act, and their complaint contains four separate counts. Count I makes allegations about the nature and mechanics of defendants' purported price fixing and its effects. Count II alleges that the purported price fixing is not necessary to effectuating the purposes of the 1934 Securities Exchange Act and that there has never been any regulation of commission rates by any governmental agency. Count III alleges that the price fixing exceeded the minimum extent necessary for effectuating the purposes of the 1934 Act. Count IV alleges that the fixed minimum commission rates have been applied far beyond the extent necessary to achieve the goals and regulatory aims of the 1934 Securities Exchange Act. Subject matter jurisdiction is said to arise under 28 U.S.C. § 1337.

Defendants have moved this Court to dismiss the complaint, or in the alternative, to stay all proceedings pending exercise by the SEC of its alleged primary jurisdiction under the 1934 Exchange Act as amended. Defendants' motion has been supported by several affidavits and memorandums of law, and has been opposed by the plaintiffs through an affidavit and a memorandum in opposition.

I begin my analysis of defendants' motion to dismiss by noting that most national securities exchanges have traditionally possessed rather broad powers to promulgate rules and regulations pertaining to the administration of their ordinary affairs, Silver v. New York Stock Exchange, 373 U.S. 341, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1962). However, these powers are now limited by the Securities Exchange Act of 1934 as amended, by the rules and regulations of the SEC adopted thereunder, and by applicable state laws, 15 U.S.C. § 78f(c). Limitations on these powers include a registration requirement, 15 U.S.C. § 78e; the need for rules on the expulsion, suspension, or disciplining of a member, 15 U.S.C. § 78f(b); a requirement that exchange rules be obeyed and be just and adequate to insure fair dealing and to protect investors, 15 U.S.C. § 78f(d); and the potential intervention by the SEC in certain securities exchange rule-making, 15 U.S.C. § 78s(b).

Among these broad powers of national securities exchanges is the ability to fix minimum commission rates to be charged by members and member organizations. The fixing of minimum commission rates is also among the areas of exchange rule-making where the SEC may intervene, 15 U.S.C. § 78s(b)(4) and Kaplan v. Lehman Brothers, 371 F.2d 409 (7th Cir. 1967); incidentally, such intervention may occur when the rates affect nonmembers as well as members of any exchange, Silver, supra, 373 U.S. at 356, 83 S.Ct. 1246. SEC — prompted rule changes on commission rates are only authorized, however, when the agency determines that ". . . such changes 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 . . .", 15 U.S.C. § 78s(b). The three securities exchanges who are defendants in this case all allege to have operated within the legal limitations of their rule-making power, and have all had rules on minimum commission rates since at least 1934. The undisputed record before me at this point indicates that the various changes which have occurred since 1934 in the minimum commission rates of the three defendant exchanges have at least been closely watched, if not regulated, by the SEC.

In the present case, plaintiffs contend the minimum commission rates of the defendant exchanges violate antitrust law — even though they may have been established pursuant to the exchanges' Congressionally recognized authority and even though the rates may be subject to potential SEC regulation. Thus, as in the leading case of Silver v. New York Stock Exchange, supra, the Court's main concern here is how to relate the goal of eliminating restraints on competition which is embodied in the Sherman Act of 1890 as amended (15 U.S.C. § 1) with the public policy favoring self-regulation by national securities exchanges which is embodied in the Securities Exchange Act of 1934 as amended (15 U.S.C. § 78a). And as in Silver, this Court — if possible — should reconcile the operation of both statutory schemes with one another rather than holding one completely ousted. Silver, supra, 373 U.S. at 357, 83 S.Ct. 1246.

According to the defendants, such a reconciliation is impossible in this case. In their motion to dismiss, defendants have generally argued that antitrust law does not apply to the self-regulating rules of the national securities exchanges which have been Congressionally authorized and which are subject to review by the SEC. Defendants contend that the fixing of minimum commissions complained of here is within the scope of authorized exchange self-regulation; was intended by Congress to be immune from antitrust attack; has been held by other courts to be so immune; and would be improperly thwarted by a collateral antitrust attack. Defendants thus ask that the complaint be dismissed since no antitrust action may lie.

The 1934 Securities Exchange Act which recognizes the broad, self-regulatory powers of national securities exchanges, including the aforementioned traditional rule-making powers, contains no express exemption of exchange rules from the application of antitrust laws. Silver, supra, 373 U.S. at 357, 83 S.Ct. 1246. This is particularly significant in light of other comparable statutes which do contain express exempt provisions. U.S. v. Philadelphia National Bank, 374 U.S. 321, footnote 27 at 350, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1962). Thus, the defendants' claim that its rules regarding minimum commissions are immune from antitrust attack must be based on the Act's implied repeal of the antitrust laws. The Supreme Court in Silver recognized that the Securities Exchange Act did impliedly repeal antitrust law to a certain extent, though it recognized the longstanding rule that repeals by implication were not favored. Silver, supra, 373 U.S. at 357, 83 S.Ct. 1246. The Court in Silver found that ". . . repeal is to be regarded as implied only if necessary to make the Securities Exchange Act work, and even then only to the minimum extent necessary." Silver, supra, 373 U.S. at 357, 83 S.Ct. at 1257. Thus, the Court in Silver recognized that ". . . particular instances of exchange self-regulation . . . may be regarded as justified in answer to the assertion of an antitrust claim." Silver, supra, 373 U.S. at 361, 83 S.Ct. at 1259. The plaintiffs' complaint essentially states that the acts of self-regulation in the present case, i.e., the fixing of minimum commission rates, do not justify a repeal of the antitrust laws. Defendants' motion to dismiss does not, however, go to the question of whether the defendant exchanges' self-regulatory acts were justified; rather, it asks this Court to decide who should properly decide whether or not the acts were justified. Defendants' alternative motion to stay proceedings also addresses itself to this question of who should decide, as well as to the manner in which the question of justification should be decided.

Since the statutory scheme setting up exchange self-regulation was not sufficiently pervasive to create a total exemption from the antitrust laws, the Court in Silver recognized that ". . . some form of review of exchange self-policing . . . is therefore not at all incompatible with the fulfillment of the aims of the Securities Exchange Act." 373 U.S. at 359, 83 S.Ct. at 1258. The Court stated that such review could be by either administrative agency or by the courts. In Silver, since the defendants' actions which plaintiffs claimed violated antitrust laws were not subject to the SEC's jurisdiction, the Court held that the plaintiffs' claim was recognizable in an antitrust court. Yet the Court said: "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." Silver, supra, 373 U.S. at 360, 83 S.Ct. at 1258. Because the SEC allegedly has the power to review minimum commission rates under 15 U.S.C. § 78s(b)(9) and their antitrust effects, the defendants argue that there is no jurisdiction in the antitrust court to review the rates for alleged antitrust violations.

It seems clear that the SEC has the power to review minimum commission rates under 15 U.S.C. § 78s(b)(9). Gordon v. New York Stock Exchange, Inc., 366 F. Supp. 1261 (S.D.N.Y. 1973), affirmed 498 F.2d 1303 (2nd Cir. 1974); Kaplan v. Lehman Brothers, 250 F. Supp. 562 (N.D.Ill. 1966), affirmed 371 F.2d 411 (7th Cir. 1967). It also seems clear that the SEC has the power to consider antitrust matters when reviewing exchange self-regulatory rules and policies, including those relating to minimum commission rates. Thill Securities Corp. v. New York Stock Exchange, 433 F.2d 264, at 271 (7th Cir. 1970); The Rules of the New York Stock Exchange, 10 SEC 270 (1941); Eisen v. Carlisle and Jacquelin, 54 F.R.D. 565, at 572 (S.D.N.Y. 1972). The provision that national securities exchange rules must be "just and adequate to insure fair dealing," 15 U.S.C. § 78f(d) seems quite similar to provisions limiting rules to those which serve the "public interest," Gulf States Utilities Co. v. F.P.C., 411 U.S. 747, at 757-758, 93 S.Ct. 1870, 36 L.Ed.2d 635 (1972) or those which are not "detrimental to the commerce of the United States . . . or is unjustly discriminating or unfair," Latin America/Pacific Coast Steamship Conference v. Federal Maritime Commission, 150 U.S.App.D.C. 362, 465 F.2d 542 at 554 and 558 (1972), cert. den. 409 U.S. 967, 93 S.Ct. 269, 34 L. Ed.2d 234. Finally, it seems clear that the SEC considered antitrust matters in this case when it at least allowed the defendant exchanges' minimum commission rates to function over the past 4-6 years. See the affidavits of Calvin, Crawford, Weithers and Rotberg.

In light of the foregoing, the central issue in the case at hand becomes this: Does SEC supervision, or at least the potential for SEC supervision, of minimum commission rates — including the consideration of relevant antitrust matters — mean that antitrust courts have absolutely no jurisdiction to entertain suits concerning these rates under the antitrust acts? In answering this question, I am aware of this Court's possible jurisdiction over the minimum rate structure under the Administrative Procedure Act and under 15 U.S.C. § 78y, Gordon, supra, 498 F.2d 1303; Thill Securities Corp., supra, 433 F.2d at 277.

The Second Circuit Court of Appeals has held that under these conditions, there can be no antitrust suits. The federal district court in Gordon held:

  "Without venturing to describe the full contours of
  this immunity, we believe that the Exchange Act, as
  construed by Silver, left the power to fix
  commission rates within the exclusive jurisdiction of
  the Exchange, ...

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