Petitioners, two Texas over the counter broker-dealers in
securities, who were not members of the New York Stock Exchange,
arranged with members of the Exchange in New York City for
direct-wire telephone connections which were essential to the
conduct of their businesses. The members applied to the Exchange,
as required by its rules promulgated under the Securities Exchange
Act of 1934, for approval of the connections. Temporary approval
was granted and the connections were established; but, without
prior notice to petitioners, the applications were denied later,
and the connections were discontinued, as required by rules of the
Exchange. Allegedly as a result, one of the petitioners was forced
out of business and the other's business was greatly diminished.
Notwithstanding repeated requests, officials of the Exchange
refused to grant petitioners a hearing or even to inform them of
the reasons for denial of the applications. Petitioners sued the
Exchange and its members in a Federal District Court for treble
damages and injunctive relief, claiming that their collective
refusal to continue the direct-wire connections violated the
Sherman Act.
Held: The duty of self-regulation imposed upon the
Exchange by the Securities Exchange Act of 1934 did not exempt it
from the antitrust laws, nor justify it in denying petitioners the
direct-wire connections without the notice and hearing which they
requested. Therefore, the Exchange's action in this case violated
§1 of the Sherman Act, and the Exchange is liable to petitioners
under §§ 4 and 16 of the Clayton Act. Pp.
373 U. S.
342-367.
(a) Absent any justification derived from the Securities
Exchange Act of 1934 or otherwise, removal of the direct-wire
connections by collective action of the Exchange and its members
constituted a
per se violation of §1 of the Sherman Act,
since it was a group boycott depriving petitioners of a valuable
business service which
Page 373 U. S. 342
they needed in order to compete effectively as broker-dealers in
the over the counter securities market. Pp.
373 U. S.
347-349.
(b) In the light of the design of the Securities Exchange Act of
1934 to give the exchanges a major part in curbing abuses by
self-regulation, the rules applied in the present case were germane
to the performance of the duty implied by §§ 6 (b) and 6 (d) to
have rules governing members' transactions and relationships with
nonmembers. Pp.
373 U. S.
349-357.
(c) The statutory scheme of the Securities Exchange Act of 1934
is not sufficiently pervasive to create a total exemption from the
antitrust laws, but particular instances of exchange
self-regulation which fall within the scope and purposes of the Act
may be regarded as justified in answer to the assertion of an
antitrust claim. Pp.
373 U. S.
357-361.
(d) In denying petitioners the direct-wire connections without
according them the notice and hearing which they requested, the
Exchange exceeded the scope of its authority under the Securities
Exchange Act of 1934 to engage in self-regulation. Therefore, it
was not justified in doing what otherwise was an antitrust
violation. Pp.
373 U. S.
361-367.
302 F.2d 714, reversed.
MR. JUSTICE GOLDBERG delivered the opinion of the Court.
We deal here today with the question, of great importance to the
public and the financial community, of whether and to what extent
the federal antitrust laws apply to securities exchanges regulated
by the Securities Exchange Act of 1934. More particularly, the
question
Page 373 U. S. 343
is whether the New York Stock Exchange is to be held liable to a
nonmember broker-dealer under the antitrust laws, or regarded as
impliedly immune therefrom when, pursuant to rules the Exchange has
adopted under the Securities Exchange Act of 1934, it orders a
number of its members to remove private direct telephone wire
connections previously in operation between their offices and those
of the nonmember without giving the nonmember notice, assigning him
any reason for the action, or affording him an opportunity to be
heard.
I
The facts material to resolution of this question are not in
dispute. Harold J. Silver, who died during the pendency of this
action, entered the securities business in Dallas, Texas, in 1955,
by establishing the predecessor of petitioner Municipal Securities
(Municipal) to deal primarily in municipal bonds. The business of
Municipal having increased steadily, Silver, in June, 1958,
established petitioner Municipal Securities, Inc. (Municipal,
Inc.), to trade in corporate over the counter securities. Both
firms are registered broker-dealers and members of the National
Association of Securities Dealers, Inc. (NASD); neither is a member
of the respondent Exchange.
Instantaneous communication with firms in the mainstream of the
securities business is of great significance to a broker-dealer not
a member of the Exchange, and Silver took steps to see that this
was established for his firms. Municipal obtained direct private
telephone wire connections with the municipal bond departments of a
number of securities firms (three of which were members of the
Exchange) and banks, and Municipal, Inc., arranged for private
wires to the corporate securities trading departments of 10 member
firms of the Exchange, as well as to the trading desks of a number
of nonmember firms.
Page 373 U. S. 344
Pursuant to the requirements of the Exchange's rules, all but
one of the member firms which had granted private wires to
Municipal, Inc., applied to the Exchange for approval of the
connections. [
Footnote 1]
During the summer of 1958, the Exchange granted "temporary
approval" for these, as well as for a direct teletype connection to
a member firm in New York City and for stock ticker service to be
furnished to petitioners directly from the floor of the
Exchange.
On February 12, 1959, without prior notice to Silver, his firms,
or anyone connected with them, the Exchange's Department of Member
Firms decided to disapprove the private wire and related
applications. Notice was sent to the member firms involved,
instructing them to discontinue the wires, a directive with which
compliance was required by the Exchange's Constitution and rules.
These firms, in turn, notified Silver that the private wires would
have to be discontinued, and the Exchange advised him directly of
the discontinuance of the stock ticker service. The wires and
ticker were all removed by the beginning of March. By telephone
calls, letters, and a personal trip to New York, Silver sought an
explanation from the Exchange of the reason for its decision, but
was repeatedly told it was the policy of the Exchange not to
disclose the reasons for such action. [
Footnote 2]
Petitioners contend that their volume of business dropped
substantially thereafter, and that their profits fell, due to a
combination of forces all stemming from the
Page 373 U. S. 345
removal of the private wires -- their consequent inability to
obtain quotations quickly, the inconvenience to other traders in
calling petitioners, and the stigma attaching to the disapproval.
As a result of this change in fortunes, petitioners contend,
Municipal, Inc., soon ceased functioning as an operating business
organization, and Municipal has remained in business only on a
greatly diminished scale.
The present litigation was commenced by Silver as proprietor of
Municipal and by Municipal, Inc., against the Exchange in April,
1959, in the Southern District of New York. [
Footnote 3] Three causes of action were asserted.
The first, seeking an injunction and treble damages, [
Footnote 4] alleged that the Exchange had, in
violation of §§ 1 and 2 of the Sherman Act, conspired with its
member firms to deprive petitioners of their private wire
connections and stock ticker service. The second alleged that the
Exchange had tortiously induced its member firms to breach their
contracts for wire connections with petitioners, and the third
asserted that the Exchange's action constituted a tort of
intentional and wrongful harm inflicted without reasonable
cause.
