Independent Broker-Deal. T. Ass'n v. Securities & E. Com'n, No. 22552.

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Writing for the CourtLEVENTHAL, ROBINSON, and ROBB, Circuit
Citation442 F.2d 132
PartiesINDEPENDENT BROKER-DEALERS' TRADE ASSOCIATION et al., Appellants, v. SECURITIES & EXCHANGE COMMISSION et al.
Docket NumberNo. 22552.
Decision Date04 March 1971

442 F.2d 132 (1971)

INDEPENDENT BROKER-DEALERS' TRADE ASSOCIATION et al., Appellants,
v.
SECURITIES & EXCHANGE COMMISSION et al.

No. 22552.

United States Court of Appeals, District of Columbia Circuit.

Argued January 23, 1970.

Decided March 4, 1971.

As Amended May 18, 1971.


442 F.2d 133
COPYRIGHT MATERIAL OMITTED
442 F.2d 134
Mr. Carl L. Shipley, Washington, D. C., and Mr. Alan A. Garfinkel, Pittsburgh, Pa., of the bar of the Supreme Court of Pennsylvania, pro hac vice, by special leave of court, for appellants

Mr. Philip A. Loomis, Jr., General Counsel, Securities & Exchange Commission, with whom Messrs. Walter P. North, Associate General Counsel, and Brian M. Eisenberg, Atty., Securities & Exchange Commission, were on the brief, for appellees.

Before LEVENTHAL, ROBINSON, and ROBB, Circuit Judges.

LEVENTHAL, Circuit Judge:

In October, 1968, the members of the New York Stock Exchange voted to abolish customer-directed give-ups of brokerage fees. Appellants, an unincorporated association of securities brokers and dealers and several of its members, brought this action in the District Court for declaratory and injunctive relief. They claimed that the Securities and Exchange Commission had in effect ordered the Exchange to abolish give-ups, in a letter dated August 30, 1968, and that this order was beyond the scope of the Commission's power and was issued without notice or adequate hearing required by statute. Motions for summary judgment were filed by appellants and by the Commission. On November 21, 1968, the District Court dismissed appellants' complaint for lack of jurisdiction over the subject matter. The District Court stated that the SEC's action had amounted to a mere suggestion, which neither required notice and hearing, nor was subject to judicial review. This appeal followed.

We hold that the record presents a case of agency action entitling the broker and dealer plaintiffs to limited judicial review,

442 F.2d 135
relying on the Commission's letter not as such but as the culmination of activity hereafter discussed in detail. Although the District Court erred in dismissing the complaint for lack of jurisdiction, we do not remand for further proceedings because we conclude on the merits that appellants' claims are insubstantial and that therefore this complaint against the Commission should stand dismissed with prejudice by granting the Commission's motion for summary judgment

Background

When a securities broker surrenders a portion of his commission on a transaction to another broker, the surrendered portion is referred to as a "give-up."1 The "customer-directed give-up" is generally paid at the direction of institutional investment managers; the recipient broker has generally not been connected with the particular transaction, but is receiving compensation in this way for other services, such as research, performed on behalf of the institution.2

The practice of give-ups developed largely as a result of the securities exchange's rigid minimum rate schedule, which did not permit volume discounts on large securities transactions. Thus "the commissions charged on an order for 10,000 shares of a given security * * * will be exactly 100 times the commission for a 100-share order,"3 even though the broker's expenses are not greater by any factor remotely like 100-fold. Because of the profitability to brokers of handling large transactions in the absence of a volume discount, many members of the New York Stock Exchange (NYSE) were willing to give up as much as 70% of the commission on these orders.4 The practice naturally increased with the huge growth of institutional investment and the consequent rise in large transactions.5

Give-ups, among other practices, posed problems of conflict of interest if not outright violation of fiduciary duty by managers of mutual funds. Give-ups also highlighted a serious question of whether a rigid minimum rate structure, such as the NYSE's, could be considered reasonable, if brokers were willing to surrender a large part of their commissions.

