PBW Stock Exchange, Inc. v. Securities and Exch. Com'n

• Decision Date: 28 September 1973
• Docket Number: 73-1165,73-1266 and 73-1267.,No. 73-1116,73-1116
• Citation: 485 F.2d 718
• Parties: PBW STOCK EXCHANGE, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. EQUITY SERVICES, INC., et al., Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. CONNECTICUT NUTMEG SECURITIES, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. Robert I. BERDON as Treasurer of the State of Connecticut, and President of Connecticut Nutmeg Securities, Inc., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Third Circuit

485 F.2d 718 (1973)

PBW STOCK EXCHANGE, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

EQUITY SERVICES, INC., et al., Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

CONNECTICUT NUTMEG SECURITIES, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

Robert I. BERDON as Treasurer of the State of Connecticut, and President of Connecticut Nutmeg Securities, Inc., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

Nos. 73-1116, 73-1165, 73-1266 and 73-1267.

United States Court of Appeals, Third Circuit.

Argued June 7, 1973.

Decided September 28, 1973.

Franklin Poul, Judith R. Cohn, Carl W. Schneider, Philadelphia, Pa., for petitioner, PBW Stock Exchange, Inc., No. 73-1116; Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., of counsel.

Daniel J. McCauley, Jr., Blank, Rome, Klaus & Comisky, Philadelphia, Pa., Milton V. Freeman, Jeffrey D. Bauman, Arnold & Porter, Washington, D. C., for petitioners in No. 73-1165.

Cadwalader, Wickersham & Taft, Washington, D. C., for petitioner in No. 73-1266.

Robert K. Killian, Atty. Gen., Bernard F. McGovern, Jr., Asst. Atty. Gen., State of Connecticut, for petitioner in No. 73-1267.

Walter P. North, Acting Gen. Counsel, David Ferber, Sol., Harvey L. Pitt, Sp. Counsel, Washington, D. C., David J. Romanski, Martin S. Berglas, Charles R. Manzoni, Jr., Washington, D. C., for respondent, Securities and Exchange Commission in No. 73-1116, No. 73-1165, No. 73-1266 and No. 73-1267.

Before SEITZ, Chief Judge, and STALEY and ADAMS, Circuit Judges.

OPINION OF THE COURT

SEITZ, Chief Judge.

Petitioners here appeal directly from the promulgation of Rule 19b-2¹ by the Securities and Exchange Commission, effective January 16, 1973. Petitioners invoke the jurisdiction of this court under § 25(a) of the Securities Exchange Act of 1934² and § 10 of the Administrative Procedure Act. 15 U.S.C. § 78y(a); 5 U.S.C. §§ 702-04 (1971). The rule was not promulgated by an order of the Commission.

Rule 19b-2 was the product of many different hearings before, and studies by, the Commission. It is premised upon the basic theory that a condition attaching to membership on a public exchange is a willingness to serve the investing public. Therefore, the rule conditions future membership of both present and potential member brokerage firms upon a manifestation of such willingness. For purposes of this determination, the rule establishes a rebuttable presumption that any brokerage company is serving the public if at least 80% of its business volume is transacted for "nonaffiliated persons." Procedurally, the exchanges are required to adopt the rule as part of their individual exchange rules and by-laws.

A three-year grace period has been built into the rule. To take advantage of it, however, those currently not in compliance with the provisions of the rule must immediately adopt and begin putting into effect a plan designed to bring them into compliance within the three-year period. Each individual exchange is charged with ensuring the adoption and effectuation of a plan by its noncomplying members or itself be subject to proceedings before the Commission. 17 C.F.R. § 240.19b-2(d) (1973).

Because the rule requires the regulated public exchanges to supplement or alter their rules to bring themselves into conformance with its terms, it first was presented to the national exchanges by letter. This was pursuant to procedures mandated under § 19(b). However, in seeking authority to promulgate the substantive portions of this rule, the Commission relied upon §§ 2, 6, 11, 17 and 23(a), in addition to § 19(b). 15 U.S.C. §§ 78b, 78f, 78k, 78q, 78s(b) and 78w(a) (1971). When the exchanges, for various reasons, refused to adopt the rule voluntarily, the Commission held a rulemaking proceeding under § 4 of the APA. 5 U.S.C. § 553 (1971). After the hearing, the rule was modified and adopted in its present form.

