Bradford Nat. Clearing Corp. v. S.E.C.

• Decision Date: 19 September 1978
• Docket Number: Nos. 77-1199,77-1547,s. 77-1199
• Citation: 191 U.S.App.D.C. 383,590 F.2d 1085
• Parties: , Fed. Sec. L. Rep. P 96,553 BRADFORD NATIONAL CLEARING CORPORATION and Bradford Securities Processing Services, Inc., Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, New York Stock Exchange, Inc., et al., National Securities Clearing Corporation, Intervenors. BRADFORD NATIONAL CLEARING CORPORATION and Bradford Securities Processing Services, Inc., Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, National Securities Clearing Corporation, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1085

590 F.2d 1085

191 U.S.App.D.C. 383, Fed. Sec. L. Rep. P 96,553

BRADFORD NATIONAL CLEARING CORPORATION and Bradford

Securities Processing Services, Inc., Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, New York

Stock Exchange, Inc., et al., National Securities

Clearing Corporation, Intervenors.

BRADFORD NATIONAL CLEARING CORPORATION and Bradford

Securities Processing Services, Inc., Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, National

Securities Clearing Corporation, Intervenor.

Nos. 77-1199, 77-1547.

United States Court of Appeals District of Columbia Circuit.

Argued May 12, 1978.

Decided Sept. 19, 1978.

Syllabus by the Court

Section 17A of the Securities Exchange Act, 15 U.S.C. § 78q-1, as amended by the Securities Act Amendments of 1975 (1975 Amendments), Pub.L. 94-29, 89 Stat. 141, gives the Securities and Exchange Commission (SEC) authority to facilitate the establishment of a national system of clearing securities. Pursuant to its authority under this provision as well as under section 19 of the Securities Exchange Act, 15 U.S.C. § 78s, also as amended by the 1975 Amendments, the SEC approved the application of National Securities Clearing Corporation (NSCC) for registration as a clearing agency, Securities Exchange Act Release No. 13,163 (Jan. 13, 1977), and the SEC subsequently approved two rule changes proposed by NSCC, Securities Exchange Act Release No. 13,456 (Apr. 21, 1977). Held : The registration of NSCC, challenged in No. 77-1199, is upheld except insofar as the SEC approved NSCC's use of "geographic price mutualization" and NSCC's mode of allocating its facilities management contract, which matters are remanded to the SEC for further consideration. The SEC's approval of the rule changes, challenged in No. 77-1547, is sustained.

(1) Partially as a result of the inability of clearing facilities in the late 1960's to keep pace with the rising trading volume, Congress in the early 1970's undertook a "searching reexamination" of the securities industry and resolved by way of the 1975 Amendments to give the SEC broad powers to restructure that industry. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1090-1096 of 590 F.2d.

(a) Congress gave the SEC the responsibility, and various quasi-legislative powers, including the power to register clearing agencies, to facilitate the rapid establishment of a safe, efficient, and computerized national clearing system. Pp. ---- - ---- of --- U.S.App.D.C., pp. 1091-1094 of 590 F.2d.

(b) Congress gave the SEC similar responsibility and authority to facilitate the establishment of a national market system. P. ---- of 191 U.S.App.D.C., 1094 of 590 F.2d.

(c) Congress intended to give the SEC exceptionally broad powers to determine the precise structure of both the national clearing and national market systems, but it placed slightly more emphasis on rapid development and national availability with respect to the former system, and on competition with respect to the latter. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1095-1096 of 590 F.2d.

(2) NSCC's registration application (pp. ---- - ---- of 191 U.S.App.D.C., pp. 1096-1099 of 590 F.2d), as amended by four SEC-imposed conditions (pp. ---- - ---- of 191 U.S.App.D.C., pp. 1099-1101 of 590 F.2d), was properly granted by the SEC, except in two respects. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1103-1114 of 590 F.2d.

(a) The SEC's procedures in granting the application were not challenged and were sufficient. P. ---- of 191 U.S.App.D.C., p. 1099 of 590 F.2d.

(b) The recent SEC hearings on NSCC are part of its ongoing oversight responsibilities and do not indicate any disapproval of its former registration decision. There is consequently no cause to remand the case to the SEC on this basis. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1102-1103 of 590 F.2d.

(c) The SEC's interpretation of the 1975 Amendments is entitled to some respect, because it is contemporaneous with passage of the legislation and is reasoned. Although reviewed under a "substantial evidence" test, the SEC's exercise of delegated authority deserves even greater deference because of the predictive and legislative nature of the facts with which it is dealing, the informal nature of the record from whence those facts are derived, and the extremely broad range of choice given it by Congress. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1103-1105 of 590 F.2d.

(d) The SEC correctly interpreted the statute to require it to balance the anticompetitive impact of registration against the aggregate of the possible regulatory benefits of registration and the likelihood that those benefits will actually accompany registration. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1104-1106 of 590 F.2d.

(e) In general, the SEC properly balanced the relevant factors in concluding that its four conditions to registration, its ongoing oversight, and its willingness to modify or withdraw registration in the future will prevent the anticompetitive effects of registration from outweighing the beneficial impact thereof on the rapid development of a safe and efficient national clearing system. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1106-1111 of 590 F.2d.

(f) The SEC's explanation for allowing NSCC to practice "geographic price mutualization" (GPM) appears inconsistent with its discussion of the competitive potential of registering NSCC, and the case must be remanded for reconsideration of the propriety of including GPM in the approval application. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1111-1113 of 590 F.2d.

(g) The SEC improperly failed to consider the anticompetitive effects of NSCC's decision not to subject its facilities management contract to competitive bidding, and the case must be remanded for consideration of the propriety of approving NSCC's application in light of that decision. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1113-1114 of 590 F.2d.

(3) The proposed rule changes (pp. ---- - ---- of 191 U.S.App.D.C., pp. 1101-1103 of 590 F.2d) were properly approved by the SEC. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1114-1116 of 590 F.2d.

(a) The SEC balanced the relevant factors in arriving at its decision to approve the rule changes. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1115-1116 of 590 F.2d.

(b) Approval of interim rule changes prior to NSCC's satisfaction of the four conditions is consistent with the SEC's registration order, insofar as the changes, as here, are (1) consistent with the requirements of the 1975 Amendments, and (2) do not allow NSCC substantially to change its rules and thus to cement its monopoly position. Pp. ---- - ---- of 191 U.S.App.D.C., pp. 1115-1116 of 590 F.2d.

Petitions for Review of Orders of the Securities and Exchange Commission.

Taylor R. Briggs, New York City, with whom Douglas W. Hawes and Richard C. Cole, New York City, were on brief, for petitioners in No. 77-1199.

Morris N. Simkin, New York City, for petitioners in No. 77-1547.

Jacob H. Stillman, Principal Asst. Gen. Counsel, Securities and Exchange Com'n, Washington, D. C., with whom Harvey L. Pitt, Gen. Counsel, Paul Gonson, Associate Gen. Counsel, and Angela M. Desmond and Linda W. Jarett, Attys., Securities and Exchange Commission, Washington, D. C., were on brief, for respondent in Nos. 77-1199 and 77-1547.

Edwin B. Mishkin, New York City, with whom Robert T. Greig and Robert J. Woldow, New York City, were on brief, for intervenor, National Securities Clearing Corp. in Nos. 77-1199 and 77-1547.

Edward J. Reilly, Thomas A. Williams and Kenneth A. Perko, Jr., New York City, were on brief, for intervenors, New York Stock Exchange, Inc., et al. in No. 77-1199.

John M. Liftin, George C. Smith and Barbara Black, Washington, D. C., were on brief, for amicus curiae in No. 77-1199 urging affirmance.

Before McGOWAN and WILKEY, Circuit Judges, and DAVIS ^* Judge, United States Court of Claims.

Opinion for the Court filed by McGOWAN, Circuit Judge.

McGOWAN, Circuit Judge.

These two unconsolidated direct review proceedings involve challenges by subsidiaries of Bradford National Clearing Corporation to successive orders of the Securities and Exchange Commission (SEC or the Commission). In No. 77-1199, petitioners ask this court to set aside the Commission's conditional approval of the application of intervenor National Securities Clearing Corporation (NSCC) for registration as a clearing agency pursuant to section 17A(b) of the Securities Exchange Act, 15 U.S.C. § 78q-1(b). In re The Application of Nat'l Securities Clearing Corp. for Registration as a Clearing Agency (hereinafter Order I ), SEC Securities Exchange Act Release No. 13,163 (Jan. 13, 1977), 42 Fed.Reg. 3916 (1977). No. 77-1547 seeks reversal of a subsequent SEC order under section 19(b) of the Securities Exchange Act, 15 U.S.C. § 78s(b), allowing NSCC to adopt two self-regulatory rules that are purportedly aimed at meeting the conditions set by the Commission in approving NSCC's registration as a clearing agency. In re Nat'l Securities Clearing Corp. (hereinafter Order II ), SEC Securities Exchange Act Release No. 13,456 (Apr. 21, 1977), 42 Fed.Reg. 21881 (1977).

In light of the significant overlap in the issues involved in the two petitions, we have decided to treat both in the same opinion. The order involved in No. 77-1199 is affirmed, except insofar as the Commission approved NSCC's use of "geographic price mutualization" and its mode of allocating its facilities management contract. As to those issues the case is remanded to the SEC for further consideration. The order under review in No. 77-1547 is affirmed.

I

Much of the historical and statutory background for this suit is laid out in considerable detail in Order I. ¹ From 1934 to the present, the Commission has exercised regulatory jurisdiction over transactions in major securities markets under the Securities Exchange Act of 1934 (hereinafter 1934 Act), 15 U.S.C. § 78a Et seq. For most of that period, the SEC's...