The record discloses that the matter of give-ups and the NYSE rate structure were subjects of concern to the Commission long before the Exchange's 1968 action that gave rise to this litigation. On July 18, 1966, the Commission wrote to all national securities exchanges and the National Association of Securities Dealers and expressed its concern over the give-up problem. In its report to the House Commerce Committee, dated December 2, 1966, the Commission reiterated this concern and recommended once

442 F.2d 136
more that the exchanges abolish give-ups.6

The first significant response came on January 2, 1968, in a letter from Robert W. Haack, president of the NYSE, to its members. (App. 24-28). Explaining the need for a change in the minimum rate structure, Mr. Haack declared that the "minimum commission rate is ceasing to be a `minimum'" because of give-ups and related practices. He recommended, among other things, the incorporation of a volume discount in the rate schedule, but also supported the continuation of customer-directed give-ups, "with a limitation on the percentage amount which may be so given-up." President Haack also stated that the NYSE proposals had been presented to the Commission for consideration.

On January 26, 1968, the Commission issued its Release No. 8239, announcing the submission of proposals by the Exchange. The Commission also announced that it had under consideration a proposal to adopt Rule 10b-10 under the Securities Exchange Act of 1934. The proposed rule was the product of Commission concern over the effect of give-ups on the ability of investment company managers to fulfill their fiduciary obligations. The rule, if adopted, would prohibit give-ups at the direction of these managers "unless the benefits of such division accrue to the investment company and its shareholders." The Commission invited all interested persons to submit their views on the Exchange proposals and the proposed rule.

The comments submitted by the Justice Department on April 1, 1968, set forth that the proposed Rule 10b-10 did not go far enough, and urged the Commission to hold hearings on the advisability of eliminating minimum rates altogether. On May 28, 1968, the Commission issued an Order directing a public hearing and investigation on several subjects, including "give-ups and reciprocal practices among different categories of members and nonmembers."

On the same day, May 28, 1968, Chairman Manuel Cohen of the SEC wrote to President Haack, making "written request pursuant to Section 19(b) of the Securities Exchange Act" that the Exchange amend its rate structure either by following a minimum fee schedule which the Commission had prepared, or by eliminating minimum rates entirely on orders of more than $50,000. (App. 31). Mr. Haack answered this letter on August 8, accepting the first of the SEC's requests, with some revisions in the Commission's proposed schedule. In addition, President Haack went on to propose the abolition of customer-directed give-ups.

The Commission accepted these counter-proposals of the Exchange in its letter of August 30, 1968. The Commission stated that in view "of the considerations set forth in your letters of August 8 and 20 and subject to confirmation of the understanding stated in the preceding paragraph of this letter, we hereby modify the direction to you, pursuant to Section 19(b) of the Exchange Act contained in the Commission's letter of May 28, 1968 to the effect that: alternative (a) of such direction will be satisfied by the adoption of the specific interim non-member commission schedule described in your letters of August 8 and 20, the specific interim intra-member commission schedule also described therein, and the additional language to the Exchange constitution prohibiting customer-directed give-ups. * * * We wish to emphasize that these changes are interim steps." (App. 52-53). The Exchange proposals were then submitted to a vote of the membership and were adopted, effective December 5, 1968.

Jurisdiction

Section 19(b) of the Securities Exchange Act of 19347 provides a two-step

442 F.2d 137
procedure for the regulation of national securities exchanges. Under this procedure the Commission first makes a Request in writing that the exchange effect on its own behalf specified changes in its rules and practices. If the exchange refuses to comply with the Request, the Commission may proceed to the second step, — i. e., if it determines after notice and opportunity for a hearing that such changes are necessary for protection of investors or to insure fair dealing in securities, the Commission is authorized, by regulation or rule, to alter or supplement the rules of the exchange

Appellants contend that the Commission's action on give-ups — especially the August 30 letter with its repeated references to "direction" — amounted to an Order under Section 19(b) of the 1934 Act. They further contend that the Commission's failure to hold public hearings on give-ups before issuing this Order was a violation of statutory duty and thus subject to judicial review. The Commission, on the other hand, argues that the Exchange alone abolished give-ups, that the Commission did no more than "request" voluntary action by the Exchange, and that it has neither violated any procedural requirements nor taken "agency action" subject to review under the Administrative Procedure Act.8

We agree with appellants that the District Court had jurisdiction to review the validity of the Commission's action in this case. However, we do not conclude, as appellants would argue, that the use of the word "direction" by the Commission in one of its letters establishes that its action is tantamount to a mandate. Rather we look at the events more broadly, and conclude that the Commission was significantly involved in the Exchange's decision to prohibit give-ups, and involved in a way and to an extent...