The rule applies to all members of all exchanges. However, the initial impact of the rule will be borne primarily by current institutional members of the various exchanges. Consequently, the rule has become known as the "institutional membership" rule. Collaterally, those exchanges which have noncomplying institutional members seemingly will be affected in the same proportion to which they have allowed such membership. On the PBW Stock Exchange, forty-three per cent of the trading volume is accounted for by institutional members which presently are not in compliance with the rule. This appears to be the high. Others, like the New York Stock Exchange (NYSE), which has not allowed institutional membership, will feel the initial impact of the rule much less.

The future impact of the rule will not be so limited. Those exchanges which have not permitted institutions to buy memberships — such as the NYSE — will be forced to allow them to do so if the brokerage affiliate of an institution complies with the rule's standards. Thus, while certain exchanges may be prevented from dealing with those whose membership they would otherwise seek, other exchanges will be forced to deal with those they have sought to exclude in the past.

Along with the four named petitioners in this action, numerous amici have filed briefs for the information of the court, including the Antitrust Division of the Department of Justice. All challenge the provisions of the rule. The three preponderant bases of attack are: (1) the hearing procedure used here did not comport with that required by both § 19(b) of the Exchange Act and §§ 4, 7, and 8 of the APA 15 U.S.C. § 78s(b); 5 U.S.C. §§ 553, 556, & 557; (2) the SEC lacked statutory authority to promulgate this rule; and (3) the SEC did not adequately attempt to reconcile the antitrust implications of the rule with the antitrust laws. A fourth underlying theme of these briefs is that the Commission's definition of "investing public" is arbitrary. Petitioners and the amici claim it fails to recognize that many institutional investors — such as mutual funds, mutual insurance funds, and state welfare and pension funds — are actually serving a broad spectrum of the investing public even though their brokerage affiliates may only execute the parent's transactions.

Although the SEC vigorously defends its rule on the merits, it has also interposed a motion to dismiss this appeal for lack of jurisdiction. We turn to the disposition of the motion.

I. THE PROBLEM IN THE CONTEXT OF THE STATUTE.

Petitioners predicate this appeal upon both § 25(a) of the Exchange Act and § 10 of the APA. We note preliminarily that § 10 contains no independent grant of appellate jurisdiction to the court of appeals. Rather, it merely amplifies any jurisdictional grant to this court contained in the substance of the Exchange Act. Therefore, our examination must focus upon the terms of § 25(a). To provide perspective on the nature of the problem posed by this motion, and to provide a basis for our examination of the terms of § 25(a), however, it is essential to first examine the provisions of § 19(b).

Section 19(b) provides procedures for both voluntary and compelled adoption of Commission recommendations in specified regulatory areas. If the Commission deems a recommendation in any of these areas to be of sufficient import to warrant formal adoption by an exchange, it must send a letter to the exchange requesting it to make voluntarily the recommended alteration in its rules or by-laws. Should the exchange accede, no formal action by the Commission is required. The Commission's recommendation becomes binding upon members of that exchange because the exchange itself had adopted the rule. Once adopted, the exchange must enforce the rule or face possible disciplinary action by the Commission under § 19(a) of the Act.

Should the exchange refuse to comply with the request of the Commission to adopt the recommendation, the statute provides:

The Commission is further authorized, if after making appropriate request in writing to a national securities exchange that such exchange effect on its behalf specified changes in its rules and practices, and after appropriate notice and opportunity for hearing, the Commission determines that such exchange has not made the changes so requested, and that such changes are necessary or appropriate for the protection of investors or to insure fair dealing in securities traded in upon such exchange or to insure fair administration of such exchange, by rules or regulations or by order to alter or supplement the rules of such exchange. . . .

15 U.S.C. § 78s(b).

In the instant case, the Commission considered the proposal sufficiently important to direct it to all the registered securities exchanges. Various exchanges refused to comply with the Commission's rule, all for different reasons. After this refusal to comply, the statute vested in the Commission the option to effect the recommendation either by proceeding in a legislative manner — promulgation of a rule, or in an adjudicatory manner — issuance of an order. Here, the Commission chose to promulgate a rule.

The crux of the problem posed by this procedural discretion vested in the Commission under § 19(b) lies in the terms of the statutory review powers granted this court under § 25(a) of the Exchange Act.³ Although the SEC has the option to proceed either by rule or regulation or by order under § 19(b), § 25 is not similarly broad in its grant of review jurisdiction to this court. Rather, § 25(a) allows review here only when an order has been entered by the Commission. Neither any section of the Exchange Act nor of the APA vests jurisdiction in this court to review on direct appeal from the SEC rules or regulations which it has promulgated.

Despite this seeming statutory preclusion of our entertaining this appeal, petitioners steadfastly contend we have jurisdiction over this appeal. In their attempt to avoid the lack of a jurisdictional grant under the statute...