Petitioners moved for summary judgment on the antitrust claim,
and for an accompanying permanent injunction against the Exchange's
coercion of its members into refusing to provide private wire
connections and against the Exchange's refusal to reinstate the
stock ticker service. The district judge, after considering the
respective affidavits of the parties, granted summary judgment and
a permanent injunction as to the private wire connections,
196 F.
Supp. 209, holding that the antitrust
Page 373 U. S. 346
laws applied to the Exchange, and that its directive and the
ensuing compliance by its members constituted a collective refusal
to continue the wires, and was a
per se violation of § 1
of the Sherman Act. The judge so held on the basis that, although
the Exchange had the power to regulate the conduct of its members
in dealing with listed securities, its members' relations with
nonmembers with regard to over the counter securities were not
sufficiently germane to the fulfillment of its duties of
self-regulation under the Securities Exchange Act to warrant its
being excused from having to answer for restraints of trade such as
occurred here by removal of the private wires. He left the issues
of treble damages and costs to a later trial. With reference to the
stock ticker service, the judge held that there were triable issues
of fact as to whether the Exchange's action could be considered to
have been the concerted action of its members, and as to whether,
if the Exchange was to be regarded as having acted by itself, any
violation of § 2 of the Sherman Act had occurred. He therefore
denied summary judgment as to that aspect of petitioners'
claims.
On the Exchange's appeal from the grant of partial summary
judgment, the United States Court of Appeals for the Second Circuit
reversed over the dissent of one judge. 302 F.2d 714. The court
held that the Securities Exchange Act
"gives the Commission and the Exchange disciplinary powers over
members of the Exchange with respect to their transactions in over
the counter securities, and that the policy of the statute requires
that the Exchange exercise these powers fully."
Id. at 720. This meant that
"the action of the Exchange in bringing about the cancellation
of the private wire connections . . . was within the general scope
of the authority of the Exchange as defined by the 1934 Act,"
id. at 716, and dictated a conclusion that
"[t]he Exchange is exempt from the restrictions of the Sherman
Act, because it is exercising a
Page 373 U. S. 347
power which it is required to exercise by the Securities
Exchange Act,"
id. at 721. The court, however, did not exclude the
possibility that the Exchange might be liable on some other theory,
and remanded the case for consideration of petitioners' second and
third causes of action.
This Court granted certiorari. 371 U.S. 808. What is before us
is only so much of the first cause of action as relates to the
collective refusal to continue the private wire connections, since
petitioners did not attempt to appeal from the denial of summary
judgment as to the portion relating to the discontinuance of the
stock ticker service. Summary judgment was never sought as to the
second and third causes of action; hence, those are also not in
issue at the present time.
II
The fundamental issue confronting us is whether the Securities
Exchange Act has created a duty of exchange self-regulation so
pervasive as to constitute an implied repealer of our antitrust
laws, thereby exempting the Exchange from liability in this and
similar cases.
A
It is plain, to begin with, that removal of the wires by
collective action of the Exchange and its members would, had it
occurred in a context free from other federal regulation,
constitute a
per se violation of § 1 of the Sherman Act.
The concerted action of the Exchange and its members here was, in
simple terms, a group boycott depriving petitioners of a valuable
business service which they needed in order to compete effectively
as broker-dealers in the over the counter securities market.
Fashion Originators' Guild of America v. Federal Trade
Comm'n, 312 U. S. 457;
Associated Press v. United States, 326 U. S.
1;
Klor's, Inc. v. Broadway-Hale Stores, Inc.,
359 U. S. 207;
Radiant Burners, Inc. v.
Peoples Gas Light & Coke Co.,
Page 373 U. S. 348
364 U. S. 656.
Unlike listed securities, there is no central trading place for
securities traded over the counter. The market is established by
traders in the numerous firms all over the country through a
process of constant communication to one another of the latest
offers to buy and sell. The private wire connection, which allows
communication to occur with a flip of a switch, is an essential
part of this process. Without the instantaneously available market
information provided by private wire connections, an over the
counter dealer is hampered substantially in his crucial endeavor --
to buy, whether it be for customers or on his own account at the
lowest quoted price, and sell at the highest quoted price. Without
membership in the network of simultaneous communication, the over
the counter dealer loses a significant volume of trading with other
members of the network which would come to him as a result of his
easy accessibility. These important business advantages were taken
away from petitioners by the group action of the Exchange and its
members. Such "concerted refusals by traders to deal with other
traders . . . have long been held to be in the forbidden category,"
Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. at
359 U. S. 212,
of restraints which, "because of their inherent nature or effect .
. . injuriously restrained trade,"
United States v. American
Tobacco Co., 221 U. S. 106,
221 U. S. 179.
[
Footnote 5] Hence, absent any
justification derived from the policy of another statute
Page 373 U. S. 349
or otherwise, the Exchange acted in violation of the Sherman
Act. In this case, however, the presence of another statutory
scheme, that of the Securities Exchange Act of 1934, means that
such a conclusion is only the beginning, not the end, of
inquiry.
B
The difficult problem here arises from the need to reconcile
pursuit of the antitrust aim of eliminating restraints on
competition with the effective operation of a public policy
contemplating that securities exchanges will engage in
self-regulation which may well have anticompetitive effects in
general and in specific applications.
The need for statutory regulation of securities exchanges and
the nature of the duty of self-regulation imposed by the Securities
Exchange Act are properly understood in the context of a
consideration of both the economic role played by exchanges and the
historical setting of the Act. Stock exchanges perform an important
function in the economic life of this country. They serve, first of
all, as an indispensable mechanism through which corporate
securities can be bought and sold. To corporate enterprise, such a
market mechanism is a fundamental element in facilitating the
successful marshaling of large aggregations of funds that would
otherwise be extremely difficult of access. To the public, the
exchanges are an investment channel which promises ready
convertibility of stock holdings into cash. The importance
Page 373 U. S. 350
of these functions in dollar terms is vast -- in 1962, the New
York Stock Exchange, by far the largest of the 14 exchanges which
are registered with the Securities and Exchange Commission, had
$47.4 billion of transactions in stocks, rights, and warrants (a
figure which represented 86% of the total dollar volume on
registered exchanges). Report of the Special Study of Securities
Markets (1963), c. IB, p. 6. [
Footnote 6] Moreover, because trading on the exchanges, in
addition to establishing the price level of listed securities,
affects securities prices in general, and because such transactions
are often regarded as an indicator of our national economic health,
the significance of the exchanges in our economy cannot be measured
only in terms of the dollar volume of trading. Recognition of the
importance of the exchanges' role led the House Committee on
Interstate and Foreign Commerce to declare, in its report preceding
the enactment of the Securities Exchange Act of 1934, that
"The great exchanges of this country, upon which millions of
dollars of securities are sold, are affected with a public interest
in the same degree as any other great utility."
H.R.Rep. No. 1383, 73d Cong., 2d Sess. 15 (1934).
The exchanges are, by their nature, bodies with a limited number
of members, each of which plays a certain role in the carrying out
of an exchange's activities. The limited-entry feature of exchanges
led historically to their being
Page 373 U. S. 351
treated by the courts as private clubs,
Belton v.
Hatch, 109 N.Y. 593, 17 N.E. 225 (1888), and to their being
given great latitude by the courts in disciplining errant members,
see Westwood and Howard, Self-Government in the Securities
Business, 17 Law and Contemp.Prob. 518-525 (1952). As exchanges
became a more and more important element in our Nation's economic
and financial system, however, the private club analogy became
increasingly inapposite, and the ungoverned self-regulation became
more and more obviously inadequate, with acceleratingly grave
consequences. This impotency ultimately led to the enactment of the
1934 Act. The House Committee Report summed up the long-developing
problem in discussing the general purposes of the bill:
"The fundamental fact behind the necessity for this bill is that
the leaders of private business, whether because of inertia,
pressure of vested interests, lack of organization, or otherwise,
have not, since the war, been able to act to protect themselves by
compelling a continuous and orderly program of change in methods
and standards of doing business to match the degree to which the
economic system has itself been constantly changing. . . . The
repetition in the summer of 1933 of the blindness and abuses of
1929 has convinced a patient public that enlightened self-interest
in private leadership is not sufficiently powerful to effect the
necessary changes alone -- that private leadership seeking to make
changes must be given Government help and protection."
H.R.Rep. No. 1383,
supra, at 3.
It was, therefore, the combination of the enormous growth in the
power and impact of exchanges in our economy, and their inability
and unwillingness to curb abuses which had increasingly grave
implications because of this growth, that moved Congress to enact
the Securities Exchange Act
Page 373 U. S. 352
of 1934. S.Rep. No. 792, 73d Cong., 2d Sess. 2-5 (1934);
H.R.Rep. No. 1383,
supra, at 2-5.
The pattern of governmental entry, however, was by no means one
of total displacement of the exchanges' traditional process of
self-regulation. The intention was, rather, as MR. JUSTICE DOUGLAS
said while Chairman of the SEC, one of
"letting the exchanges take the leadership with Government
playing a residual role. Government would keep the shotgun, so to
speak, behind the door, loaded, well oiled, cleaned, ready for use,
but with the hope it would never have to be used."
Douglas, Democracy and Finance (Allen ed. 1940), 82. Thus, the
Senate Committee Report stressed that
"the initiative and responsibility for promulgating regulations
pertaining to the administration of their ordinary affairs remain
with the exchanges themselves. It is only where they fail
adequately to provide protection to investors that the Commission
is authorized to step in and compel them to do so."
S.Rep. No. 792,
supra, at 13. The House Committee
Report added the hope that the bill would give the exchanges
sufficient power to reform themselves without intervention by the
Commission. H.R.Rep. No. 1383,
supra, at 15.
See
also 2 Loss, Securities Regulation (2d ed. 1961), 1175-1178,
1180-1182.
Thus arose the federally mandated duty of self-policing by
exchanges. Instead of giving the Commission the power to curb
specific instances of abuse, the Act placed in the exchanges a duty
to register with the Commission, § 5, 15 U.S.C. § 78e, and decreed
that registration could not be granted unless the exchange
submitted copies of its rules, § 6(a)(3), 15 U.S.C. § 78f(a)(3),
and unless such rules were "just and adequate to insure fair
dealing and to protect investors," § 6(d), 15 U.S.C. § 78f(d). The
general dimensions of the duty of self-regulation are suggested by
§ 19(b) of the Act, 15 U.S.C. § 78s(b), which gives the Commission
power to order changes in exchange
Page 373 U. S. 353
rules respecting a number of subjects, which are set forth in
the margin. [
Footnote 7]
One aspect of the statutorily imposed duty of self-regulation is
the obligation to formulate rules governing the conduct of exchange
members. The Act specifically requires that registration cannot be
granted
"unless the rules of the exchange include provision for the
expulsion, suspension, or disciplining of a member for conduct or
proceeding inconsistent with just and equitable principles of trade
. . . ,"
§ 6(b), 15 U.S.C. § 78f(b). In addition, the general requirement
of § 6(d) that an exchange's rules be "just and adequate to insure
fair dealing and to protect investors" has obvious relevance to the
area of rules regulating the conduct of an exchange's members.
The § 6(b) and § 6(d) duties, taken together, have the broadest
implications in relation to the present problem, for members
inevitably trade on the over the counter market in addition to
dealing in listed securities, [
Footnote 8] and
Page 373 U. S. 354
such trading inexorably brings contact and dealings with
nonmember firms which deal in or specialize in over the counter
securities. It is no accident that the Exchange's Constitution and
rules are permeated with instances of regulation of members'
relationships with nonmembers including nonmember broker-dealers.
[
Footnote 9] A member's
purchase of unlisted securities for itself or on behalf of its
customer from a boiler-shop operation [
Footnote 10] creates an obvious
Page 373 U. S. 355
danger of loss to the principal in the transaction, and sale of
securities to a nonmember insufficiently capitalized to protect
customers' rights creates similar risks. In addition to the
potential financial injury to the investing public and Exchange
members that is inherent in these transactions, as well as in
dealings with nonmembers who are unreliable for any other reason,
all such intercourse carries with it the gravest danger of
engendering in the public a loss of confidence in the Exchange and
its members, a kind of damage which can significantly impair
fulfillment of the Exchange's function in our economy. Rules which
regulate Exchange members' doing of business with nonmembers in the
over the counter market are therefore very much pertinent to the
aims of self-regulation under the 1934 Act. Transactions with
nonmembers under the circumstances mentioned can only be described
as "inconsistent with just and equitable principles of trade," and
rules regulating such dealing are indeed "just and adequate to
insure fair dealing and to protect investors."
The Exchange's constitutional provision and rules relating to
private wire connections [
Footnote 11] are unquestionably part
Page 373 U. S. 356
of this fulfillment of the § 6(b) and § 6(d) duties, for such
wires between members and nonmembers facilitate trading in and
exchange of information about unlisted securities, and such contact
with an unreliable nonmember not only may further his business
undesirably, but may injure the member or the member's customer on
whose behalf the contract is made, and ultimately imperil the
future status of the Exchange by sapping public confidence. In
light of the important role of exchanges in our economy and the
1934 Act's design of giving the exchanges a major part in curbing
abuses by obligating them to regulate themselves, it appears
conclusively -- contrary to the District Court's conclusion -- that
the rules applied in the present case are germane to performance of
the duty, implied by § 6(b) and § 6(d), to have rules governing
members' transactions and relationships with nonmembers. The
Exchange's enforcement of such rules inevitably affects the
nonmember involved, often (as here) far more seriously than it
affects the members in question. The sweeping of the nonmembers
into the currents of the Exchange's process of self-regulation is
therefore unavoidable; the case cannot be disposed of by holding,
as the
Page 373 U. S. 357
district judge did, that the substantive act of regulation
engaged in here was outside the boundaries of the public policy
established by the Securities Exchange Act of 1934.
C
But it does not follow that the case can be disposed of, as the
Court of Appeals did, by holding that, since the Exchange has a
general power to adopt rules governing its members' relations with
nonmembers, particular applications of such rules are therefore
outside the purview of the antitrust laws. Contrary to the
conclusions reached by the courts below, the 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 exemption 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 of implication, and "[i]t is a cardinal
principle of construction that repeals by implication are not
favored."
United States v. Borden Co., 308 U.
S. 188,
308 U. S. 198;
see Georgia v. Pennsylvania R. Co., 324 U.
S. 439,
324 U. S.
456-457;
California v. Federal Power Comm'n,
369 U. S. 482,
369 U. S. 485.
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. This is the guiding principle to reconciliation
of the two statutory schemes.
Although the Act gives to the Securities and Exchange Commission
the power to request exchanges to make changes in their rules, §
19(b), 15 U.S.C. § 78s(b), and impliedly, therefore, to disapprove
any rules adopted by an exchange,
see also § 6(a)(4), 15
U.S.C. § 78f(a)(4), it does not give the Commission jurisdiction to
review particular instances of enforcement of exchange rules.
See 2 Loss,
op. cit. supra, at 1178; Westwood
and
Page 373 U. S. 358
Howard,
supra, 17 Law & Contemp.Prob. at 525. This
aspect of the statute, for one thing, obviates any need to consider
whether petitioners were required to resort to the Commission for
relief before coming into court.
Compare Georgia v.
Pennsylvania R. Co., 324 U.S. at
324 U. S. 455.
Moreover, the Commission's lack of jurisdiction over particular
applications of exchange rules means that the question of antitrust
exemption does not involve any problem of conflict or
coextensiveness of coverage with the agency's regulatory power.
See Georgia v. Pennsylvania R. Co., supra; United States v.
Radio Corp. of America, 358 U. S. 334;
California v. Federal Power Comm'n, supra; Pan American World
Airways, Inc. v. United States, 371 U.
S. 296. [
Footnote
12] The issue is only that of the extent to which the character
and objectives of the duty of exchange self-regulation contemplated
by the Securities Exchange Act are incompatible with the
maintenance of an antitrust action.
Compare Maryland &
Virginia Milk Producers Ass'n v. United States, 362 U.
S. 458.
The absence of Commission jurisdiction, besides defining the
limits of the inquiry, contributes to its solution. There is
nothing built into the regulatory scheme which performs the
antitrust function of insuring that an exchange will not in some
cases apply its rules so as to do injury to competition which
cannot be justified as furthering legitimate self-regulative ends.
By providing
Page 373 U. S. 359
no agency check on exchange behavior in particular cases,
Congress left the regulatory scheme subject to
"the influences of . . . [improper collective action] over which
the Commission has no authority, but which, if proven to exist, can
only hinder the Commission in the tasks with which it is
confronted,"
Georgia v. Pennsylvania R. Co., 324 U.S. at
324 U. S. 460;
see United States v. Borden Co., 308 U.S. at
308 U. S. 200;
Maryland & Virginia Milk Producers Ass'n v. United
States, 362 U.S. at
362 U. S.
465-466. Enforcement of exchange rules, particularly
those of the New York Stock Exchange, with its immense economic
power, may well, in given cases, result in competitive injury to an
issuer, a nonmember broker-dealer, or another when the imposition
of such injury is not within the scope of the great purposes of the
Securities Exchange Act. Such unjustified self-regulatory activity
can only diminish public respect for, and confidence in, the
integrity and efficacy of the exchange mechanism. Some form of
review of exchange self-policing, whether by administrative agency
or by the courts, is therefore not at all incompatible with the
fulfillment of the aims of the Securities Exchange Act. Only this
year, SEC Chairman Cary observed that
"some government oversight is warranted -- indeed necessary --
to insure that action in the name of self-regulation is neither
discriminatory nor capricious."
Cary, Self-Regulation in the Securities Industry, 49 A.B.A.J.
244, 246 (1963). [
Footnote
13] Since the antitrust laws serve, among other things, to
protect competitive freedom,
i.e., the freedom of
individual business units to compete unhindered by the
Page 373 U. S. 360
group action of others, it follows that the antitrust laws are
peculiarly appropriate as a check upon anticompetitive acts of
exchanges which conflict with their duty to keep their operations
and those of their members honest and viable. Applicability of the
antitrust laws, therefore, rests on the need for vindication of
their positive aim of insuring competitive freedom. Denial of their
applicability would defeat the congressional policy reflected in
the antitrust laws without serving the policy of the Securities
Exchange Act. 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.
See note 12 supra.
Yet it is only frank to acknowledge that the absence of power in
the Commission to review particular exchange exercises of
self-regulation does create problems for the Exchange. The entire
public policy of self-regulation, beginning with the idea that the
Exchange may set up barriers to membership, contemplates that the
Exchange will engage in restraints of trade which might well be
unreasonable absent sanction by the Securities Exchange Act.
Without the oversight of the Commission to elaborate from time to
time on the propriety of various acts of self-regulation, the
Exchange is left without guidance and without warning as to what
regulative action would be viewed as excessive by an antitrust
court possessing power to proceed based upon the considerations
enumerated in the preceding paragraphs. But, under the aegis of the
rule of reason, traditional antitrust concepts are flexible enough
to permit the Exchange sufficient breathing space within which to
carry out the mandate of the Securities Exchange Act.
See
United States v. Terminal R. Ass'n of St. Louis, 224 U.
S. 383,
224 U. S.
394-395;
Board of Trade of City of Chicago v. United
States, 246 U. S. 231,
246 U. S. 238.
Although, as we have seen, the statutory scheme of that Act is not
sufficiently pervasive to create a total exemption
Page 373 U. S. 361
from the antitrust laws,
compare Hale and Hale,
Competition or Control VI: Application of Antitrust Laws to
Regulated Industries, 111 U. of Pa.L.Rev. 46, 48, 57-59 (1962), it
is also true that particular instances of exchange self-regulation
which fall within the scope and purposes of the Securities Exchange
Act may be regarded as justified in answer to the assertion of an
antitrust Claim.
III
The final question here is, therefore, whether the act of
self-regulation in this case was so justified. The answer to that
question is that it was not, because the collective refusal to
continue the private wires occurred under totally unjustifiable
circumstances. Notwithstanding their prompt and repeated requests,
petitioners were not informed of the charges underlying the
decision to invoke the Exchange rules, and were not afforded an
appropriate opportunity to explain or refute the charges against
them.
Given the principle that exchange self-regulation is to be
regarded as justified in response to antitrust charges only to the
extent necessary to protect the achievement of the aims of the
Securities Exchange Act, it is clear that no justification can be
offered for self-regulation conducted without provision for some
method of telling a protesting nonmember why a rule is being
invoked, so as to harm him and allowing him to reply in explanation
of his position. No policy reflected in the Securities Exchange Act
is, to begin with, served by denial of notice and an opportunity
for hearing. Indeed, the aims of the statutory scheme of
self-policing -- to protect investors and promote fair dealing --
are defeated when an exchange exercises its tremendous economic
power without explaining its basis for acting, for the absence of
an obligation to give some form of notice, and, if timely
requested, a hearing creates a great danger of perpetration of
injury that will damage public confidence in the exchanges. The
requirement
Page 373 U. S. 362
of such a hearing will, by contrast, help in effectuating
antitrust policies by discouraging anticompetitive applications of
exchange rules which are not justifiable as within the scope of the
purposes of the Securities Exchange Act. In addition to the general
impetus to refrain from making unsupportable accusations that is
present when it is required that the basis of charges be laid bare,
the explanation or rebuttal offered by the nonmember will, in many
instances, dissipate the force of the
ex parte information
upon which an exchange proposes to act. The duty to explain and
afford an opportunity to answer will, therefore, be of extremely
beneficial effect in keeping exchange action from straying into
areas wholly foreign to the purposes of the Securities Exchange
Act. And, given the possibility of antitrust liability for
anticompetitive acts of self-regulation which fall too far outside
the scope of the Exchange Act, the utilization of a notice and
hearing procedure, with its inherent check upon unauthorized
exchange action, will diminish, rather than enlarge, the likelihood
that such liability will be incurred, and hence will not interfere
with the Exchange's ability to engage efficaciously in legitimate
substantive self-regulation. [
Footnote 14] Provision of such a hearing will, moreover,
contribute
Page 373 U. S. 363
to the effective functioning of the antitrust court, which would
be severely impeded in providing the review of exchange action
which we deem essential if the exchange could obscure, rather than
illuminate, the circumstances under which it has acted. Hence, the
affording of procedural safeguards not only will substantively
encourage the lessening of anticompetitive behavior outlawed by the
Sherman Act, but will allow the antitrust court to perform its
function effectively. [
Footnote
15]
Page 373 U. S. 364
Our decision today recognizes that the action here taken by the
Exchange would clearly be in violation of the Sherman Act unless
justified by reference to the purposes of the Securities Exchange
Act, and holds that that statute affords no justification for
anticompetitive collective action taken without according fair
procedures. [
Footnote 16]
Congress, in effecting a scheme of self-regulation designed to
insure fair dealing, cannot be thought to have sanctioned and
protected self-regulative activity when carried out in a
fundamentally unfair manner. [
Footnote 17] The point is not that the antitrust laws
impose the requirement of
Page 373 U. S. 365
notice and a hearing here, but, rather that, in acting without
according petitioners these safeguards in response to their
request, the Exchange has plainly exceeded the scope of its
authority under the Securities Exchange Act to engage in
self-regulation, and therefore has not even reached that threshold
of justification under that statute for what would otherwise be an
antitrust violation. Since it is perfectly clear that the Exchange
can offer no justification under the Securities Exchange Act for
its collective action in denying petitioners the private wire
connections without notice and an opportunity for hearing, and that
the Exchange has therefore violated § 1 of the Sherman Act, 15
U.S.C. § 1, and is thus liable to petitioners under §§ 4 and 16 of
the Clayton Act, 15 U.S.C. §§ 15, 26, there is no occasion for us
to pass upon the sufficiency of the reasons which the Exchange
later assigned for its action. [
Footnote 18] Thus, there is also no need for
Page 373 U. S. 366
us to define further whether the interposing of a substantive
justification in an antitrust suit brought to challenge a
particular enforcement of the rules on its merits is to be governed
by a standard of arbitrariness, good faith, reasonableness, or some
other measure. It will be time enough to deal with that problem if
and when the occasion arises. Experience teaches, however, that the
affording of procedural safeguards, which, by their nature, serve
to illuminate the underlying facts, in itself often operates to
prevent erroneous decisions on the merits from occurring. There is
no reason to believe that the experience of the Exchange will be
different from that of other institutions, both public and private.
The benefits which a guarantee of procedural safeguards brings
about are, moreover, of particular importance here. It requires but
little appreciation of the extent of the Exchange's economic power,
and of what happened in this country during the 1920's and 1930's,
to realize how essential it is that the highest ethical standards
prevail as to every aspect of the Exchange's activities. What is
basically at issue here is whether the type of partnership between
government and private enterprise that marks the design of the
Securities Exchange Act of 1934 can operate effectively to insure
the maintenance of such standards in the long run.
Page 373 U. S. 367
We have today provided not a brake upon the private partner
executing the public policy of self-regulation, but a balance wheel
to insure that it can perform this necessary activity in a setting
compatible with the objectives of both the antitrust laws and the
Securities Exchange Act.
The judgment is reversed and remanded for further proceedings
consistent with this opinion.
It is so ordered.
MR. JUSTICE CLARK concurs in the result on the grounds stated in
the opinion of the District Court,
196 F.
Supp. 209, and the dissenting opinion in the Court of Appeals,
302 F.2d 714.
[
Footnote 1]
Exchange approval was never sought for Municipal's private wires
to the municipal bond departments of member firms.
[
Footnote 2]
Ultimately, during the pretrial stages of this litigation, the
Exchange disclosed most of the reasons for its action, and these
are summarized and discussed in the opinions of both the District
Court,
196 F.
Supp. 209, 216-217, 225-227, and the Court of Appeals, 302 F.2d
714, 716. In view, however, of the disposition we make of the case
hereafter, there is no need to set forth these reasons in detail in
this opinion.
[
Footnote 3]
Silver died while the case was pending in the Court of Appeals,
and his widow, Evelyn B. Silver, as executrix of his estate, was
substituted for him.
[
Footnote 4]
These forms of relief are provided by §§ 4 and 16 of the Clayton
Act, 15 U.S.C. §§ 15, 26.
[
Footnote 5]
The fact that the consensus underlying the collective action was
arrived at when the members bound themselves to comply with
Exchange directives upon being admitted to membership, rather than
when the specific issue of Silver's qualifications arose, does not
diminish the collective nature of the action. A blanket
subscription to possible future restraints does not excuse the
restraints when they occur.
Associated Press v. United
States, 326 U. S. 1. Nor
does any excuse derive from the fact that the collective refusal to
deal was only with reference to the private wires, the member firms
remaining willing to deal with petitioners for the purchase and
sale of securities.
See Bigelow v. RKO Radio Pictures,
Inc., 327 U. S. 251;
United States v. Paramount Pictures, Inc., 334 U.
S. 131,
334 U. S. 167.
A valuable service germane to petitioners' business and important
to their effective competition with others was withheld from them
by collective action. That is enough to create a violation of the
Sherman Act.
United States v. Terminal R. Ass'n of St.
Louis, 224 U. S. 383;
United States v. First National Pictures, Inc.,
282 U. S. 44;
Associated Press v. United States, supra; cf. Anderson v.
United States, 171 U. S. 604,
171 U. S.
618-619.
[
Footnote 6]
The report cited in the text is the recently issued first
segment of a study which the Commission was directed to make by a
1961 amendment to the Securities Exchange Act, § 19(d), 15 U.S.C.
(Supp. III) § 78s(d). Another set of figures reported by the
Special Study illustrates the great importance of corporate
securities as a form of private property. As of the end of 1961,
individuals had net financial savings of about $900,000,000,000, of
which direct holdings of corporate securities amounted to more than
half. In addition, life insurance companies and private pension
funds held about $93,000,000,000 in corporate securities, and
personal trust funds held another $57,000,000,000. Special Study,
c. IB, pp. 2-3.
[
Footnote 7]
"The Commission is . . . authorized . . . to alter or supplement
the rules of . . . [an] exchange . . . in respect of such matters
as (1) safeguards in respect of the financial responsibility of
members and adequate provision against the evasion of financial
responsibility through the use of corporate forms or special
partnerships; (2) the limitation or prohibition of the registration
or trading in any security within a specified period after the
issuance or primary distribution thereof; (3) the listing or
striking from listing of any security; (4) hours of trading; (5)
the manner, method, and place of soliciting business; (6)
fictitious or numbered accounts; (7) the time and method of making
settlements, payments, and deliveries and of closing accounts; (5)
the reporting of transactions on the exchange and upon tickers
maintained by or with the consent of the exchange, including the
method of reporting short sales, stopped sales, sales of securities
of issuers in default, bankruptcy or receivership, and sales
involving other special circumstances; (9) the fixing of reasonable
rates of commission, interest, listing, and other charges; (10)
minimum units of trading; (11) odd-lot purchases and sales; (12)
minimum deposits on margin accounts; and (13) similar matters."
[
Footnote 8]
Member firms of the New York Stock Exchange accounted for over
half of the total dollar volume of over the counter business in
fiscal 1961, Special Study,
op. cit., supra, c. IB, pp.
17-18, and trading in over the counter stocks constituted 21.6% of
the estimated gross income of member firms of the Exchange for the
same period,
id., c. I, Table I-12.
[
Footnote 9]
Of most significance in this connection is Art. XIV, § 17, of
the Exchange's Constitution, which permits it to order a member to
sever any business connection which might cause the interest or
good repute of the Exchange to suffer, and Rules 331-335, which
provide various specific regulations governing members' relations
with nonmember corporations and associations (including
broker-dealers) in which they have an ownership interest or with
which they are otherwise connected. Equally important are Rule 403,
prohibiting transaction of business with a bucket shop, and Rule
435, prohibiting participation in any manipulative operation. The
subject of commissions to be collected from nonmembers is regulated
by Article XV of the Constitution, and by numerous rules.
Arbitration involving nonmembers is dealt with by Art. VIII, §§ 1
and 6, of the Constitution. Various other rules prohibit the joint
use of an office with a nonmember unless the Exchange approves
(Rule 344), the giving of compensation or gratuities to the
employees of nonmembers without their employer's consent (Rule
350), and the paying of certain expenses of nonmembers (Rule 369).
Rule 418 permits the Exchange to engage in a "surprise" audit of
any member who does business with nonmembers. And Art. III, § 6, of
the Constitution and Rules 355 through 358 deal with private wire
connections and related installations,
see note 11 infra.
[
Footnote 10]
In deposition, the assistant director of the Exchange's
Department of Member Firms described a boiler shop as
"usually a physically small operation which employs high
pressure telephone salesmanship to oversell to the public by
quantity, and, in many cases, by quality."
He said that this kind of firm, as well as bucket shops,
inadequately capitalized firms, and firms which might misrepresent
or withhold material facts from customers, was among those which
the Exchange seeks to prevent from having the use of its
facilities.
[
Footnote 11]
Article III, § 6, of the Constitution, which is entitled
"Supervision Over Members, Allied Members, Member Firms and Member
Corporations," provides, among other things, that the Exchange
"shall have power to approve or disapprove any application for
ticker service to any nonmember, or for wire, wireless, or other
connection between any office of any member of the Exchange, member
firm or member corporation and any nonmember, and may require the
discontinuance of any such service or connection."
Rule 355 provides,
"(a) No member or member organization shall establish or
maintain any wire connection, private radio, television or wireless
system between his or its offices and the office of any nonmember,
or permit any private radio or television system between his or its
offices, without prior consent of the Exchange."
"(b) Every nonmember will be required to execute a private wire
contract in form prescribed by the Exchange, to be filed with it,
unless a contract is already on file with the Exchange."
"(c) Notification regarding a private means of communication
with a nonmember and the signed contract when necessary shall be
submitted to the Department of Member Firms. This notification, by
a member or allied member, may be in form supplied by the Exchange
or in letter form, and shall include the essential facts concerning
the nonmember and the means of communication."
"(d) Each member or member organization shall submit annually to
the Department of Member Firms a list of all nonmembers with whom
private means of communication are maintained."
"(e) The Exchange may require at any time that any means of
communication be discontinued."
Rule 356, insofar as relevant, provides,
"The Exchange may require at any time the discontinuance of any
means of communication whatsoever which has a terminus in the
office of a member or member organization."
[
Footnote 12]
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
(
i.e., by the NASD), §§ 15A(g), 15A(h), 25(a), 15 U.S.C.
§§ 78
o-3(g), 78
o-3(h), 78y(a);
see R. H.
Johnson & Co. v. Securities & Exchange Comm'n, 198
F.2d 690 (C.A.2d Cir.1952),
cert. denied, 344 U.S. 855, a
different case would arise concerning exemption from the operation
of laws designed to prevent anticompetitive activity, an issue we
do not decide today.
[
Footnote 13]
Although the recently issued first segment of the Report of the
Special Study of Securities Markets is more critical of situations
in the over the counter market and with reference to exchanges
other than the respondent, it does point out that improper selling
practices have occurred among member firms of respondent, c. IIIB,
pp. 178-179, 183-184, and suggests the need for new Commission
rules to govern selling practices of securities dealers,
id., p. 186.
[
Footnote 14]
The Exchange argues that total disclosure of the reasons for its
action and of the sources of its information will subject it and
its informants to a risk of being sued for defamation in many
instances. This risk, however, is properly met by the flexibility
inherent in the law of defamation in the concept of the conditional
or qualified privilege. 1 Harper and James, The Law of Torts
(1956), §§ 5.21, 5.25, 5.26, especially § 5.26 at 442, n. 3. In
addition, even if a particular communication of information to the
Exchange should fall outside the scope of such a privilege, the
Exchange can protect itself and its informant from expansion of
damage liability by confining the hearing, unless otherwise
requested by the aggrieved nonmember, to the parties to the dispute
and the necessary witnesses, so as to limit the area of
dissemination of the defamatory matter.
See 1 Harper and
James,
op. cit. supra, § 5.30, at 469. Similarly, any
concern that our holding exposes the Exchange to excessive
liability for past enforcement of its rules accomplished without a
hearing ignores the presumable applicability of familiar principles
of waiver, laches, and estoppel to bar relief to a nonmember who
failed to make timely and appropriate protest to the Exchange.
[
Footnote 15]
The affording of procedural safeguards will not burden the New
York Stock Exchange; notice and hearing are already guaranteed by
its Constitution, Art. XIV, § 14, to any member accused of
violating its rules. The existence of these guarantees goes far
toward dispelling fears that provision of a hearing to nonmembers
would interfere significantly with the need for timely Exchange
action, for it can surely be assumed that prompt action is as much
required to deal with member wrongdoing as with that of a
nonmember. We have no doubt, moreover, that provision of a hearing
to a protesting nonmember can, when circumstances require, be
accomplished expeditiously enough to prevent injury to investors.
Indeed, if the basis for invocation of an Exchange rule is also a
violation of the Securities Act of 1933, the Securities Exchange
Act of 1934, or the Commission's rules and regulations under either
statute, the Commission can come to the aid of the Exchange by
obtaining a preliminary or permanent injunction or restraining
order against such practice in the appropriate United States
District Court. Securities Act of 1933, § 20(b), 15 U.S.C. §
77t(b); Securities Exchange Act of 1934, § 21(e), 15 U.S.C. §
78u(e). It is significant, however, that the Commission's power to
obtain restraint of particular violation is confined to traditional
judicial channels, with the safeguards implied thereby, and that
when the Commission, pursuant to the powers conferred on it by
Congress in the Maloney Act of 1938, wishes to resort to the more
drastic sanction of suspending or revoking the membership in the
NASD of a wrongdoing over the counter dealer, it may only do so
"after appropriate notice and opportunity for hearing. . . ." §
15A(
l), 15 U.S.C. § 78
o-3(
l).
[
Footnote 16]
It may be assumed that the Securities and Exchange Commission
would have had the power, under § 19(b) of the Exchange Act, 15
U.S.C. § 78s(b), pp. 352-353, 357 &
note 7 supra, to direct the Exchange to adopt a
general rule providing a hearing and attendant procedures to
nonmembers. However, any rule that might be adopted by the
Commission would, to be consonant with the antitrust laws, have to
provide, as a minimum, the procedural safeguards which those laws
make imperative in cases like this. Absent Commission adoption of a
rule requiring fair procedure, and in light of both the utility of
such a rule as an antitrust matter and its compatibility with
securities regulation principles,
see p.
373 U. S. 361,
supra, no incompatibility with the Commission's power
inheres in announcement by an antitrust court of the rule.
Compare Colorado Anti-Discrimination Comm'n v. Continental Air
Lines, Inc., 372 U. S. 714,
372 U. S.
723-724.
[
Footnote 17]
The basic nature of the rights which we hold to be required
under the antitrust laws in the circumstances of today's decision
is indicated by the fact that public agencies, labor unions, clubs,
and other associations have, under various legal principles, all
been required to afford notice, a hearing, and an opportunity to
answer charges to one who is about to be denied a valuable right.
Goldsmith v. United States Board of Tax Appeals,
270 U. S. 117;
Russell v. Duke of Norfolk, (1949) 1 All E.R. 109 (C.A.);
Fellman, Constitutional Rights of Association, in The Supreme Court
Review, 1961 (Kurland ed.), 74, 104, 112-113; Developments in the
Law -- Judicial Control of Actions of Private Associations, 76
Harv.L.Rev. 983, 1026-1037 (1963);
see authorities cited
note 18 infra; cf.
Vitarelli v. Seaton, 359 U. S. 535;
Cafeteria & Restaurant Workers Union, Local 473, AFL-CIO v.
McElroy, 367 U. S. 886,
367 U. S.
894-895;
Willner v. Committee on Character and
Fitness, ante, p.
373 U. S. 96.
[
Footnote 18]
The principle that a private association's failure to afford
procedural safeguards may result in the imposition of damage
liability without inquiry into whether the association's action
lacked substantive basis is reflected in many state court
decisions, resting on various theories of liability.
Cason v.
Glass Bottle Blowers Ass'n, 37 Cal. 2d
134, 231 P.2d 6 (1951);
Lahiff v. Saint Joseph's Total
Abstinence & Benevolent Soc., 76 Conn. 648, 57 A. 692
(1904);
Malmsted v. Minneapolis Aerie, 111 Minn. 119, 126
N.W. 486 (1910);
Johnson v. International of United Brotherhood
of Carpenters, 52 Nev. 400, 288 P. 170 (1930); 54 Nev. 332, 16
P.2d 658, 18 P.2d 448 (1932);
Brooks v. Engar, 259
App.Div. 333, 19 N.Y.S.2d 114 (1st Dept.),
appeal
dismissed, 284 N.Y. 767, 31 N.E.2d 514 (1940);
Blek v.
Wilson, 145 Misc. 373, 259 N.Y.S. 443 (Sup.Ct.1932),
modified and aff'd, 237 App.Div. 712, 262 N.Y.S. 416 (1st
Dept.),
rev'd on other grounds, 262 N.Y. 253, 186 N.E. 692
(1933);
Glauber v. Patof, 183 Misc. 400, 47 N.Y.S.2d 762
(Sup.Ct.1944),
aff'd mem., 269 App.Div. 687, 54 N.Y.S.2d
384 (1st Dept.),
modified per curiam on other grounds, 294
N.Y. 583, 63 N.E.2d 181 (1945);
O'Brien v. Papas, 49
N.Y.S.2d 521 (Sup.Ct.1944);
Taxicab Drivers' Local Union No.
889 v. Pittman, 322 P.2d 159
(Okl.1957);
International Printing Pressmen & Assistants'
Union of North America v. Smith, 145 Tex. 399, 198 S.W.2d 729
(1946);
Leo v. Local Union No. 612 of International Union of
Operating Engineers, 26 Wash. 2d 498, 174 P.2d 523 (1946)
(alternative holding).
See also Developments in the Law,
supra, 76 Harv.L.Rev. at 1087-1095; Note, Procedural "Due
Process" in Union Disciplinary Proceedings, 57 Yale L.J. 1302
(1948). The precedents cited undoubtedly rest on a recognition that
the according of fair procedures is of fundamental significance,
that serious and irreversible economic injury may result from their
denial in a context like that of the present case, and that a
substantive inquiry after the fact cannot possibly succeed in
accurately ascertaining retrospectively what the outcome would have
been had the procedural safeguards been afforded in the first
instance. The conditioning of relief for the procedural breach on a
finding that a concomitant substantive breach occurred might well,
therefore, result in an ultimate wrongful denial of recovery to a
party in the position of petitioners here.
MR. JUSTICE STEWART, whom MR. JUSTICE HARLAN joins,
dissenting.
The Court says that the fundamental question in this case is
"whether and to what extent the federal antitrust laws apply to
securities exchanges regulated by the Securities Exchange Act of
1934." I agree that this is the issue presented, but, with all
respect, it seems to me that the answer which the Court has given
is both unsatisfactory and incomplete.
The Court begins by pointing out, correctly, that removal of the
petitioners' wire connections by collective action of the Exchange
and its members would constitute a violation of the Sherman Act had
it occurred in an ordinary commercial context. [
Footnote 2/1] The Court then reviews at length the
purpose, scope, and structure of the Securities Exchange Act and
holds, again correctly I think, that the
Page 373 U. S. 368
substantive act of regulation engaged in here was inside "the
boundaries of the public policy" established by the Exchange Act.
The Court next reminds us, correctly, that the Exchange Act
contains no express exemption from the antitrust laws, and that a
stock exchange or its members might in some cases "apply its rules
so as to do injury to competition which cannot be justified as
furthering legitimate self-regulative ends."
So far, so good. The Court has fairly and thoroughly stated the
competing considerations bearing upon the basic problem involved in
this case. But then -- in the last five pages of the Court's
opinion -- the nature of the problem seems suddenly to change. The
case becomes one involving due process concepts of notice,
confrontation, and hearing.
It may be that a hearing should be accorded a member or
nonmember of an exchange, injured by the invocation of an exchange
rule, in all cases. On the other hand, in view of the
sophisticated, subtle, and highly technical nature of the problem
of what are "just and equitable principles of trade," or because of
the fragile and mercurial ingredients of public confidence in the
securities markets, there might be cases in which the public
interest would demand that at least preliminary disciplinary action
be taken with swift effectiveness. These broad policy questions
were, quite properly, neither briefed nor argued in the present
case. They are questions well within the power of Congress and of
the Securities and Exchange Commission to canvass and to resolve.
[
Footnote 2/2] But they
Page 373 U. S. 369
are questions, I respectfully submit, which have only the most
tangential bearing upon the issues now before us.
The Court says that, because of the failure to accord
"procedural safeguards" to the petitioners, the respondent Exchange
is
ipso facto liable to them under the antitrust laws.
This means that a bucket shop operator who had been engaged in
swindling the public could collect treble damages from a stock
exchange which had denied him
Page 373 U. S. 370
its wire connections without first according him notice and a
hearing. For, as I understand the Court's opinion, the exchange
would not be allowed to prove in this hypothetical antitrust case
that the plaintiff was such a swindler, even though proof of that
fact to an absolute certainty were available. This result seems to
me completely to frustrate the purpose and policy of the Securities
Exchange Act, and to bear no relevance to the purpose and policy of
the antitrust laws. Even assuming that Congress agreed with the
Court's notions of the appropriate procedures under the Exchange
Act, I cannot believe that Congress would have provided an
antitrust forum and private treble damage liability to enforce
them.
Whether there has been a violation of the antitrust laws depends
not at all upon whether or not the defendants' conduct was
arbitrary. As this Court has said,
"the reasonableness of the methods pursued by the combination to
accomplish its unlawful object is no more material than would be
the reasonableness of the prices fixed by unlawful
combination."
Fashion Originators' Guild v. Federal Trade Comm'n,
312 U. S. 457,
312 U. S. 468.
[
Footnote 2/3] Yet the Court today
says that, because the Exchange did not accord the petitioners what
the Court considers "fair procedures" under the Exchange Act, the
Exchange has therefore violated § 1 of the Sherman Act.
I think the Court errs in using the antitrust laws to serve ends
they were never intended to serve -- to enforce the Court's concept
of fair procedures under a totally unrelated statute. I should have
thought that the aftermath of
Duplex Printing Press Co. v.
Deering [
Footnote 2/4]
Page 373 U. S. 371
would have provided a sufficient lesson as to the unwisdom of
such a broad and basically irrelevant use of the antitrust
laws.
The purpose of the self-regulation provisions of the Securities
Exchange Act was to delegate governmental power to working
institution which would undertake at their own initiative, to
enforce compliance with ethical, as well as legal, standards in a
complex and changing industry. This self-initiating process of
regulation can work effectively only if the process itself is
allowed to operate free from a constant threat of antitrust
penalties. To achieve this end, I believe it must be held that the
Securities Exchange Act removes antitrust liability for any action
taken in good faith to effectuate an exchange's statutory duty of
self-regulation. The inquiry in each case should be whether the
conduct complained of was for this purpose. If it was, that should
be the end of the matter so far as the antitrust laws are concerned
-- unless, of course, some antitrust violation other than the mere
concerted action of an exchange and its members is alleged.
[
Footnote 2/5]
I would vacate the judgment of the Court of Appeals and remand
the case to the District Court for further proceedings consistent
with the views expressed in this dissenting opinion.
[
Footnote 2/1]
See, e.g., Radiant Burners, Inc. v. Peoples Gas Light &
Coke Co., 364 U. S. 656;
Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.
S. 207;
Fashion Originators' Guild v. Federal Trade
Comm'n, 312 U. S. 457. It
may be assumed, I think, that almost every exercise of an
exchange's statutory duty of self-regulation would involve an
actual or threatened concerted refusal to deal -- a "group
boycott."
[
Footnote 2/2]
See ante, p.
373 U. S. 364,
note 16 Contrary to the
Court's suggestion, there has not been a total absence of agency or
legislative attention to the problems of the Exchange's
disciplinary machinery. In § 19(c) of the 1934 Act, Congress
expressly ordered the Securities and Exchange Commission to study
the exchanges' procedures for disciplining members, and to report
back on the need for further legislation. The Commission reported
the following year, giving a detailed account of existing
procedures and making specific recommendations for reform. H.R.Doc.
No. 85, 74th Cong., 1st Sess. (Jan. 25, 1935). It advised against
legislation, however, suggesting that the exchanges themselves be
given the opportunity to adopt the recommendations voluntarily. The
agency also undertook to continue its surveillance of such
procedures and to report to Congress "such further recommendations
as it may deem advisable in regard to exchange government."
Id. at 17. In its 1935 Annual Report, the Commission
stated that the respondent Exchange, as well as many others, had
voluntarily complied. 1 S.E.C.Ann.Rep. 20 (1935). The process of
surveillance has continued. In 1938, a general overhaul of the
respondent Exchange's constitution was effected by informal
Commission action.
See 2 Loss, Securities Regulation,
1179-1182. In 1941, the Commission's proposals for statutory
amendments included a specific request to extend § 19(b) rulemaking
authority over rules governing discipline of members. Report of the
Securities and Exchange Commission on Proposals for Amendments to
the Securities Act of 1933 and the Securities Exchange Act of 1934,
House Committee Print, Committee on Interstate and Foreign
Commerce, 77th Cong., 1st Sess. 40 (Aug. 7, 1941). The proposal was
not acted upon. Exchange disciplinary procedures were again
examined in recent congressional hearings concerning the operation
of the stock market. The absence of review by the Commission in
individual cases was noted, but representatives of the respondent
Exchange also testified that all such actions are reported
informally to the agency. A detailed account of the Exchange's
present procedures was included in the record. Hearings before a
Subcommittee of the House Committee on Interstate and Foreign
Commerce on H.J.Res. 438, 87th Cong., 1st Sess. 107-113. These
recent hearings have led to an exhaustive study of current stock
market conditions, and completion of the resulting report by the
Commission is imminent.
See Securities Exchange Act of
1934, § 19(d), added by 75 Stat. 465, as amended, 76 Stat. 247, 15
U.S.C. (Supp. IV) § 78s(d); S.E.C., Report of Special Study of
Securities Markets (Apr. 3, 1963).
[
Footnote 2/3]
The Court pointed out that
"[a]n elaborate system of trial and appellate tribunals exists
for the determination of whether a given garment is in fact a copy
of a Guild member's design."
312 U.S. at
312 U. S.
462-463.
See also Klor's, Inc. v. Broadway-Hale
Stores, Inc., 359 U. S. 207,
359 U. S.
212.
[
Footnote 2/4]
254 U. S. 254 U.S.
443.
See Apex Hosiery Co. v. Leader, 310 U.
S. 469;
United States v. Hutcheson,
312 U. S. 219.
[
Footnote 2/5]
For example, an exchange would be liable under the antitrust
laws if it conspired with outsiders, or if it attempted to use its
power to monopolize.
United States v. Borden Co.,
308 U. S. 188;
Maryland & Va. Milk Producers Assn, v. United States,
362 U. S. 458;
Allen Bradley Co. v. Local Union No. 3, IBEW, 325 U.
S. 797. Furthermore, individual members of an exchange
would be liable if it were shown that they had conspired to use the
exchange's machinery for the purpose of suppressing competition.
Cf. Georgia v. Pennsylvania R. Co., 324 U.
S. 439;
United States v. Pacific & Arctic Ry.
& Nav. Co., 228 U. S. 87.
Application of the antitrust laws to such conduct would rest on the
presence of an independent violation, not, as the present case
does, simply upon concerted activity by the exchange and its
members.