To continue reading

Request your trial
49 practice notes
  • Haviland v. Butz, No. 74-1322
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • March 23, 1976
    ...Secretary's activity to judicial review at this point. See Independent Broker-Dealers' Trade Ass'n v. SEC, 142 U.S.App.D.C. 384, 391-393, 442 F.2d 132, 139-141, cert. denied, 404 U.S. 828, 92 S.Ct. 63, 30 L.Ed.2d 57 (1971); Medical Comm. for Human Rights v. SEC, 139 U.S.App.D.C. 226, 235-24......
  • Shell Oil Co. v. Train, No. 76-1870
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • November 3, 1978
    ...prior to the time that Shell brought this action. (Cf. Independent Broker-Dealers' Trade Ass'n v. SEC (1971) 142 U.S.App.D.C. 384, 393, 442 F.2d 132, 141.) The proceedings before the state administrative agencies were not complete when this action was filed, and subsequent developments befo......
  • Oljato Chapter of Navajo Tribe v. Train, Nos. 74-1525 and 74-1587
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • July 7, 1975
    ...denied, 405 U.S. 1074, 92 S.Ct. 1495, 31 L.Ed.2d 808 (1972); Independent Broker-Dealers' Trade Ass'n v. SEC, 142 U.S.App.D.C. 384, 395, 442 F.2d 132, 143, cert. denied, 404 U.S. 828, 92 S.Ct. 63, 30 L.Ed.2d 57 (1971). Here, however, we find that Congress intended to allow a direct petition ......
  • Natural Resources Defense Council, Inc. v. Train, No. 74--1433
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • March 10, 1975
    ...U.S. 669, 688, 93 S.Ct. 2405, 37 L.Ed.2d 254 (1973). 52 See, e.g., Independent Broker-Dealers' Trade Ass'n v. SEC, 142 U.S.App.D.C. 384, 442 F.2d 132, cert. denied, 404 U.S. 828, 92 S.Ct. 63, 30 L.Ed.2d 57 (1971); Scanwell Laboratories, Inc. v. Shaffer, 137 U.S.App.D.C. 371, 424 F.2d 859 (1......
  • Request a trial to view additional results
49 cases
  • Haviland v. Butz, No. 74-1322
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • March 23, 1976
    ...Secretary's activity to judicial review at this point. See Independent Broker-Dealers' Trade Ass'n v. SEC, 142 U.S.App.D.C. 384, 391-393, 442 F.2d 132, 139-141, cert. denied, 404 U.S. 828, 92 S.Ct. 63, 30 L.Ed.2d 57 (1971); Medical Comm. for Human Rights v. SEC, 139 U.S.App.D.C. 226, 235-24......
  • Shell Oil Co. v. Train, No. 76-1870
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • November 3, 1978
    ...prior to the time that Shell brought this action. (Cf. Independent Broker-Dealers' Trade Ass'n v. SEC (1971) 142 U.S.App.D.C. 384, 393, 442 F.2d 132, 141.) The proceedings before the state administrative agencies were not complete when this action was filed, and subsequent developments befo......
  • Oljato Chapter of Navajo Tribe v. Train, Nos. 74-1525 and 74-1587
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • July 7, 1975
    ...denied, 405 U.S. 1074, 92 S.Ct. 1495, 31 L.Ed.2d 808 (1972); Independent Broker-Dealers' Trade Ass'n v. SEC, 142 U.S.App.D.C. 384, 395, 442 F.2d 132, 143, cert. denied, 404 U.S. 828, 92 S.Ct. 63, 30 L.Ed.2d 57 (1971). Here, however, we find that Congress intended to allow a direct petition ......
  • Natural Resources Defense Council, Inc. v. Train, No. 74--1433
    • United States
    • United States Courts of Appeals. United States Court of Appeals (District of Columbia)
    • March 10, 1975
    ...U.S. 669, 688, 93 S.Ct. 2405, 37 L.Ed.2d 254 (1973). 52 See, e.g., Independent Broker-Dealers' Trade Ass'n v. SEC, 142 U.S.App.D.C. 384, 442 F.2d 132, cert. denied, 404 U.S. 828, 92 S.Ct. 63, 30 L.Ed.2d 57 (1971); Scanwell Laboratories, Inc. v. Shaffer, 137 U.S.App.D.C. 371, 424 F.2d 859 (1......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT