United States v. NASD, Inc.Annotate this Case
422 U.S. 694 (1975)
U.S. Supreme Court
United States v. NASD, Inc., 422 U.S. 694 (1975)
United States v. National Association of Securities Dealers, Inc.
Argued March 17, 1975
Decided June 26, 1975
422 U.S. 694
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Section 22(d) of the Investment Company Act of 1940 provides that
"no dealer shall sell [mutual fund shares] to any person except a dealer, a principal underwriter, or the issuer, except at a current public offering price described in the prospectus."
Section 22(f) authorizes mutual funds to impose restrictions on the negotiability and transferability of shares, provided they conform with the fund's registration statement and do not contravene any rules and regulations that the Securities and Exchange Commission (SEC) may prescribe in the interests of the holders of all of the outstanding securities. Section 2(a)(6) defines a "broker" as a person engaged in the business of effecting transactions in securities for the account of others, and § 2(a)(11) defines a "dealer" as a person regularly engaged in the business of buying and selling securities for his own account. The Maloney Act of 1938 (§ 15A of the Securities Exchange Act of 1934) supplements the SEC's regulation of over-the-counter markets by providing a system of cooperative self-regulation through voluntary associations of brokers and dealers. The Government brought this action against appellee National Association of Securities Dealers (NASD), certain mutual funds, mutual fund underwriters, and broker-dealers, alleging that appellees, in violation of § 1 of the Sherman Act, combined and agreed to restrict the sale and fix the resale prices of mutual fund shares in secondary market transactions between dealers, from an investor to a dealer, and between investors through brokered transactions, and sought to enjoin such agreements. Count I of the complaint charged a horizontal combination and conspiracy among NASD's members to prevent the growth of a secondary dealer market in the purchase and sale of mutual fund shares, the Government contending that such count was not to be read as a direct attack on NASD rules, but on NASD's interpretations and appellees' extension of the rules so as to include a secondary market. Counts II-VIII alleged various vertical restrictions on secondary
market activities. The District Court dismissed the complaint on the grounds that §§ 22(d) and (f), when read in conjunction with the Maloney Act, afforded antitrust immunity from all of the challenged practices. It further determined that, apart from this statutory immunity, the pervasive regulatory scheme established by these statutes conferred an implied immunity from antitrust sanction. The court concluded that the § 22(d) price maintenance mandate for sales by "dealers" applied to transactions in which a broker-dealer acts as statutory "broker", rather than a statutory "dealer," and thus that § 22(d) governs transactions in which the broker-dealer acts as an agent for an investor as well as those in which he acts as a principal selling shares for his own account.
1. Neither the language nor legislative history of § 22(d) justifies extending the section's price maintenance mandate beyond its literal terms to encompass transactions by broker-dealers acting as statutory "brokers." Pp. 422 U. S. 711-720.
(a) To construe § 22(d) to cover all broker-dealer transactions would displace the antitrust laws by implication and also would impinge on the SEC's more flexible authority under § 22(f). Implied antitrust immunity can be justified only by a convincing showing of clear repugnancy between the antitrust laws and the regulatory system, and here no such showing has been made. Pp. 422 U. S. 719-720.
(b) Such an expansion of § 22(d)'s coverage would serve neither this Court's responsibility to reconcile the antitrust and regulatory statutes where feasible nor the Court's obligation to interpret the Investment Company Act in a manner most conducive to the effectuation of its goals. P. 422 U. S. 720.
2. The vertical restrictions sought to be enjoined in Counts II-VIII are among the kinds of agreements authorized by § 22(f), and hence such restrictions are immune from liability under the Sherman Act. Pp. 422 U. S. 720-730.
(a) The restrictions on transferability and negotiability contemplated by § 22(f) include restrictions on the distribution system for mutual fund shares as well as limitations on the face of the shares themselves. To interpret the section as covering only the latter would disserve the broad remedial function of the section, which, as a complement to § 22(d)'s protection against disruptive price competition caused by dealers' "bootleg market" trading of mutual fund shares, authorizes the funds and the SEC to deal more flexibly with other detrimental trading practices
by imposing SEC-approved restrictions on transferability and negotiability. Pp. 422 U. S. 722-725.
(b) To contend, as the Government does, that the SEC's exercise of regulatory authority has been insufficient to give rise to an implied immunity for agreements conforming with § 22(f) misconceives the statute's intended operation. By its terms, § 22(f) authorizes properly disclosed restrictions unless they are inconsistent with SEC rules or regulations, and thus authorizes funds to impose transferability or negotiability restrictions subject to SEC disapproval. Pp. 422 U. S. 726-728.
(c) The SEC's authority would be compromised if the agreements challenged in Counts II-VIII were deemed actionable under the Sherman Act. There can be no reconciliation of the SEC's authority under § 22(f) to permit these and similar restrictive agreements with the Sherman Act's declaration that they are illegal per se. In this instance, the antitrust laws must give way if the regulatory scheme established by the Investment Company Act is to work. Pp. 422 U. S. 729-730.
3. The activities charged in Count I are neither required by § 22(d) nor authorized under § 22(f), and therefore cannot find antitrust shelter therein. The SEC's exercise of regulatory authority under the Maloney and Investment Company Acts is sufficiently pervasive, however, to confer implied immunity from antitrust liability for such activities. Pp. 422 U. S. 730-735.
374 F.Supp. 95, affirmed.
POWELL, J., wrote the opinion of the Court, in which BURGER, C.J., and STEWART, BLACKMUN, and REHNQUIST, JJ., joined. WHITE, J., filed a dissenting opinion, in which DOUGLAS, BRENNAN, and MARSHALL, JJ., joined, post, p. 422 U. S. 735.
Opinion of the Court by MR JUSTICE POWELL, announced by MR. JUSTICE BLACKMUN.
This appeal requires the Court to determine the extent to which the regulatory authority conferred upon the Securities and Exchange Commission by the Maloney Act, 52 Stat. 1070, as amended, 15 U.S.C. § 78o-3, and the Investment Company Act of 1940, 54 Stat. 789, as amended, 15 U.S.C. § 80a-1 et seq., displaces the strong antitrust policy embodied in § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1. At issue is whether certain sales and distribution practices employed in marketing securities of open-end management companies, popularly referred to as "mutual funds," are immune from antitrust liability. We conclude that they are, and accordingly affirm the judgment of the District Court.
An "investment company" invests in the securities of other corporations and issues securities of its own. [Footnote 1]
Shares in an investment company thus represent proportionate interests in its investment portfolio, and their value fluctuates in relation to the changes in the value of the securities it owns. The most common form of investment company, the "open end" company or mutual fund, is required by law to redeem its securities on demand at a price approximating their proportionate share of the fund's net asset value at the time of redemption. [Footnote 2] In order to avoid liquidation through redemption, mutual funds continuously issue and sell new shares. These features -- continuous and unlimited distribution and compulsory redemption -- are, as the Court recently recognized, "unique characteristic[s]" of this form of investment. United States v. Cartwright,411 U. S. 546, 411 U. S. 547 (1973).
The initial distribution of mutual fund shares is conducted by a principal underwriter, often an affiliate of
the fund, and by broker-dealers [Footnote 3] who contract with that underwriter to sell the securities to the public. The sales price commonly consists of two components, a sum calculated from the net asset value of the fund at the time of purchase and a "load," a sales charge representing a fixed percentage of the net asset value. The load is divided between the principal underwriter and the broker-dealers, compensating them for their sales efforts. [Footnote 4]
The distribution-redemption system constitutes the primary market in mutual fund shares, the operation of which is not questioned in this litigation. The parties agree that § 22(d) of the Investment Company Act requires broker-dealers to maintain a uniform price in sales in this primary market to all purchasers except the fund, its underwriters, and other dealers. And in view of this express requirement, no question exists that antitrust immunity must be afforded these sales. This case
focuses, rather, on the potential secondary market in mutual fund shares. Although a significant secondary market existed prior to enactment of the Investment Company Act, little presently remains. The United States agrees that the Act was designed to restrict most of secondary market trading, but nonetheless contends that certain industry practices have extended the statutory limitation beyond its proper boundaries. The complaint in this action alleges that the defendants, appellees herein, combined and agreed to restrict the sale and fix the resale prices of mutual fund shares in secondary market transactions between dealers, from an investor to a dealer, and between investors through brokered transactions. [Footnote 5] Named as defendants are the National Association of Securities Dealers (NASD), [Footnote 6] and certain mutual funds, [Footnote 7] mutual fund underwriters, [Footnote 8] and securities broker-dealers. [Footnote 9]
The United States charges that these agreements violate § 1 of the Sherman Act, 15 U.S.C. § 1, [Footnote 10] and prays that they be enjoined under § 4 of that Act.
Count I charges a horizontal combination and conspiracy among the members of appellee NASD to prevent
the growth of a secondary dealer market in the purchase and sale of mutual fund shares. Seen 42, infra. Counts II-VIII, by contrast, allege various vertical restrictions on secondary market activities. In Counts II, IV, and VI, the United States charges that the principal underwriters and broker-dealers entered into agreements that compel the maintenance of the public offering price in brokerage transactions of specified mutual fund shares, and that prohibit inter-dealer transactions by allowing each broker-dealer to sell and purchase shares only to or from investors. [Footnote 11] Count VIII alleges that the broker-dealers entered into other, similar contracts and combinations with numerous principal underwriters. Counts III, V, and VII allege violations on the part of the principal underwriters and the funds themselves. In Counts III and VII, the various defendants
are charged with entering into contracts requiring the restrictive underwriter-dealer agreements challenged in Counts II and VI. Count V charges that the agreement between one fund and its underwriter restricted the latter to serving as a principal for its own account in all transactions with the public, thereby prohibiting brokerage transactions in the fund's shares. App. 14.
After carefully examining the structure, purpose, and history of the Investment Company Act, 15 U.S.C. § 80a-1 et seq., and the Maloney Act, 15 U.S.C. § 78o-3, the District Court held that this statutory scheme was "incompatible with the maintenance of (an) antitrust action,'" 374 F.Supp. 95, 109 (DC 1973), quoting Silver v. New York Stock Exchange,373 U. S. 341, 373 U. S. 358 (1963). The court concluded that §§ 22(d) and (f) of the Investment Company Act, when read in conjunction with the Maloney Act, afford antitrust immunity for all of the practices here challenged. The court further held that, apart from this explicit statutory immunity, the pervasive regulatory scheme established by these statutes confers an implied immunity from antitrust sanction in the "narrow area of distribution and sale of mutual fund shares." 374 F.Supp. at 114. The court accordingly dismissed the complaint, and the United States appealed to this Court. [Footnote 12]
The position of the United States in this appeal can be summarized briefly. Noting that implied repeals of the antitrust laws are not favored, see, e.g., United States v. Philadelphia National Bank,374 U. S. 321, 374 U. S. 348 (1963), the United States urges that the antitrust immunity conferred by § 22 of the Investment Company
Act should not extend beyond its precise terms, none of which, it maintains, requires or authorizes the practices here challenged. The United States maintains, moreover, that the District Court expanded the limits of the implied immunity doctrine beyond those recognized by decisions of this Court. In response, appellees advance all of the positions relied on by the District Court. They are joined by the Securities and Exchange Commission (hereinafter SEC or Commission), which asserts as amicus curiae that the regulatory authority conferred upon it by § 22(f) of the Investment Company Act displaces § 1 of the Sherman Act. The SEC contends, therefore, that the District Court properly dismissed Counts II-VIII, but takes no position with respect to Count I.
The Investment Company Act of 1940 originated in congressional concern that the Securities Act of 1933, 48 Stat. 74, 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934, 48 Stat. 881, 15 U.S.C. § 78a et seq., were inadequate to protect the purchasers of investment company securities. Thus, in § 30 of the Public Utility Holding Company Act, 49 Stat. 837, 15 U.S.C. § 79z-4, Congress directed the SEC to study the structures, practices, and problems of investment companies with a view toward proposing further legislation. Four years of intensive scrutiny of the industry culminated in the publication of the Investment Trust Study and the recommendation of legislation to rectify the problems and abuses it identified. After extensive congressional consideration, the Investment Company Act of 1940 was adopted.
The Act vests in the SEC broad regulatory authority
over the business practices of investment companies. [Footnote 13] We are concerned on this appeal with § 22 of the Act, 15 U.S.C. § 80a-22, which controls the sales and distribution of mutual fund shares. The questions presented require us to determine whether § 22(d) obligates appellees to engage in the practices challenged in Counts II-VIII, and thus necessarily confers antitrust immunity on them. If not, we must determine whether such practices are authorized by § 22(f), and, if so, whether they are immune from antitrust sanction. Resolution of these issues will be facilitated by examining the nature of the problems and abuses to which § 22 is addressed, a matter to which we now turn.
The most thorough description of the sales and distribution practices of mutual funds prior to passage of the
Investment Company Act may be found in Part III of the Investment Trust Study. [Footnote 14] That Study, as Congress has recognized, see 15 U.S.C. § 80a-1, forms the initial basis for any evaluation of the Act.
Prior to 1940, the basic framework for the primary distribution of mutual fund shares was similar to that existing today. The fund normally retained a principal underwriter to serve as a wholesaler of its shares. The principal underwriter, in turn, contracted with a number of broker-dealers to sell the fund's shares to the investing public. [Footnote 15] The price of the shares was based on the fund's net asset value at the approximate time of sale, and a sales commission or load was added to that price.
Although, prior to 1940, the primary distribution system for mutual fund shares was similar to the present one, a number of conditions then existed that largely disappeared following passage of the Act. The most prominently discussed characteristic was the "two-price system," which encouraged an active secondary market under conditions that tolerated disruptive and discriminatory trading practices. The two-price
system reflected the relationship between the commonly used method of computing the daily net asset value of mutual fund shares and the manner in which the price for the following day was established. The net asset value of mutual funds, which depends on the market quotations of the stocks in their investment portfolios, fluctuates constantly. Most funds computed their net asset values daily on the basis of the fund's portfolio value at the close of exchange trading, and that figure established the sales price that would go into effect at a specified hour on the following day. During this interim period, two prices were known: the present day's trading price based on the portfolio value established the previous day; and the following day's price, which was based on the net asset value computed at the close of exchange trading on the present day. One aware of both prices could engage in "riskless trading" during this interim period. See Investment Trust Study pt. III, pp. 851-852.
The two-price system did not benefit the investing public generally. Some of the mutual funds did not explain the system thoroughly, and unsophisticated investors probably were unaware of its existence. See id. at 867. Even investors who knew of the two-price system and understood its operation were rarely in a position to exploit it fully. It was possible, however for a knowledgeable investor to purchase shares in a rising market at the current price with the advance information that the next day's price would be higher. He thus could be guaranteed an immediate appreciation in the market value of his investment, [Footnote 16] although this advantage
was obtained at the expense of the existing shareholders, whose equity interests were diluted by a corresponding amount. [Footnote 17] The load fee that was charged in the sale of mutual funds to the investing public made it difficult for these investors to realize the "paper gain" obtained in such trading. Because the daily fluctuation in net asset value rarely exceeded the load, public investors generally were unable to realize immediate profits from the two-price system by engaging in rapid in-and-out trading. But insiders, who often were able to purchase shares without paying the load, did not operate under this constraint. Thus, insiders could, and sometimes did, purchase shares for immediate redemption at the appreciated value. Seen 24, infra, and sources cited therein.
The two-price system often afforded other advantages to underwriters and broker-dealers. In a falling market, they could enhance profits by waiting to fill orders with shares purchased from the fund at the next day's anticipated lower price. In a similar fashion, in a rising market, they could take a "long position" in mutual fund shares by establishing an inventory in order to satisfy anticipated purchases with securities previously obtained at a lower price. Investment Trust Study pt. III, pp. 854-855. In each case, the investment company would
receive the lower of the two prevailing prices for its shares, id. at 854, and the equity interests of shareholders would suffer a corresponding dilution.
As a result, an active secondary market in mutual fund shares existed. Id. at 865-867. Principal underwriters and contract broker-dealers often maintained inventory positions established by purchasing shares through the primary distribution system and by buying from other dealers and retiring shareholders. [Footnote 18] Additionally, a "bootleg market" sprang up, consisting of broker-dealers having no contractual relationship with the fund or its principal underwriter. These bootleg dealers purchased shares at a discount from contract dealers or bought them from retiring shareholders at a price slightly higher than the redemption price. Bootleg dealers would then offer the shares at a price slightly lower than that required in the primary distribution system, thus "initiating a small scale price war between retailers and tend[ing] generally to disrupt the established offering price." Id. at 865.
Section 22 of the Investment Company Act of 1940 was enacted with these abuses in mind. Sections 22(a) and (c) were designed to
"eliminat[e] or reduc[e] so far as reasonably practicable any dilution of the value of other outstanding securities . . . or any other result of [the] purchase, redemption or sale [of mutual fund securities] which is unfair to holders of such other outstanding securities,"
15 U.S.C. § 80a-22(a). They authorize
the NASD and the SEC to regulate certain pricing and trading practices in order to effectuate that goal. [Footnote 19] Section 22(b) authorizes registered securities associations and the SEC to prescribe the maximum sales commissions or loads that can be charged in connection with a primary distribution; and § 22(e) protects the right of redemption by restricting mutual funds' power to suspend redemption or postpone the date of payment.
The issues presented in this litigation revolve around subsections (d) and (f) of § 22. Bearing in mind the history and purposes of the Investment Company Act, we now consider the effect of these subsections on the
question of potential antitrust liability for the practices here challenged.
Section 22(d) prohibits mutual funds from selling shares at other than the current public offering price to any person except either to or through a principal underwriter for distribution. It further commands that
"no dealer shall sell [mutual fund shares] to any person except a dealer, a principal underwriter, or the issuer, except at a current public offering price described in the prospectus."
15 U.S.C. § 80a-22(d). [Footnote 20] By its terms, § 22(d) excepts inter-dealer sales from its price maintenance requirement. Accordingly, this section cannot be relied upon by appellees as justification for the restrictions imposed upon inter-dealer transactions. At issue, rather, is the narrower question whether the § 22(d) price maintenance mandate for sales by "dealers" applies to transactions in which a broker-dealer acts as a statutory "broker", rather than a statutory "dealer." The District Court concluded that it does, and thus that § 22(d) governs transactions in which the broker-dealer acts as an agent for an investor as well as those in which he acts as a principal selling shares for his own account.
The District Court's decision reflects an expansive
view of § 22(d). The Investment Company Act specifically defines "broker" and "dealer," [Footnote 21] and uses the terms distinctively throughout. [Footnote 22] Appellees maintain, however, that the definition of "dealer" is sufficiently broad to require price maintenance in brokerage transactions. In support of this position, appellees assert that the critical elements of the dealer definition are that the term relates to a "person", rather than to a transaction, and that the person must engage "regularly" in the sale and purchase of securities to qualify as a dealer. It is argued, therefore, that any person who purchases and sells securities with sufficient regularity to qualify as a statutory dealer is thereafter bound by all dealer restrictions, regardless of the nature of the particular
transaction in question. We do not find this argument persuasive.
Appellees' reliance on the statutory reference to "person" in defining dealer adds little to the analysis, for the Act defines "broker," "investment banker," "issuer," "underwriter," and others to be "persons" as well. See 15 U.S.C. § 80a-2(a)(6), (21), (22), and (40). In each instance, the critical distinction relates to their transactional capacity. Moreover, we think that appellees' reliance on the regularity requirement in the dealer definition places undue emphasis on that element at the expense of the remainder of the provision. On the face of the statute, the most apparent distinction between a broker and a dealer is that the former effects transactions for the account of others and the latter buys and sells securities for his own account. We therefore cannot agree that the terms of the Act compel the conclusion that a broker-dealer acting in a brokerage capacity would be bound by the § 22(d) dealer mandate. Indeed, the language of the Act suggests the opposite result.
Even if we assume, arguendo, that the statutory definition is ambiguous, we find nothing in the contemporaneous legislative history of the Investment Company Act to justify interpreting § 22(d) to encompass brokered transactions. That history is sparse, [Footnote 23] and
suggests only that § 22(d) was considered necessary to curb abuses that had arisen in the sales of securities to insiders. [Footnote 24]
The prohibition against insider trading would seem adequately served by the first clause of § 22(d), which prevents mutual funds from selling shares at other than the public offering price to any person except a principal underwriter or dealer. Seen 20, supra. [Footnote 25] The further
restriction on dealer sales bears little relation to insider trading, however, and logically would be thought to serve some other purpose. The obvious effect of the dealer prohibition is to shield the primary distribution system from the competitive impact of unrestricted dealer trading in the secondary markets, a concern that was reflected in the Study, see Investment Trust Study pt. III, p. 865. The SEC perceives this to be one of the purposes of this provision. [Footnote 26]
But concluding that protection of the primary distribution system is a purpose of § 22(d) does little to resolve the question whether Congress intended to require strict price maintenance in all broker-dealer transactions with the investing public. By its terms, § 22(d) protects only against the possibly disruptive effects of secondary dealer sales which, as statutorily defined, constituted the most active secondary market existing prior to the Act's passage. Nothing in the contemporary history suggests that Congress was equally concerned with possible disruption from investor transactions in outstanding shares conducted through statutory brokers.
Nor do we think that the history attending subsequent congressional consideration of the Act provides adequate support for appellees' contention that § 22(d) requires strict price maintenance in all broker-dealer transactions in mutual fund shares. To be sure, portions of the testimony of SEC Chairman Cohen before the House Subcommittee on Commerce and Finance in 1967 suggested that the price maintenance requirement of § 22(d) encompassed all broker-dealers, irrespective of how they obtained the traded shares, [Footnote 27] and, on other occasions, the Chairman referred to sales by brokers when discussing mutual fund transactions. [Footnote 28] Appellees also can point to congressional characterizations of § 22(d) that suggest that some members of Congress understood the reach of that provision to be as broad as the District Court thought. [Footnote 29]
Appellees maintain that this history indicates that Congress always intended § 22(d) to control broker as well as dealer transactions, and that it reenacted the amended § 22 with that purpose in mind. The District Court accepted this position, and it is not without some support in this historical record. [Footnote 30] But impressive evidence to the contrary is found in the position consistently maintained by the SEC. Responding to an inquiry in 1941, the SEC General Counsel stated that § 22(d) did not bar brokerage transactions in mutual fund shares:
"In my opinion, the term 'dealer,' as used in section 22(d), refers to the capacity in which a broker-dealer is acting in a particular transaction. It follows, therefore, that, if a broker-dealer in a particular transaction is acting solely in the capacity of agent for a selling investor, or for both a selling investor and a purchasing investor, the sale may be made at a price other than the current offering price described in the prospectus. . . ."
"On the other hand, if a broker-dealer is acting for his own account in a transaction and as principal
sells a redeemable security to an investor, the public offering price must be maintained, even though the sale is made through another broker who acts as agent for the seller, the investor, or both."
"As section 22(d) itself states, the offering price is not required to be maintained in the case of sales in which both the buyer and the seller are dealers acting as principals in the transaction."
Investment Company Act, Rel. No. 78, Mar. 4, 1941, 11 Fed.Reg. 10992 (1941). This substantially contemporaneous interpretation of the Act has consistently been maintained in subsequent SEC opinions, see Oxford Co., Inc., 21 S.E.C. 681, 690 (1946); Mutual Funds Advisory, Inc., Investment Company Act Rel. No. 6932, p. 3 (1972). The same position was asserted in a recent staff report, see 1974 Staff Report 105 n. 2, 107 n. 2, and 109, was relied on by the SEC in its subsequent decision to encourage limited price competition in brokered transactions, [Footnote 31] and is advanced by it as
amicus curiae in this Court. This consistent and longstanding interpretation by the agency charged with administration of the Act, while not controlling, is entitled to considerable weight. See, e.g., Saxbe v. Bustos,419 U. S. 65 (1974); Investment Co. Institute v. Camp,401 U. S. 617, 401 U. S. 626-627 (1971); Udall v. Tallman,380 U. S. 1, 380 U. S. 16 (1965).
The substance of appellees' position is that the dealer prohibition of § 22(d) should be interpreted in generic, rather than statutory, terms. The price maintenance requirement of that section accordingly would encompass all broker-dealer transactions with the investing public, and would shelter them from antitrust sanction. But such an expansion of § 22(d) beyond its terms would not only displace the antitrust laws by implication, it also would impinge seriously on the SEC's more flexible regulatory authority under § 22(f). [Footnote 32]
Implied antitrust immunity is not favored, and can be justified only by a convincing showing of clear repugnancy between the antitrust laws and the regulatory system.
See, e.g., United States v. Philadelphia National Bank, 374 U.S. at 374 U. S. 348; United States v. Borden Co.,308 U. S. 188, 308 U. S. 197-206 (1939). We think no such showing has been made. Moreover, in addition to satisfying our responsibility to reconcile the antitrust and regulatory statutes where feasible, Silver v. New York Stock Exchange, 373 U.S. at 373 U. S. 356-357, we must interpret the Investment Company Act in a manner most conducive to the effectuation of its goals. We conclude that appellees' interpretation of § 22(d) serves neither purpose, and cannot be justified by the language or history of that section.
We therefore hold that the price maintenance mandate of § 22(d) cannot be stretched beyond its literal terms to encompass transactions by broker-dealers acting as statutory "brokers." Congress defined the limitations for the mandatory price maintenance requirement of the Investment Company Act.
"We are not only bound by those limitations, but we are bound to construe them strictly, since resale price maintenance is a privilege restrictive of a free economy."
United States v. McKesson & Robbins,351 U. S. 305, 351 U. S. 316 (1956). Accordingly, we hold that the District Court erred in relying on § 22(d) in determining that the activities here questioned are immune from antitrust liability.
Our determination that the restrictions on the secondary market are not immunized by § 22(d) does not end the inquiry, for the District Court also found them sheltered from antitrust liability by § 22(f). Appellees, joined by the SEC, defend this ruling and urge that it requires dismissal of the challenge to the vertical restrictions sought to be enjoined in Counts II-VIII.
Section 22(f) authorizes mutual funds to impose
restrictions on the negotiability and transferability of their shares, provided they conform with the fund's registration statement and do not contravene any rules and regulations the Commission may prescribe in the interests of the holders of all of the outstanding securities. [Footnote 33] The Government does not contend that the vertical restrictions are not disclosed in the registration statements of the funds in question. Nor does it assert that the agreements imposing such restrictions violate Commission rules and regulations. Indeed, it could not do so, because to date the SEC has prescribed no such standards. Instead, the Government maintains that the contractual restrictions do not come within the meaning of the Act, asserting that § 22(f) does not authorize the imposition of restraints on the distribution system, rather than on the shares themselves. The Government thus apparently urges that the only limitations contemplated by this section are those that appear on the face of the certificate itself. The Government also urges that the SEC's unexercised power to prescribe rules and regulations is insufficient to create repugnancy between its regulatory authority and the antitrust laws.
Our examination of the language and history of § 22(f) persuades us, however, that the agreements challenged in Counts II-VIII are among the kinds of restrictions Congress contemplated when it enacted that section. And this conclusion necessarily leads to a determination that they are immune from liability under the Sherman Act,
for we see no way to reconcile the Commission's power to authorize these restrictions with the competing mandate of the antitrust laws.
Unlike § 22(d), § 22(f) originated in the Commission-sponsored bill considered in the Senate subcommittee hearings that preceded introduction of the compromise proposal later enacted into law. The Commission-sponsored provision authorized the SEC to promulgate rules, regulations, or orders prohibiting restrictions on the transferability or negotiability of mutual fund shares, S. 3580, § 22(d)(2), 76th Cong., 3d Sess. (1940). [Footnote 34] Commission testimony indicates that it considered this authority necessary to allow regulatory control of industry measures designed to deal with the disruptive effects of "bootleg market" trading and with other detrimental trading practices identified in the Investment Trust Study. [Footnote 35]
The Study indicates, moreover, that a number of funds had begun to deal with these problems prior to passage of the Act. And while their methods may have included the imposition of restrictive legends on the face of the certificate, seen 35, supra, they were by no means confined to such narrow limits. A number of funds imposed controls on the activities of their principal underwriters, see Investment Trust Study pt. III, pp. 868-869; and in some instances the funds required the underwriters to impose similar restrictions on the dealers, see id. at 869, or entered into these restrictive agreements with the dealers themselves, id. at 870-871.
In view of the history of the Investment Company Act, we find no justification for limiting the range of possible transfer restrictions to those that appear on the face of the certificate. The bootleg market was primarily a problem of the distribution system, and bootleg dealers found a source of supply in the contract dealers, as well as in retiring shareholders. See id. at 865. Moreover, the Study indicates that part of the bootleg distribution system consisted of "trading firms" that served as wholesalers of mutual fund securities in much the same fashion as the principal underwriters. These trading firms primarily purchased and sold shares to and from other dealers, Investment Trust Study pt. II, p. 327, frequently offering them at a price slightly lower than
the discounted rate charged to dealers in the primary distribution system. Id. at 327-328. Thus, trading firms not only helped supply the bootleg dealers whose sales undercut those of the contract dealers, they competed with the principal underwriters by offering a source for lower cost shares that inevitably discouraged participation in the primary distribution system. See id. at 328 n. 85.
The bootleg market was a complex phenomenon whose principal origins lay in the distribution system itself. In view of this history, limitation of the industry's ability, subject of course to SEC regulation, to reach these problems at their source would constitute an inappropriate contraction of the remedial function of the statute. [Footnote 36] Indeed, in view of the role of trading firms and inter-dealer transactions in the maintenance of the bootleg market, the narrow interpretation of § 22(f) urged by the Government would seem to afford inadequate authority to deal with the problem.
Together, §§ 22(d) and 22(f) protect the primary distribution system for mutual fund securities. Section 22(d), by eliminating price competition in dealer sales, inhibits the most disruptive factor in the pre-1940's mutual market, and thus assures the maintenance of a viable sales system. Section 22(f) complements this protection by authorizing the funds and the SEC to deal more flexibly with other detrimental trading practices by
imposing SEC-approved restrictions on transferability and negotiability. The Government's limiting interpretation of § 22(f) compromises this flexible mandate, and cannot be accepted.
We find support for our interpretation of § 22(f) in the views expressed by the SEC shortly after the passage of the Act. Rule 2(j)(2), proposed by the NASD to curb abuses identified in the Study and the congressional hearings, provided limitations on underwriter sales and redemptions to or from dealers who are not parties to sales agreements. In commenting on this proposed rule, the SEC characterized it as a "restriction on the transferability of securities," and specifically adverted to its power to regulate such restrictions under § 22(f). National Association of Securities Dealers, Inc., 9 S.E.C. 38, 44-45 and n. 10 (1941). As indicated above, see supra at 422 U. S. 719, and sources there cited, this contemporaneous interpretation by the responsible agency is entitled to considerable weight. We therefore conclude that the restrictions on transferability and negotiability contemplated by § 22(f) include restrictions on the distribution system for mutual fund shares as well as limitations on the face of the shares themselves. The narrower interpretation of this provision advanced by the Government would disserve the broad remedial function of the statute. [Footnote 37]
The Government's additional contention that the SEC's exercise of regulatory authority has been insufficient to give rise to an implied immunity for agreements conforming with § 22(f) misconceives the intended operation of the statute. By its terms, § 22(f) authorizes properly disclosed restrictions unless they are inconsistent with SEC rules or regulations. The provision thus authorizes funds to impose transferability or negotiability restrictions, subject to Commission disapproval. In view of the evolution of this provision, there can be no doubt that this is precisely what Congress intended.
Section 22(f), as originally introduced, would have authorized the SEC to promulgate rules, regulations, or orders prohibiting restrictions on the redeemability or transferability of mutual fund shares. Congressional consideration of that provision raised some question whether existing restrictions on transferability and negotiability would remain valid unless specifically disapproved by the SEC. [Footnote 38] The compromise provision, which
subsequently was enacted into law, eliminated this uncertainty, however, and manifested a more positive attitude toward self-regulation.
Thus, § 22(f) specifically recognizes' that mutual funds can impose such restrictions on the distribution system provided they are disclosed in the registration statement and conform to any rules and regulations that the SEC might adopt. In addition, § 22(f) alters the focus of Commission scrutiny. Whereas the original provision allowed the SEC to make rules that serve "the public interest or . . . the protection of investors," S. 3580, § 22(d)(2), supra, § 22(f) as enacted, limits the Commission's rulemaking authority to the protection of the "interests of the holders of all of the outstanding securities of such investment company." 15 U.S.C. § 80a-22(f). Viewed in this historical context, the statute reflects a clear congressional determination that, subject to Commission oversight, mutual funds should be allowed to retain the initiative in dealing with the potentially adverse effects of disruptive trading practices.
The Commission repeatedly has recognized the role of private agreements in the control of trading practices in the mutual fund industry. For example, in First Multifund of America, Inc., Investment Company Act Rel. No. 6700 (1971), [1970-1971 Transfer Binder] CCH Fed.Sec.L.Rep.