Section 22(d) of the Investment Company Act of 1940 provides
that
"no dealer shall sell [mutual fund shares] to any person except
a dealer, a principal underwriter, or the issuer, except at a
current public offering price described in the prospectus."
Section 22(f) authorizes mutual funds to impose restrictions on
the negotiability and transferability of shares, provided they
conform with the fund's registration statement and do not
contravene any rules and regulations that the Securities and
Exchange Commission (SEC) may prescribe in the interests of the
holders of all of the outstanding securities. Section 2(a)(6)
defines a "broker" as a person engaged in the business of effecting
transactions in securities for the account of others, and §
2(a)(11) defines a "dealer" as a person regularly engaged in the
business of buying and selling securities for his own account. The
Maloney Act of 1938 (§ 15A of the Securities Exchange Act of
1934) supplements the SEC's regulation of over-the-counter markets
by providing a system of cooperative self-regulation through
voluntary associations of brokers and dealers. The Government
brought this action against appellee National Association of
Securities Dealers (NASD), certain mutual funds, mutual fund
underwriters, and broker-dealers, alleging that appellees, in
violation of § 1 of the Sherman Act, combined and agreed to
restrict the sale and fix the resale prices of mutual fund shares
in secondary market transactions between dealers, from an investor
to a dealer, and between investors through brokered transactions,
and sought to enjoin such agreements. Count I of the complaint
charged a horizontal combination and conspiracy among NASD's
members to prevent the growth of a secondary dealer market in the
purchase and sale of mutual fund shares, the Government contending
that such count was not to be read as a direct attack on NASD
rules, but on NASD's interpretations and appellees' extension of
the rules so as to include a secondary market. Counts II-VIII
alleged various vertical restrictions on secondary
Page 422 U. S. 695
market activities. The District Court dismissed the complaint on
the grounds that §§ 22(d) and (f), when read in
conjunction with the Maloney Act, afforded antitrust immunity from
all of the challenged practices. It further determined that, apart
from this statutory immunity, the pervasive regulatory scheme
established by these statutes conferred an implied immunity from
antitrust sanction. The court concluded that the § 22(d) price
maintenance mandate for sales by "dealers" applied to transactions
in which a broker-dealer acts as statutory "broker", rather than a
statutory "dealer," and thus that § 22(d) governs transactions
in which the broker-dealer acts as an agent for an investor as well
as those in which he acts as a principal selling shares for his own
account.
Held:
1. Neither the language nor legislative history of § 22(d)
justifies extending the section's price maintenance mandate beyond
its literal terms to encompass transactions by broker-dealers
acting as statutory "brokers." Pp.
422 U. S.
711-720.
(a) To construe § 22(d) to cover all broker-dealer
transactions would displace the antitrust laws by implication and
also would impinge on the SEC's more flexible authority under
§ 22(f). Implied antitrust immunity can be justified only by a
convincing showing of clear repugnancy between the antitrust laws
and the regulatory system, and here no such showing has been made.
Pp.
422 U. S.
719-720.
(b) Such an expansion of § 22(d)'s coverage would serve
neither this Court's responsibility to reconcile the antitrust and
regulatory statutes where feasible nor the Court's obligation to
interpret the Investment Company Act in a manner most conducive to
the effectuation of its goals. P.
422 U. S.
720.
2. The vertical restrictions sought to be enjoined in Counts
II-VIII are among the kinds of agreements authorized by §
22(f), and hence such restrictions are immune from liability under
the Sherman Act. Pp.
422 U. S.
720-730.
(a) The restrictions on transferability and negotiability
contemplated by § 22(f) include restrictions on the
distribution system for mutual fund shares as well as limitations
on the face of the shares themselves. To interpret the section as
covering only the latter would disserve the broad remedial function
of the section, which, as a complement to § 22(d)'s protection
against disruptive price competition caused by dealers' "bootleg
market" trading of mutual fund shares, authorizes the funds and the
SEC to deal more flexibly with other detrimental trading
practices
Page 422 U. S. 696
by imposing SEC-approved restrictions on transferability and
negotiability. Pp.
422 U. S.
722-725.
(b) To contend, as the Government does, that the SEC's exercise
of regulatory authority has been insufficient to give rise to an
implied immunity for agreements conforming with § 22(f)
misconceives the statute's intended operation. By its terms, §
22(f) authorizes properly disclosed restrictions unless they are
inconsistent with SEC rules or regulations, and thus authorizes
funds to impose transferability or negotiability restrictions
subject to SEC disapproval. Pp.
422 U. S.
726-728.
(c) The SEC's authority would be compromised if the agreements
challenged in Counts II-VIII were deemed actionable under the
Sherman Act. There can be no reconciliation of the SEC's authority
under § 22(f) to permit these and similar restrictive
agreements with the Sherman Act's declaration that they are illegal
per se. In this instance, the antitrust laws must give way
if the regulatory scheme established by the Investment Company Act
is to work. Pp.
422 U. S.
729-730.
3. The activities charged in Count I are neither required by
§ 22(d) nor authorized under § 22(f), and therefore
cannot find antitrust shelter therein. The SEC's exercise of
regulatory authority under the Maloney and Investment Company Acts
is sufficiently pervasive, however, to confer implied immunity from
antitrust liability for such activities. Pp.
422 U. S.
730-735.
374 F.
Supp. 95, affirmed.
POWELL, J., wrote the opinion of the Court, in which BURGER,
C.J., and STEWART, BLACKMUN, and REHNQUIST, JJ., joined. WHITE, J.,
filed a dissenting opinion, in which DOUGLAS, BRENNAN, and
MARSHALL, JJ., joined,
post, p.
422 U. S.
735.
Page 422 U. S. 697
Opinion of the Court by MR JUSTICE POWELL, announced by MR.
JUSTICE BLACKMUN.
This appeal requires the Court to determine the extent to which
the regulatory authority conferred upon the Securities and Exchange
Commission by the Maloney Act, 52 Stat. 1070, as amended, 15 U.S.C.
§ 78
o-3, and the Investment Company Act of 1940, 54
Stat. 789, as amended, 15 U.S.C. § 80a-1
et seq.,
displaces the strong antitrust policy embodied in § 1 of the
Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1. At issue
is whether certain sales and distribution practices employed in
marketing securities of open-end management companies, popularly
referred to as "mutual funds," are immune from antitrust liability.
We conclude that they are, and accordingly affirm the judgment of
the District Court.
I
An "investment company" invests in the securities of other
corporations and issues securities of its own. [
Footnote 1]
Page 422 U. S. 698
Shares in an investment company thus represent proportionate
interests in its investment portfolio, and their value fluctuates
in relation to the changes in the value of the securities it owns.
The most common form of investment company, the "open end" company
or mutual fund, is required by law to redeem its securities on
demand at a price approximating their proportionate share of the
fund's net asset value at the time of redemption. [
Footnote 2] In order to avoid liquidation
through redemption, mutual funds continuously issue and sell new
shares. These features -- continuous and unlimited distribution and
compulsory redemption -- are, as the Court recently recognized,
"unique characteristic[s]" of this form of investment.
United
States v. Cartwright, 411 U. S. 546,
411 U. S. 547
(1973).
The initial distribution of mutual fund shares is conducted by a
principal underwriter, often an affiliate of
Page 422 U. S. 699
the fund, and by broker-dealers [
Footnote 3] who contract with that underwriter to sell the
securities to the public. The sales price commonly consists of two
components, a sum calculated from the net asset value of the fund
at the time of purchase and a "load," a sales charge representing a
fixed percentage of the net asset value. The load is divided
between the principal underwriter and the broker-dealers,
compensating them for their sales efforts. [
Footnote 4]
The distribution-redemption system constitutes the primary
market in mutual fund shares, the operation of which is not
questioned in this litigation. The parties agree that § 22(d)
of the Investment Company Act requires broker-dealers to maintain a
uniform price in sales in this primary market to all purchasers
except the fund, its underwriters, and other dealers. And in view
of this express requirement, no question exists that antitrust
immunity must be afforded these sales. This case
Page 422 U. S. 700
focuses, rather, on the potential secondary market in mutual
fund shares. Although a significant secondary market existed prior
to enactment of the Investment Company Act, little presently
remains. The United States agrees that the Act was designed to
restrict most of secondary market trading, but nonetheless contends
that certain industry practices have extended the statutory
limitation beyond its proper boundaries. The complaint in this
action alleges that the defendants, appellees herein, combined and
agreed to restrict the sale and fix the resale prices of mutual
fund shares in secondary market transactions between dealers, from
an investor to a dealer, and between investors through brokered
transactions. [
Footnote 5]
Named as defendants are the National Association of Securities
Dealers (NASD), [
Footnote 6]
and certain mutual funds, [
Footnote
7] mutual fund underwriters, [
Footnote 8] and securities broker-dealers. [
Footnote 9]
Page 422 U. S. 701
The United States charges that these agreements violate § 1
of the Sherman Act, 15 U.S.C. § 1, [
Footnote 10] and prays that they be enjoined under
§ 4 of that Act.
Count I charges a horizontal combination and conspiracy among
the members of appellee NASD to prevent
Page 422 U. S. 702
the growth of a secondary dealer market in the purchase and sale
of mutual fund shares.
See n 42,
infra. Counts II-VIII, by contrast, allege
various vertical restrictions on secondary market activities. In
Counts II, IV, and VI, the United States charges that the principal
underwriters and broker-dealers entered into agreements that compel
the maintenance of the public offering price in brokerage
transactions of specified mutual fund shares, and that prohibit
inter-dealer transactions by allowing each broker-dealer to sell
and purchase shares only to or from investors. [
Footnote 11] Count VIII alleges that the
broker-dealers entered into other, similar contracts and
combinations with numerous principal underwriters. Counts III, V,
and VII allege violations on the part of the principal underwriters
and the funds themselves. In Counts III and VII, the various
defendants
Page 422 U. S. 703
are charged with entering into contracts requiring the
restrictive underwriter-dealer agreements challenged in Counts II
and VI. Count V charges that the agreement between one fund and its
underwriter restricted the latter to serving as a principal for its
own account in all transactions with the public, thereby
prohibiting brokerage transactions in the fund's shares. App.
14.
After carefully examining the structure, purpose, and history of
the Investment Company Act, 15 U.S.C. § 80a-1
et
seq., and the Maloney Act, 15 U.S.C. § 78
o-3,
the District Court held that this statutory scheme was
"
incompatible with the maintenance of (an) antitrust action,'"
374 F.
Supp. 95, 109 (DC 1973), quoting Silver v. New York Stock
Exchange, 373 U. S. 341,
373 U. S. 358
(1963). The court concluded that §§ 22(d) and (f) of the
Investment Company Act, when read in conjunction with the Maloney
Act, afford antitrust immunity for all of the practices here
challenged. The court further held that, apart from this explicit
statutory immunity, the pervasive regulatory scheme established by
these statutes confers an implied immunity from antitrust sanction
in the "narrow area of distribution and sale of mutual fund
shares." 374 F. Supp. at 114. The court accordingly dismissed the
complaint, and the United States appealed to this Court. [Footnote 12]
The position of the United States in this appeal can be
summarized briefly. Noting that implied repeals of the antitrust
laws are not favored,
see, e.g., United States v. Philadelphia
National Bank, 374 U. S. 321,
374 U. S. 348
(1963), the United States urges that the antitrust immunity
conferred by § 22 of the Investment Company
Page 422 U. S. 704
Act should not extend beyond its precise terms, none of which,
it maintains, requires or authorizes the practices here challenged.
The United States maintains, moreover, that the District Court
expanded the limits of the implied immunity doctrine beyond those
recognized by decisions of this Court. In response, appellees
advance all of the positions relied on by the District Court. They
are joined by the Securities and Exchange Commission (hereinafter
SEC or Commission), which asserts as
amicus curiae that
the regulatory authority conferred upon it by § 22(f) of the
Investment Company Act displaces § 1 of the Sherman Act. The
SEC contends, therefore, that the District Court properly dismissed
Counts II-VIII, but takes no position with respect to Count I.
II
A
The Investment Company Act of 1940 originated in congressional
concern that the Securities Act of 1933, 48 Stat. 74, 15 U.S.C.
§ 77a
et seq., and the Securities Exchange Act of
1934, 48 Stat. 881, 15 U.S.C. § 78a
et seq., were
inadequate to protect the purchasers of investment company
securities. Thus, in § 30 of the Public Utility Holding
Company Act, 49 Stat. 837, 15 U.S.C. § 79z-4, Congress
directed the SEC to study the structures, practices, and problems
of investment companies with a view toward proposing further
legislation. Four years of intensive scrutiny of the industry
culminated in the publication of the Investment Trust Study and the
recommendation of legislation to rectify the problems and abuses it
identified. After extensive congressional consideration, the
Investment Company Act of 1940 was adopted.
The Act vests in the SEC broad regulatory authority
Page 422 U. S. 705
over the business practices of investment companies. [
Footnote 13] We are concerned on
this appeal with § 22 of the Act, 15 U.S.C. § 80a-22,
which controls the sales and distribution of mutual fund shares.
The questions presented require us to determine whether §
22(d) obligates appellees to engage in the practices challenged in
Counts II-VIII, and thus necessarily confers antitrust immunity on
them. If not, we must determine whether such practices are
authorized by § 22(f), and, if so, whether they are immune
from antitrust sanction. Resolution of these issues will be
facilitated by examining the nature of the problems and abuses to
which § 22 is addressed, a matter to which we now turn.
B
The most thorough description of the sales and distribution
practices of mutual funds prior to passage of the
Page 422 U. S. 706
Investment Company Act may be found in Part III of the
Investment Trust Study. [
Footnote 14] That Study, as Congress has recognized,
see 15 U.S.C. § 80a-1, forms the initial basis for
any evaluation of the Act.
Prior to 1940, the basic framework for the primary distribution
of mutual fund shares was similar to that existing today. The fund
normally retained a principal underwriter to serve as a wholesaler
of its shares. The principal underwriter, in turn, contracted with
a number of broker-dealers to sell the fund's shares to the
investing public. [
Footnote
15] The price of the shares was based on the fund's net asset
value at the approximate time of sale, and a sales commission or
load was added to that price.
Although, prior to 1940, the primary distribution system for
mutual fund shares was similar to the present one, a number of
conditions then existed that largely disappeared following passage
of the Act. The most prominently discussed characteristic was the
"two-price system," which encouraged an active secondary market
under conditions that tolerated disruptive and discriminatory
trading practices. The two-price
Page 422 U. S. 707
system reflected the relationship between the commonly used
method of computing the daily net asset value of mutual fund shares
and the manner in which the price for the following day was
established. The net asset value of mutual funds, which depends on
the market quotations of the stocks in their investment portfolios,
fluctuates constantly. Most funds computed their net asset values
daily on the basis of the fund's portfolio value at the close of
exchange trading, and that figure established the sales price that
would go into effect at a specified hour on the following day.
During this interim period, two prices were known: the present
day's trading price based on the portfolio value established the
previous day; and the following day's price, which was based on the
net asset value computed at the close of exchange trading on the
present day. One aware of both prices could engage in "riskless
trading" during this interim period.
See Investment Trust
Study pt. III, pp. 851-852.
The two-price system did not benefit the investing public
generally. Some of the mutual funds did not explain the system
thoroughly, and unsophisticated investors probably were unaware of
its existence.
See id. at 867. Even investors who knew of
the two-price system and understood its operation were rarely in a
position to exploit it fully. It was possible, however for a
knowledgeable investor to purchase shares in a rising market at the
current price with the advance information that the next day's
price would be higher. He thus could be guaranteed an immediate
appreciation in the market value of his investment, [
Footnote 16] although this advantage
Page 422 U. S. 708
was obtained at the expense of the existing shareholders, whose
equity interests were diluted by a corresponding amount. [
Footnote 17] The load fee that was
charged in the sale of mutual funds to the investing public made it
difficult for these investors to realize the "paper gain" obtained
in such trading. Because the daily fluctuation in net asset value
rarely exceeded the load, public investors generally were unable to
realize immediate profits from the two-price system by engaging in
rapid in-and-out trading. But insiders, who often were able to
purchase shares without paying the load, did not operate under this
constraint. Thus, insiders could, and sometimes did, purchase
shares for immediate redemption at the appreciated value.
See n 24,
infra, and sources cited therein.
The two-price system often afforded other advantages to
underwriters and broker-dealers. In a falling market, they could
enhance profits by waiting to fill orders with shares purchased
from the fund at the next day's anticipated lower price. In a
similar fashion, in a rising market, they could take a "long
position" in mutual fund shares by establishing an inventory in
order to satisfy anticipated purchases with securities previously
obtained at a lower price. Investment Trust Study pt. III, pp.
854-855. In each case, the investment company would
Page 422 U. S. 709
receive the lower of the two prevailing prices for its shares,
id. at 854, and the equity interests of shareholders would
suffer a corresponding dilution.
As a result, an active secondary market in mutual fund shares
existed.
Id. at 865-867. Principal underwriters and
contract broker-dealers often maintained inventory positions
established by purchasing shares through the primary distribution
system and by buying from other dealers and retiring shareholders.
[
Footnote 18] Additionally,
a "bootleg market" sprang up, consisting of broker-dealers having
no contractual relationship with the fund or its principal
underwriter. These bootleg dealers purchased shares at a discount
from contract dealers or bought them from retiring shareholders at
a price slightly higher than the redemption price. Bootleg dealers
would then offer the shares at a price slightly lower than that
required in the primary distribution system, thus "initiating a
small scale price war between retailers and tend[ing] generally to
disrupt the established offering price."
Id. at 865.
Section 22 of the Investment Company Act of 1940 was enacted
with these abuses in mind. Sections 22(a) and (c) were designed
to
"eliminat[e] or reduc[e] so far as reasonably practicable any
dilution of the value of other outstanding securities . . . or any
other result of [the] purchase, redemption or sale [of mutual fund
securities] which is unfair to holders of such other outstanding
securities,"
15 U.S.C. § 80a-22(a). They authorize
Page 422 U. S. 710
the NASD and the SEC to regulate certain pricing and trading
practices in order to effectuate that goal. [
Footnote 19] Section 22(b) authorizes registered
securities associations and the SEC to prescribe the maximum sales
commissions or loads that can be charged in connection with a
primary distribution; and § 22(e) protects the right of
redemption by restricting mutual funds' power to suspend redemption
or postpone the date of payment.
The issues presented in this litigation revolve around
subsections (d) and (f) of § 22. Bearing in mind the history
and purposes of the Investment Company Act, we now consider the
effect of these subsections on the
Page 422 U. S. 711
question of potential antitrust liability for the practices here
challenged.
III
Section 22(d) prohibits mutual funds from selling shares at
other than the current public offering price to any person except
either to or through a principal underwriter for distribution. It
further commands that
"no dealer shall sell [mutual fund shares] to any person except
a dealer, a principal underwriter, or the issuer, except at a
current public offering price described in the prospectus."
15 U.S.C. § 80a-22(d). [
Footnote 20] By its terms, § 22(d) excepts
inter-dealer sales from its price maintenance requirement.
Accordingly, this section cannot be relied upon by appellees as
justification for the restrictions imposed upon inter-dealer
transactions. At issue, rather, is the narrower question whether
the § 22(d) price maintenance mandate for sales by "dealers"
applies to transactions in which a broker-dealer acts as a
statutory "broker", rather than a statutory "dealer." The District
Court concluded that it does, and thus that § 22(d) governs
transactions in which the broker-dealer acts as an agent for an
investor as well as those in which he acts as a principal selling
shares for his own account.
A
The District Court's decision reflects an expansive
Page 422 U. S. 712
view of § 22(d). The Investment Company Act specifically
defines "broker" and "dealer," [
Footnote 21] and uses the terms distinctively throughout.
[
Footnote 22] Appellees
maintain, however, that the definition of "dealer" is sufficiently
broad to require price maintenance in brokerage transactions. In
support of this position, appellees assert that the critical
elements of the dealer definition are that the term relates to a
"person", rather than to a transaction, and that the person must
engage "regularly" in the sale and purchase of securities to
qualify as a dealer. It is argued, therefore, that any person who
purchases and sells securities with sufficient regularity to
qualify as a statutory dealer is thereafter bound by all dealer
restrictions, regardless of the nature of the particular
Page 422 U. S. 713
transaction in question. We do not find this argument
persuasive.
Appellees' reliance on the statutory reference to "person" in
defining dealer adds little to the analysis, for the Act defines
"broker," "investment banker," "issuer," "underwriter," and others
to be "persons" as well.
See 15 U.S.C. § 80a-2(a)(6),
(21), (22), and (40). In each instance, the critical distinction
relates to their transactional capacity. Moreover, we think that
appellees' reliance on the regularity requirement in the dealer
definition places undue emphasis on that element at the expense of
the remainder of the provision. On the face of the statute, the
most apparent distinction between a broker and a dealer is that the
former effects transactions for the account of others and the
latter buys and sells securities for his own account. We therefore
cannot agree that the terms of the Act compel the conclusion that a
broker-dealer acting in a brokerage capacity would be bound by the
§ 22(d) dealer mandate. Indeed, the language of the Act
suggests the opposite result.
Even if we assume,
arguendo, that the statutory
definition is ambiguous, we find nothing in the contemporaneous
legislative history of the Investment Company Act to justify
interpreting § 22(d) to encompass brokered transactions. That
history is sparse, [
Footnote
23] and
Page 422 U. S. 714
suggests only that § 22(d) was considered necessary to curb
abuses that had arisen in the sales of securities to insiders.
[
Footnote 24]
The prohibition against insider trading would seem adequately
served by the first clause of § 22(d), which prevents mutual
funds from selling shares at other than the public offering price
to any person except a principal underwriter or dealer.
See n 20,
supra. [
Footnote
25] The further
Page 422 U. S. 715
restriction on dealer sales bears little relation to insider
trading, however, and logically would be thought to serve some
other purpose. The obvious effect of the dealer prohibition is to
shield the primary distribution system from the competitive impact
of unrestricted dealer trading in the secondary markets, a concern
that was reflected in the Study,
see Investment Trust
Study pt. III, p. 865. The SEC perceives this to be one of the
purposes of this provision. [
Footnote 26]
But concluding that protection of the primary distribution
system is a purpose of § 22(d) does little to resolve the
question whether Congress intended to require strict price
maintenance in all broker-dealer transactions with the investing
public. By its terms, § 22(d) protects only against the
possibly disruptive effects of secondary dealer sales which, as
statutorily defined, constituted the most active secondary market
existing prior to the Act's passage. Nothing in the contemporary
history suggests that Congress was equally concerned with possible
disruption from investor transactions in outstanding shares
conducted through statutory brokers.
Page 422 U. S. 716
Nor do we think that the history attending subsequent
congressional consideration of the Act provides adequate support
for appellees' contention that § 22(d) requires strict price
maintenance in all broker-dealer transactions in mutual fund
shares. To be sure, portions of the testimony of SEC Chairman Cohen
before the House Subcommittee on Commerce and Finance in 1967
suggested that the price maintenance requirement of § 22(d)
encompassed all broker-dealers, irrespective of how they obtained
the traded shares, [
Footnote
27] and, on other occasions, the Chairman referred to sales by
brokers when discussing mutual fund transactions. [
Footnote 28] Appellees also can point to
congressional characterizations of § 22(d) that suggest that
some members of Congress understood the reach of that provision to
be as broad as the District Court thought. [
Footnote 29]
Page 422 U. S. 717
Appellees maintain that this history indicates that Congress
always intended § 22(d) to control broker as well as dealer
transactions, and that it reenacted the amended § 22 with that
purpose in mind. The District Court accepted this position, and it
is not without some support in this historical record. [
Footnote 30] But impressive evidence
to the contrary is found in the position consistently maintained by
the SEC. Responding to an inquiry in 1941, the SEC General Counsel
stated that § 22(d) did not bar brokerage transactions in
mutual fund shares:
"In my opinion, the term 'dealer,' as used in section 22(d),
refers to the capacity in which a broker-dealer is acting in a
particular transaction. It follows, therefore, that, if a
broker-dealer in a particular transaction is acting solely in the
capacity of agent for a selling investor, or for both a selling
investor and a purchasing investor, the sale may be made at a price
other than the current offering price described in the prospectus.
. . ."
"On the other hand, if a broker-dealer is acting for his own
account in a transaction and as principal
Page 422 U. S. 718
sells a redeemable security to an investor, the public offering
price must be maintained, even though the sale is made through
another broker who acts as agent for the seller, the investor, or
both."
"As section 22(d) itself states, the offering price is not
required to be maintained in the case of sales in which both the
buyer and the seller are dealers acting as principals in the
transaction."
Investment Company Act, Rel. No. 78, Mar. 4, 1941, 11 Fed.Reg.
10992 (1941). This substantially contemporaneous interpretation of
the Act has consistently been maintained in subsequent SEC
opinions,
see Oxford Co., Inc., 21 S.E.C. 681, 690 (1946);
Mutual Funds Advisory, Inc., Investment Company Act Rel.
No. 6932, p. 3 (1972). The same position was asserted in a recent
staff report,
see 1974 Staff Report 105 n. 2, 107 n. 2,
and 109, was relied on by the SEC in its subsequent decision to
encourage limited price competition in brokered transactions,
[
Footnote 31] and is
advanced by it as
Page 422 U. S. 719
amicus curiae in this Court. This consistent and
longstanding interpretation by the agency charged with
administration of the Act, while not controlling, is entitled to
considerable weight.
See, e.g., Saxbe v. Bustos,
419 U. S. 65
(1974);
Investment Co. Institute v. Camp, 401 U.
S. 617,
401 U. S.
626-627 (1971);
Udall v. Tallman, 380 U. S.
1,
380 U. S. 16
(1965).
B
The substance of appellees' position is that the dealer
prohibition of § 22(d) should be interpreted in generic,
rather than statutory, terms. The price maintenance requirement of
that section accordingly would encompass all broker-dealer
transactions with the investing public, and would shelter them from
antitrust sanction. But such an expansion of § 22(d) beyond
its terms would not only displace the antitrust laws by
implication, it also would impinge seriously on the SEC's more
flexible regulatory authority under § 22(f). [
Footnote 32]
Implied antitrust immunity is not favored, and can be justified
only by a convincing showing of clear repugnancy between the
antitrust laws and the regulatory system.
Page 422 U. S. 720
See, e.g., United States v. Philadelphia National Bank,
374 U.S. at
374 U. S. 348;
United States v. Borden Co., 308 U.
S. 188,
308 U. S.
197-206 (1939). We think no such showing has been made.
Moreover, in addition to satisfying our responsibility to reconcile
the antitrust and regulatory statutes where feasible,
Silver v.
New York Stock Exchange, 373 U.S. at
373 U. S.
356-357, we must interpret the Investment Company Act in
a manner most conducive to the effectuation of its goals. We
conclude that appellees' interpretation of § 22(d) serves
neither purpose, and cannot be justified by the language or history
of that section.
We therefore hold that the price maintenance mandate of §
22(d) cannot be stretched beyond its literal terms to encompass
transactions by broker-dealers acting as statutory "brokers."
Congress defined the limitations for the mandatory price
maintenance requirement of the Investment Company Act.
"We are not only bound by those limitations, but we are bound to
construe them strictly, since resale price maintenance is a
privilege restrictive of a free economy."
United States v. McKesson & Robbins, 351 U.
S. 305,
351 U. S. 316
(1956). Accordingly, we hold that the District Court erred in
relying on § 22(d) in determining that the activities here
questioned are immune from antitrust liability.
IV
Our determination that the restrictions on the secondary market
are not immunized by § 22(d) does not end the inquiry, for the
District Court also found them sheltered from antitrust liability
by § 22(f). Appellees, joined by the SEC, defend this ruling
and urge that it requires dismissal of the challenge to the
vertical restrictions sought to be enjoined in Counts II-VIII.
Section 22(f) authorizes mutual funds to impose
Page 422 U. S. 721
restrictions on the negotiability and transferability of their
shares, provided they conform with the fund's registration
statement and do not contravene any rules and regulations the
Commission may prescribe in the interests of the holders of all of
the outstanding securities. [
Footnote 33] The Government does not contend that the
vertical restrictions are not disclosed in the registration
statements of the funds in question. Nor does it assert that the
agreements imposing such restrictions violate Commission rules and
regulations. Indeed, it could not do so, because to date the SEC
has prescribed no such standards. Instead, the Government maintains
that the contractual restrictions do not come within the meaning of
the Act, asserting that § 22(f) does not authorize the
imposition of restraints on the distribution system, rather than on
the shares themselves. The Government thus apparently urges that
the only limitations contemplated by this section are those that
appear on the face of the certificate itself. The Government also
urges that the SEC's unexercised power to prescribe rules and
regulations is insufficient to create repugnancy between its
regulatory authority and the antitrust laws.
Our examination of the language and history of § 22(f)
persuades us, however, that the agreements challenged in Counts
II-VIII are among the kinds of restrictions Congress contemplated
when it enacted that section. And this conclusion necessarily leads
to a determination that they are immune from liability under the
Sherman Act,
Page 422 U. S. 722
for we see no way to reconcile the Commission's power to
authorize these restrictions with the competing mandate of the
antitrust laws.
A
Unlike § 22(d), § 22(f) originated in the
Commission-sponsored bill considered in the Senate subcommittee
hearings that preceded introduction of the compromise proposal
later enacted into law. The Commission-sponsored provision
authorized the SEC to promulgate rules, regulations, or orders
prohibiting restrictions on the transferability or negotiability of
mutual fund shares, S. 3580, § 22(d)(2), 76th Cong., 3d Sess.
(1940). [
Footnote 34]
Commission testimony indicates that it considered this authority
necessary to allow regulatory control of industry measures designed
to deal with the disruptive effects of "bootleg market" trading and
with other detrimental trading practices identified in the
Investment Trust Study. [
Footnote 35]
Page 422 U. S. 723
The Study indicates, moreover, that a number of funds had begun
to deal with these problems prior to passage of the Act. And while
their methods may have included the imposition of restrictive
legends on the face of the certificate,
see n 35,
supra, they were by no means
confined to such narrow limits. A number of funds imposed controls
on the activities of their principal underwriters,
see
Investment Trust Study pt. III, pp. 868-869; and in some instances
the funds required the underwriters to impose similar restrictions
on the dealers,
see id. at 869, or entered into these
restrictive agreements with the dealers themselves,
id. at
870-871.
In view of the history of the Investment Company Act, we find no
justification for limiting the range of possible transfer
restrictions to those that appear on the face of the certificate.
The bootleg market was primarily a problem of the distribution
system, and bootleg dealers found a source of supply in the
contract dealers, as well as in retiring shareholders.
See
id. at 865. Moreover, the Study indicates that part of the
bootleg distribution system consisted of "trading firms" that
served as wholesalers of mutual fund securities in much the same
fashion as the principal underwriters. These trading firms
primarily purchased and sold shares to and from other dealers,
Investment Trust Study pt. II, p. 327, frequently offering them at
a price slightly lower than
Page 422 U. S. 724
the discounted rate charged to dealers in the primary
distribution system.
Id. at 327-328. Thus, trading firms
not only helped supply the bootleg dealers whose sales undercut
those of the contract dealers, they competed with the principal
underwriters by offering a source for lower cost shares that
inevitably discouraged participation in the primary distribution
system.
See id. at 328 n. 85.
The bootleg market was a complex phenomenon whose principal
origins lay in the distribution system itself. In view of this
history, limitation of the industry's ability, subject of course to
SEC regulation, to reach these problems at their source would
constitute an inappropriate contraction of the remedial function of
the statute. [
Footnote 36]
Indeed, in view of the role of trading firms and inter-dealer
transactions in the maintenance of the bootleg market, the narrow
interpretation of § 22(f) urged by the Government would seem
to afford inadequate authority to deal with the problem.
Together, §§ 22(d) and 22(f) protect the primary
distribution system for mutual fund securities. Section 22(d), by
eliminating price competition in dealer sales, inhibits the most
disruptive factor in the pre-1940's mutual market, and thus assures
the maintenance of a viable sales system. Section 22(f) complements
this protection by authorizing the funds and the SEC to deal more
flexibly with other detrimental trading practices by
Page 422 U. S. 725
imposing SEC-approved restrictions on transferability and
negotiability. The Government's limiting interpretation of §
22(f) compromises this flexible mandate, and cannot be
accepted.
We find support for our interpretation of § 22(f) in the
views expressed by the SEC shortly after the passage of the Act.
Rule 2(j)(2), proposed by the NASD to curb abuses identified in the
Study and the congressional hearings, provided limitations on
underwriter sales and redemptions to or from dealers who are not
parties to sales agreements. In commenting on this proposed rule,
the SEC characterized it as a "restriction on the transferability
of securities," and specifically adverted to its power to regulate
such restrictions under § 22(f).
National Association of
Securities Dealers, Inc., 9 S.E.C. 38, 44-45 and n. 10 (1941).
As indicated above,
see supra at
422 U. S. 719,
and sources there cited, this contemporaneous interpretation by the
responsible agency is entitled to considerable weight. We therefore
conclude that the restrictions on transferability and negotiability
contemplated by § 22(f) include restrictions on the
distribution system for mutual fund shares as well as limitations
on the face of the shares themselves. The narrower interpretation
of this provision advanced by the Government would disserve the
broad remedial function of the statute. [
Footnote 37]
Page 422 U. S. 726
The Government's additional contention that the SEC's exercise
of regulatory authority has been insufficient to give rise to an
implied immunity for agreements conforming with § 22(f)
misconceives the intended operation of the statute. By its terms,
§ 22(f) authorizes properly disclosed restrictions unless they
are inconsistent with SEC rules or regulations. The provision thus
authorizes funds to impose transferability or negotiability
restrictions, subject to Commission disapproval. In view of the
evolution of this provision, there can be no doubt that this is
precisely what Congress intended.
Section 22(f), as originally introduced, would have authorized
the SEC to promulgate rules, regulations, or orders prohibiting
restrictions on the redeemability or transferability of mutual fund
shares. Congressional consideration of that provision raised some
question whether existing restrictions on transferability and
negotiability would remain valid unless specifically disapproved by
the SEC. [
Footnote 38] The
compromise provision, which
Page 422 U. S. 727
subsequently was enacted into law, eliminated this uncertainty,
however, and manifested a more positive attitude toward
self-regulation.
Thus, § 22(f) specifically recognizes' that mutual funds
can impose such restrictions on the distribution system provided
they are disclosed in the registration statement and conform to any
rules and regulations that the SEC might adopt. In addition, §
22(f) alters the focus of Commission scrutiny. Whereas the original
provision allowed the SEC to make rules that serve "the public
interest or . . . the protection of investors," S. 3580, §
22(d)(2),
supra, § 22(f) as enacted, limits the
Commission's rulemaking authority to the protection of the
"interests of the holders of all of the outstanding securities of
such investment company." 15 U.S.C. § 80a-22(f). Viewed in
this historical context, the statute reflects a clear congressional
determination that, subject to Commission oversight, mutual funds
should be allowed to retain the initiative in dealing with the
potentially adverse effects of disruptive trading practices.
The Commission repeatedly has recognized the role of private
agreements in the control of trading practices in the mutual fund
industry. For example, in
First Multifund of America,
Inc., Investment Company Act Rel. No. 6700 (1971), [1970-1971
Transfer Binder] CCH Fed.Sec.L.Rep. � 78,209, p. 80,602 it
looked to restrictive agreements similar to those challenged in
this litigation to ascertain an investment advisor's capacity in a
particular transaction. At no point did it intimate that those
agreements were not legitimate. [
Footnote 39] Likewise,
Page 422 U. S. 728
Commission reports repeatedly have acknowledged the significant
role that private agreements have played in restricting the growth
of a secondary market in mutual fund shares. [
Footnote 40] Until recently, the Commission has
allowed the industry to control the secondary market through
contractual restrictions duly filed and publicly disclosed. Even
the SEC's recently expressed intention to introduce an element of
competition in brokered transactions reflects measured caution as
to the possibly adverse impact of a totally unregulated and
restrained brokerage market on the primary distribution system.
See n 31,
supra. The Commission's acceptance of fund-initiated
restrictions for more than three decades hardly represents
abdication of its regulatory responsibilities. Rather, we think it
manifests an informed administrative judgment that the contractual
restrictions employed by the funds to protect their shareholders
were appropriate means for combating the problems of the industry.
The SEC's election not to initiate restrictive rules or regulations
is precisely the kind of administrative oversight of private
practices that Congress contemplated when it enacted §
22(f).
We conclude, therefore, that the vertical restrictions sought to
be enjoined in Counts II-VIII are among the kinds of agreements
authorized by § 22(f) of the Investment Company Act.
Page 422 U. S. 729
B
The agreements questioned by the United States restrict the
terms under which the appellee underwriters and broker-dealers may
trade in shares of mutual funds. Such restrictions, effecting
resale price maintenance and concerted refusals to deal, normally
would constitute
per se violations of § 1 of the
Sherman Act.
See, e.g., Klor's, Inc. v. Broadway-Hale Stores,
Inc., 359 U. S. 207,
359 U. S.
211-213 (1959);
Fashion Originators' Guild of
America, Inc. v. FTC, 312 U. S. 457,
312 U. S.
465-468 (1941). Here, however, Congress has made a
judgment that these restrictions on competition might be
necessitated by the unique problems of the mutual fund industry,
and has vested in the SEC final authority to determine whether and
to what extent they should be tolerated "in the interests of the
holders of all the outstanding securities" of mutual funds. 15
U.S.C.§ 80a-22(f).
The SEC, the federal agency responsible for regulating the
conduct of the mutual fund industry, urges that its authority will
be compromised seriously if these agreements are deemed actionable
under the Sherman Act. [
Footnote
41] We agree. There can be no reconciliation of its authority
under § 22(f) to permit these and similar restrictive
agreements with the Sherman Act's declaration that they are illegal
per se. In this instance, the antitrust laws must give way
if the regulatory scheme established
Page 422 U. S. 730
by the Investment Company Act is to work.
Silver v. New York
Stock Exchange, 373 U. S. 341
(1963). We conclude, therefore, that such agreements are not
actionable under the Sherman Act, and that the District Court
properly dismissed Counts II-VIII.
V
It remains to be determined whether the District Court properly
dismissed Count I of the Government's complaint, which charged
activities allegedly constituting a horizontal conspiracy between
the NASD and its members to "prevent the growth of a secondary
dealer market and a brokerage market in the purchase and sale of
mutual fund shares." App. 9.
The precise nature of the allegations of the complaint are
obscured by subsequent concessions made by the Government to the
District Court and reiterated here. It is clear, however, that
Count I alleges activities that are neither required by §
22(d) nor authorized under § 22(f). And since they cannot find
antitrust shelter in these provisions of the Investment Company
Act, the question presented is whether the SEC's exercise of
regulatory authority under this statute and the Maloney Act is
sufficiently pervasive to confer an implied immunity. We hold that
it is, and accordingly affirm the District Court's dismissal of
this portion of the complaint.
Count I originally appeared to be a general attack on the NASD's
role in encouraging the restrictions on secondary market activities
challenged in the remainder of the Government's complaint. The acts
charged in Count I focused in large part on NASD rules, and on
information distributed by that association to its members.
[
Footnote 42]
Page 422 U. S. 731
Subsequently the Government advised the District Court that its
complaint was not to be read as a direct attack on NASD rules,
however, and it repeated that position before this Court. [
Footnote 43] The Government now
contends that
Page 422 U. S. 732
its complaint should be interpreted as a challenge to various
unofficial NASD interpretations and to appellees' extension of the
rules in a manner that inhibits a secondary market.
In view of the scope of the SEC's regulatory authority over the
activities of the NASD, the Government's decision to withdraw from
direct attack on the association's rules was prudent. The SEC's
supervisory authority over the NASD is extensive. Not only does the
Maloney Act require the SEC to determine whether an association
satisfies the strict statutory requirements of that Act, and thus
qualifies to engage in supervised regulation of the trading
activities of its membership, 15 U.S.C. § 78
o-3(b),
it requires registered associations thereafter to submit for
Commission approval any proposed rule changes, §
78
o-3(j). The Maloney Act additionally authorizes the SEC
to request changes in or supplementation of association rules, a
power that recently has been exercised with respect to some of the
precise conduct questioned in this litigation,
see
n 31,
supra. If
such a request is not complied with, the SEC may order such changes
itself. § 78
o-3(k)(2).
The SEC, in its exercise of authority over association rules and
practices, is charged with protection of the public interest, as
well as the interests of shareholders,
see, e.g.,
§§ 78
o-3(a)(1), (b)(3), and (c), and it
repeatedly has indicated that it weighs competitive concerns in the
exercise of its continued supervisory responsibility.
See,
e.g., National Association of Securities Dealers, Inc., 19
S.E.C. 424, 436-437, 486-487
Page 422 U. S. 733
(1945);
National Association of Securities Dealers,
Inc., 9 S.E.C. at 43-46;
see also 1974 Staff Report
105, 109. As the Court previously has recognized,
United States
v. Socony-Vacuum Oil Co., 310 U. S. 150,
310 U. S. 227
n. 60 (1940), the investiture of such pervasive supervisory
authority in the SEC suggests that Congress intended to lift the
ban of the Sherman Act from association activities approved by the
SEC.
We further conclude that the Government's attack on NASD
interpretations of those rules cannot be maintained under the
Sherman Act, for we see no meaningful distinction between the
Association's rules and the manner in which it construes and
implements them. Each is equally a subject of SEC oversight.
Finally, we hold that the Government's additional challenges to
the alleged activities of the membership of the NASD designed to
encourage the kinds of restraints averred in Counts II-VIII
likewise are precluded by the regulatory authority vested in the
SEC by the Maloney and Investment Company Acts. It should be noted
that the Government does not contend that appellees' activities
have had the purpose or effect of restraining competition among the
various funds. [
Footnote 44]
Instead, the Government urges in Count I that appellees' alleged
conspiracy was designed to encourage the suppression of intra-fund
secondary market activities, precisely the restriction that the SEC
consistently has approved pursuant to § 22(f) for nearly 35
years. This close relationship is fatal to the Government's
complaint, as the Commission's regulatory approval of the
restrictive agreements
Page 422 U. S. 734
challenged in Counts II-VIII cannot be reconciled with the
Government's attack on the ancillary activities averred in Count I.
And this conclusion applies with equal force now that the SEC has
determined to introduce a controlled measure of competition into
the secondary market.
There can be little question that the broad regulatory authority
conferred upon the SEC by the Maloney and Investment Company Acts
enables it to monitor the activities questioned in Count I, and the
history of Commission regulations suggests no laxity in the
exercise of this authority. [
Footnote 45] To the extent that any of appellees'
ancillary activities frustrate the SEC's regulatory objectives, it
has ample authority to eliminate them. [
Footnote 46]
Here, implied repeal of the antitrust laws is "necessary to make
the [regulatory scheme] work."
Silver v. New York Stock
Exchange, 373 U.S. at
373 U. S. 357. In generally similar situations, we have
implied immunity in particular and discrete instances to assure
that the federal agency entrusted with regulation in the public
interest could carry out that responsibility free from the
disruption of conflicting judgments that might be voiced by courts
exercising jurisdiction under the antitrust laws.
See
Page 422 U. S. 735
Hughes Tool Co. v. Trans World Airlines, 409 U.
S. 363 (1973);
Pan American World Airways, Inc. v.
United States, 371 U. S. 296
(1963). In this instance, maintenance of an antitrust action for
activities so directly related to the SEC's responsibilities poses
a substantial danger that appellees would be subjected to
duplicative and inconsistent standards. This is hardly a result
that Congress would have mandated. We therefore hold that, with
respect to the activities challenged in Count I of the complaint,
the Sherman Act has been displaced by the pervasive regulatory
scheme established by the Maloney and Investment Company Acts.
Affirmed.
[
Footnote 1]
The Investment Company Act of 1940 defines "investment company"
to include any issuer of securities which
"(1) is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing,
reinvesting, or trading in securities;"
"(2) is engaged or proposes to engage in the business of issuing
face amount certificates of the installment type, or has been
engaged in such business and has any such certificate outstanding;
or"
"(3) is engaged or proposes to engage in the business of
investing, reinvesting, owning, holding, or trading in securities,
and owns or proposes to acquire investment securities having a
value exceeding 40 per centum of the value of such issuer's total
assets (exclusive of Government securities and cash items) on an
unconsolidated basis."
15 U.S.C.§ 80a-3(a). This broad definition is qualified,
however, by a series of specific exemptions.
See
§§ 83a-3(b) and (c).
[
Footnote 2]
See 15 U.S.C. §§ 80a-2(a)(32), 80a-22(e).
Management investment companies whose securities lack this
redeemability feature are defined as "closed end" companies, §
80a-5, and their sales and distribution practices are regulated
under § 23 of the Act. 15 U.S.C. § 80a-23. Section 22 of
the Act, the provision under consideration in this appeal, governs
the sales and distribution practices of "open end" companies
only.
[
Footnote 3]
In this opinion, we will use the term "broker-dealer" to refer
generally to persons registered under the Securities Exchange Act
of 1934, 48 Stat. 895, 15 U.S.C. § 78
o et
seq., and authorized to effect transactions or induce the
purchase or sale of securities pursuant to the authorization of
that Act. We also will refer separately to "brokers" and "dealers"
as defined by the Investment Company Act,
see 15 U.S.C.
§§ 80a-2(a)(6) and (11), to describe the capacity in
which a broker-dealer acts in a particular transaction.
[
Footnote 4]
The Act defines "sales load" to be the difference between the
public offering price and the portion of the ales proceeds that is
invested or held for investment purposes by the issuer. §
80a-2(a)(35). Most mutual funds charge this sales load in order to
encourage vigorous sales efforts on the part of underwriters and
broker-dealers. There are some funds that do not charge this
additional sales fee. These "no load" funds generally sell directly
to the investor, without relying on the promotional and sales
efforts of underwriters and broker-dealers.
See SEC Report
of the Division of Investment Management Regulation, Mutual Fund
Distribution and Section 22(d) of the Investment Company Act of
1940, p. 112 (Aug.1974) (hereinafter 1974 Staff Report).
[
Footnote 5]
Two additional private antitrust actions premised on similar
theories were filed in the District Court and subsequently
dismissed,
Haddad v. Crosby Corp. and
Gross v.
National Assn. of Securities Dealers, Inc., 374 F. Supp.
95 (DC 1973). The Court of Appeals for the District of Columbia
Circuit stayed those appeals to await the resolution of this case,
and the petition of one of the parties for certiorari before
judgment was denied,
Gross v. National Assn. of Securities
Dealers, Inc., 419 U.S. 843 (1974).
Subsequent to the filing of the United States' complaint, some
50 private suits purporting to be class actions under Fed.Rule
Civ.Proc. 23 were filed in various District Courts around the
country. These cases were transferred to the United States District
Court for the District of Columbia by the Judicial Panel on
Multidistrict Litigation,
In re Mutual Fund Sales Antitrust
Litigation, Civil Action No. Misc. 103-73.
See 374 F.
Supp. at 97 n. 4. The District Court deferred determination of
whether the actions could be maintained as class actions under Rule
23 and additionally postponed discovery and other activity pending
disposition of the motion to dismiss in this case. 374 F. Supp. at
114.
[
Footnote 6]
The NASD is registered under § 15A of the Securities
Exchange Act of 1934, 15 U.S.C. § 783, the so-called Maloney
Act of 1938. The Maloney Act supplements the Securities and
Exchange Commission's regulation of the over-the-counter markets by
providing a system of cooperative self-regulation through voluntary
associations of brokers and dealers. The Act provides that
associations may register with the Commission pursuant to specified
terms and conditions, and authorizes them to promulgate rules
designed to prevent fraudulent and manipulative practices; to
promote equitable principles of trade; to safeguard against
unreasonable profits and charges; and generally to protect
investors and the public interest. § 783(b)(8). The Act also
authorizes the SEC to exercise a significant oversight function
over the rules and activities of the registered associations.
See, e.g., §§ 783(b), (e), (h), (j), and (k).
The NASD is presently the only association registered under this
Act.
[
Footnote 7]
The mutual funds named as defendants in this action are
Massachusetts Investors Growth Stock Fund, Inc., Fidelity Fund,
Inc., and Wellington Fund, Inc.
[
Footnote 8]
The defendant underwriters include the Crosby Corp., Vance,
Sanders & Co., and the Wellington Management Co.
[
Footnote 9]
Named as defendant broker-dealers are the following: Merrill
Lynch, Pierce, Fenner & Smith, Inc., Bache & Co., Inc.,
Reynolds Securities Corp., E. I. duPont, Glore Forgan, Inc., E. F.
Hutton, Inc., Walston & Co., Inc., Dean Witter & Co., Inc.,
Paine, Webber, Jackson & Curtis, Inc., and Hornblower &
Weeks-Hemphill, Noyes, Inc.
[
Footnote 10]
Section 1 of the Sherman Act provides in pertinent part:
"Every contract, combination in the form of trust or otherwise,
or conspiracy, in restraint of trade or commerce among the several
States, or with foreign nations, is declared to be illegal. . .
."
"Every person who shall make any contract or engage in any
combination or conspiracy declared by sections 1 to 7 of this title
to be illegal shall be deemed guilty of a misdemeanor, and, on
conviction thereof, shall be punished by fine not exceeding fifty
thousand dollars, or by imprisonment not exceeding one year, or by
both said punishments, in the discretion of the court."
[
Footnote 11]
The violations alleged in Count II are typical of those charged
in Counts IV and VI. In Count II, appellee Crosby, a principal
underwriter of appellee Fidelity Fund, Inc., is charged with
entering into contracts and combinations with appellee
broker-dealers, the substantial terms of which are that
"(a) each broker/dealer must maintain the public offering price
in any brokerage transaction in which it participates involving the
purchase or sale of shares of the Fidelity Funds; and"
"(b) each broker/dealer must sell shares of the Fidelity Funds
only to investors or the fund and purchase such shares only from
investors or the fund."
App. 111. Count VI, in addition to charging restrictive
agreements similar to the above, alleged that appellee Wellington,
a principal underwriter, agreed to act only as an agent of the
appropriate mutual fund in all transactions with the
broker-dealers.
Id. at 15.
The alleged effect of the restrictive agreement charged in
� (a) was to inhibit the growth and development of a
brokerage market in mutual fund shares. The alleged effect of the
restriction identified in � (b), by contrast, was to inhibit
inter-dealer transactions, and thus to restrict the growth and
development of a secondary dealer market. App. 11.
[
Footnote 12]
The Court noted probable jurisdiction on October 15, 1974. 419
U.S. 822. Accordingly, the recent amendments to the Expediting Act,
88 Stat. 1709, 15 U.S.C. § 29 (1970 led., Supp. IV), do not
affect our jurisdiction.
[
Footnote 13]
For example, the Act requires companies to register with the
SEC, 15 U.S.C. § 80a-8.
See also § 80a-7.
Companies also must register all securities they issue,
see Securities Act of 1933, 15 U.S.C. § 77f;
Investment Company Act, 15 U.S.C. § 80a-24(a), and must submit
for SEC inspection copies of the sales literature they send to
prospective investors. § 80a-24(b). The Investment Company Act
requires the submission and periodic updating of detailed financial
reports and documentation and the semiannual transmission of
reports containing similar information to the shareholders. §
80a-29. It also imposes controls and restrictions on the internal
management of investment companies: establishing minimum capital
requirements, § 80a-14; limiting permissible methods for
selecting directors, § 80a-16; and establishing certain
qualifications for persons seeking to affiliate with the companies,
§ 80a-9. Finally, the Act imposes a number of controls on the
internal practices of investment companies. For example, it
requires a majority shareholder vote for certain fundamental
business decisions, § 80a-13, and limits certain dividend
distributions, § 80a-19.
See generally The Mutual
Fund Industry: A Legal Survey, 44 Notre Dame Law. 732 (1969).
[
Footnote 14]
H.R.Doc. No. 279, 76th Cong., 1st Sess. (1940) (hereinafter
Investment Trust Study pt. III). Part I of the Investment Trust
Study is printed as H.R.Doc. No. 707, 75th Cong., 3d Sess. (1938).
Part II of the Study is printed as H.R.Doc. No. 70, 76th Cong., 1st
Sess. (1939) (hereinafter Investment Trust Study pt. II). For
additional discussion of the operations of open-end management
investment companies,
see 1974 Staff Report; SEC Report of
the Staff on the Potential Economic Impact of a Repeal of Section
22(d) of the Investment Company Act of 1940 (Nov.1972); H.R.Rep.
No. 2337, 89th Cong., 2d Sess. (1966); SEC Report of the Special
Study of Securities Markets, c. XI -- Open-End Investment Companies
(Mutual Funds), H.R.Doc. No. 95, pt. 4, 88th Cong., 1st Sess.
(1963) (hereinafter 1963 Special Study).
[
Footnote 15]
The broker-dealers operating within the primary distribution
system are denominated "contract dealers" in the Study, and will be
so identified in this opinion.
[
Footnote 16]
The Study indicates that mutual funds increasingly began to
disclose more information about the existence and operation of the
two-price system.
See Investment Trust Study pt. III, pp.
867-868. And in some instances, the funds encouraged broker-dealers
to explain to potential incoming investors the immediate
appreciation in investment value that could be obtained from the
pricing system in the hope of encouraging the purchase of shares.
Id. at 854.
See Hearings on S. 3580 before a
Subcommittee of the Senate Committee on Banking and Currency, 76th
Cong., 3d Sess., pt. 1, p. 138 (1940) (hereinafter 1940 Senate
Hearings).
[
Footnote 17]
The existing shareholders' equity interests were diluted because
the incoming investors bought into the fund at less than the actual
value of the shares at the time of purchase. Moreover, SEC
testimony indicated that this dilution could be substantial. In one
instance, the Commission calculated that the two-price system
resulted in a loss to existing shareholders of one trust of some
$133,000 in a single day.
Id. at 139-140.
[
Footnote 18]
Contract dealers trading from an inventory position often could
obtain an additional profit from the sales load. When the dealer
acted as an agent for the fund and traded from the primary
distribution system, the dealer and the underwriter divided the
load charge in accordance with the sales agreement. But the dealer
could retain the full load when he filled the purchase order from
an inventory position in shares purchased from retiring
shareholders or other dealers. Investment Trust Study pt. III, pp.
858-859.
[
Footnote 19]
Sections 22(a) and (c) reflect the same basic relationship
between the SEC and the NASD that is established by the Maloney
Act.
See n 6,
supra. Section 22(a) authorizes registered securities
associations, in this case the NASD, to prescribe rules for the
regulation of these matters. 15 U.S.C. § 80a-22(a). The
industry thus is afforded the initial opportunity to police its own
practices. If, however, industry self-regulation proves
insufficient, § 22(c) authorizes the Commission to make rules
and regulations "covering the same subject matter, and for the
accomplishment of the same ends as are prescribed in subsection
(a)," and proclaims that the SEC rules and regulations supersede
any inconsistent rules of the registered securities association. 15
U.S.C. § 80a-22(c).
Shortly after enactment of the Investment Company Act, the NASD
proposed, and the SEC approved, a rule establishing twice-daily
pricing.
See National Association of Securities Dealers,
Inc., 9 S.E.C. 38 (1941). Twice-daily pricing reduced the time
period in which persons could engage in riskless trading and
correspondingly decreased the potential for dilution. The
Commission subsequently provided full protection against the
dilutive effects of riskless trading. In late 1968, it exercised
its authority under § 22(c) to adopt Rule 22c-1, which
requires all funds to establish "forward pricing." Forward pricing
eliminates the potential for riskless trading altogether.
See Adoption of Rule 22c-1, Investment Company Act Rel.
No. 5519 (1968), [1967-1969 Transfer Binder] CCH Fed.Sec.L.Rep.
� 77,616; 17 CFR § 270.22c-1 (1974).
[
Footnote 20]
This section provides in pertinent part:
"No registered investment company shall sell any redeemable
security issued by it to any person except either to or through a
principal underwriter for distribution or at a current public
offering price described in the prospectus, and, if such class of
security is being currently offered to the public by or through an
underwriter, no principal underwriter of such security and no
dealer shall sell any such security to any person except a dealer,
a principal underwriter, or the issuer, except at a current public
offering price described in the prospectus."
[
Footnote 21]
The Investment Company Act defines a "dealer" to be:
"[A]ny person regularly engaged in the business of buying and
selling securities for his own account, through a broker or
otherwise, but does not include a bank, insurance company, or
investment company, or any person insofar as he is engaged in
investing, reinvesting, or trading in securities, or in owning or
holding securities, for his own account, either individually or in
some fiduciary capacity, but not as a part of a regular
business."
15 U.S.C. § 80a-2(a)(11). A "broker," by contrast, is
defined to be:
"[A]ny person engaged in the business of effecting transactions
in securities for the account of others, but does not include a
bank or any person solely by reason of the fact that such person is
an underwriter for one or more investment companies."
§ 80a-2(a)(6).
[
Footnote 22]
Congress employed the term "broker" without reference to
"dealer" in various sections of the Act.
See §§
80a-3(c)(2), 80a-10(b)(1), 80a-17(e)(1) and (2). In other
instances, the Act refers to "dealer" without reference to
"broker,"
see §§ 80a-2(a) (40), 80a-22(c) and
(d). And in some cases, including the very definition of the term
"dealer" itself,
see n 21,
supra, the Act refers to both "broker" and
"dealer" in the same provision,
see §§
80a-1(b)(2), 80a-9(a)(1) and (2), and 80a-30(a). Finally. the Act
in some cases refers to the more general term "broker-dealer,"
see §§ 80a-22(b)(1) and (2).
[
Footnote 23]
The original Commission-sponsored bill considered in the initial
hearings before a Subcommittee of the Senate Banking and Commerce
Committee, S. 3580, 76th Cong., 3d Sess. (1940), contained no
provision resembling this subsection. Section 22(d) first emerged
in a compromise proposal advanced after a period of intensive
consultation between the SEC and industry representatives that
followed initial Senate hearings,
see 1940 Senate
Hearings, pt. 4, pp. 1105-1107, and the Commission subsequently has
indicated that this provision was suggested by the industry.
See Midamerica Mutual Fund, Inc., 41 S.E.C. 328, 331
(1963); H.R.Rep. No. 2337, 89th Cong., 2d Sess., 219 (1966).
Revised legislation reflecting this compromise was submitted, and
further hearings were conducted in the Senate and the House. Both
bills were reported favorably by their respective committees,
S.Rep. No. 1775, 76th Cong., 3d Sess. (1940); H.R.Rep. No. 2639,
76th Cong., 3d Sess. (1940), and the House bill, with minor
amendments not relevant to this appeal, was accepted by the Senate.
86 Cong.Rec. 10069-10071 (1940).
This history perhaps explains the dearth of discussion relating
to § 22(d). The majority of the Senate hearings were completed
before this provision was advanced, and both the Senate and House
hearings that followed provide relatively little illumination as to
the intended purpose or scope of this subsection.
[
Footnote 24]
Insider trading abuses were identified as a problem during the
Senate hearings that preceded submission of the compromise bill
containing § 22(d),
see 1940 Senate Hearings, pt. 2,
pp. 526-527 and 660-661. At the close of the initial Senate
hearings, an industry representative suggested that the Act should
contain a provision prohibiting sales at preferential terms to
insiders and others.
Id. at 1057. The Commission and
industry representatives thereafter met to seek a compromise on the
various differences that had been identified in the Senate
hearings, and the industry memorandum outlining the nature of the
resultant agreement again indicated that a provision should be
added to the Act to prohibit insider trading.
See
Framework of Proposed Investment Company Bill (Title I), Memorandum
Embodying Suggestions Resulting from Conferences Between Securities
and Exchange Commission and Representatives of Investment Companies
(May 13, 1940) printed in Hearings on H.R. 10065 before a
Subcommittee of the House Committee on Interstate and Foreign
Commerce, 76th Cong., 3d Sess., 99 (1940).
[
Footnote 25]
The insider trading prohibition is complemented by § 22(g),
which precludes issuance of mutual fund shares for services or
property other than cash or securities. 15 U.S.C. §
80a-22(g).
[
Footnote 26]
See Adoption of Rule N-22D-I, Investment Company Act
Rel. No. 2798 P. 1 (1958), [1957-1961 Transfer Binder] CCH
Fed.Sec.L.Rep. � 76,625, p. 80,393;
Investors
Diversified Services, Inc., Investment Company Act Rel. No.
3015 (1960), [1957-1961 Transfer Binder] CCH Fed.Sec.L.Rep.
� 76,699, p. 80,620;
In re Sideris, Securities
Exchange Act Rel. No. 8816, p. 2 (1970);
Mutual Funds Advisory,
Inc., Investment Company Act Rel. No. 6932, p. 4 (1972).
The SEC also has suggested that preventing discrimination among
investors was one of the purposes of this provision.
See, e.g.,
In re Sideris, supra; Midamerica Mutual Fund, Inc., 41 S.E.C.
at 331;
Adoption of Rule N-22D-I, supra. But we do not
think that brokerage transactions inevitably would foster the kind
of investor discrimination sought to be remedied by this statute.
All investors would be equally free to seek to engage in brokered
transactions, and the possibility that the more sophisticated or
fortuitous investor would profit from this market does not, by
itself, bring this category of transactions within the purview of
§ 22(d).
[
Footnote 27]
Responding to inquiries concerning the relationship of §
22(d) and the operation of state law, Chairman Cohen stated:
"The statute is unequivocal. No person, no matter where he gets
it, from the issuer, from another dealer, or even from a private
person, no broker-dealer may sell a share of a particular fund at a
price less than that fixed by the issuer."
Hearings on the Investment Company Act Amendments of 1967 before
the Subcommittee on Commerce and Finance of the House Committee on
Interstate and Foreign Commerce, 90th Cong., 1st Sess., pt. 2, p.
711 (1967).
[
Footnote 28]
Id. at pt. 1, p. 53
[
Footnote 29]
Senator Sparkman, Chairman of the Senate Banking and Currency
Committee which reported the 1970 amendments to the full Senate,
stated on the floor of the Senate that § 22(d) "now makes it a
Federal crime for
anyone to sell mutual fund shares at a
price lower than that fixed by the fund's distributor." 115
Cong.Rec. 838 (1969) (emphasis added). Senator Magnuson reflected
perhaps a similar view, stating that, as a result of § 22(d),
"mutual fund sales charges are
totally insulated from
price competition." 114 Cong.Rec. 23057 (1968) (emphasis
added).
The testimony of some witnesses suggests that they shared this
expansive view.
See, e.g., Hearings on S. 1659 before the
Senate Committee on Banking and Currency, 90th Cong., 1st Sess.,
pt. 2, p. 741 (1967) (hereinafter 1967 Senate Hearings) (testimony
of Mr. Funston, President of the New York Stock Exchange);
id. at pt. 1, pp. 348, 356 (testimony of Professor
Samuelson);
id. at pt. 2, p. 1064 (testimony of Professor
Wallich).
[
Footnote 30]
We conclude, however, that the context of the post-enactment
history of § 22(d) limits the force of the statements relied
upon by appellees. A broker-dealer can serve in either a broker's
or a dealer's capacity, and the distinction between the two
functions is rather technical and precise. The parties are in
general agreement that no significant number of brokered
transactions, as statutorily defined, existed prior or subsequent
to passage of the Act. In view of the care with which the statute
defines these functions and the absence of focus on these
distinctions in the statements in the subsequent consideration of
§ 22(d), we think that the broader characterizations of that
section must be viewed with some skepticism.
[
Footnote 31]
Acting in accordance with the recommendations of the Staff
Report, the SEC Chairman recently requested that the NASD amend its
Rules of Fair Practice to prohibit agreements between underwriters
and broker-dealers that preclude broker-dealers, acting as agents,
"from matching orders to buy and sell fund shares in a secondary
market at competitively determined prices and commission rates."
Letter from Mr. Ray Garrett, Jr., Chairman of the SEC to Mr. Gordon
S. Macklin, President of the NASD, Nov. 22, 1974, printed in Brief
for Appellees Bache & Co.
et al., Add. 18. The
Chairman further revealed the SEC's intention to exercise its
regulatory authority under § 22(f) to neutralize any adverse
effects this market might have on the fund's primary distribution
system.
Id. at Add. 19. As the Staff Report indicates, the
Commission's exercise of regulatory authority is premised on its
view that § 22(d) does not require strict price maintenance in
brokered transactions.
See 1974 Staff Report 104. If
§ 22(d) did control these transactions as well as "dealer"
sales, the Commission's ability to encourage controlled competition
in this market would be subject to question.
[
Footnote 32]
The Department of Justice previously suggested a manner in which
its interpretation of § 22(d) could be reconciled with the
Commission's exercise of regulatory authority over brokered
transactions. Addressing the question of possible repeal of §
22(d), the Justice Department suggested that, rather than continue
to wait for congressional repeal, the Commission should eliminate
the adverse effects of price maintenance by freeing all
transactions from the § 22(d) mandate through the exercise of
its § 6(c) power of exemption, 15 U.S.C. § 80a-6(c). 1974
Staff Report 70. This presumably would leave the SEC free to
regulate transactions through the exercise of the powers conferred
on it by other provisions of the Act. We need not consider the
validity of the Justice Department's broad interpretation of the
SEC's power of exemption, for even assuming it to be correct our
analysis would not be affected.
[
Footnote 33]
Section 22(f) of the Act, 15 U.S.C. § 80a-22(f),
provides:
"No registered open-end company shall restrict the
transferability or negotiability of any security of which it is the
issuer except in conformity with the statements with respect
thereto contained in its registration statement nor in
contravention of such rules and regulations as the Commission may
prescribe in the interests of the holders of all of the outstanding
securities of such investment company."
[
Footnote 34]
Section 22(d) of the original bill, S. 3580, 76th Cong., 3d
Sess. (1940), provided, in pertinent part:
"The Commission is authorized, by rules and regulations or order
in the public interest or for the protection of investors, to
prohibit -- "
"
* * * *"
"(2) restrictions upon the transferability or negotiability of
any redeemable security of which any registered investment company
is the issuer."
[
Footnote 35]
Testifying before the Senate subcommittee, an SEC spokesman
stated:
"Now coming to subparagraph (2) of (d), it just says that the
Commission shall have the right to make rules and regulations with
respect to any restrictions upon the transferability or
negotiability of any redeemable security of which any registered
investment company is the issuer."
"There are some companies that have a provision in their
certificates to the effect that you cannot sell that certificate to
anybody else, and the only way you can sell it is to sell it back
to the company. That is a technical problem. It presents a whole
problem which they call the bootleg market. What happens is that
dealers keep switching people from one company to another. In order
to prevent these switches, some provisions require that you cannot
make these switches but must sell the certificate back to the
company. . . ."
"If the committee wants the provision, we shall recommend what,
on the basis of our experience up to the present time, it ought to
be; but we think subjects like that ought to be a matter of rules
and regulations."
1940 Senate Hearings, pt. 1, pp. 292-293.
[
Footnote 36]
Neither are we convinced of the necessity to limit negotiability
or transferability restrictions to those appearing on the face of
the certificate in order to assure their adequate disclosure to
investors. Section 24 of the Act requires that mutual funds submit
for SEC inspection copies of all sales literature that they send to
prospective investors. 15 U.S.C. § 80a-24(b). The Commission
is therefore fully apprised as to the nature and sufficiency of the
disclosure of these restrictions and can, if necessary, require
supplementation of the information provided investors.
[
Footnote 37]
Neither do we agree with the Government's suggestion that §
22(f) does not authorize restrictions in contracts between
underwriters and dealers in which the fund is not a party. We note,
preliminarily, that this position would not save Counts III, V, and
VII from dismissal, since they relate to restrictions on
underwriter conduct that are imposed by the fund. Even under the
most technical reading of the statute, these restrictions are
"fund-imposed." Moreover, it further appears from the complaint
that the agreement challenged in Count II is required by the
fund-underwriter agreement challenged in Count III, and thus also
is "fund-imposed" in any but the most literal sense. More
importantly, however, we think that the Government's position fails
to recognize the relationship between the various participants in
the distribution chain. As the history of the Investment Company
Act recognizes, the relationship between the fund and its principal
underwriter traditionally has been a close one. Sections 15(b) and
(c) reflect this fact, requiring, in effect, that funds establish
written contracts with the underwriter that must be approved by a
majority of the fund's disinterested directors and cannot remain in
force for more than two years. 15 U.S.C. §§ 80a-15(b) and
(c). And NASD Rule 26(c), in effect since 1941, requires that
principal underwriters enter into agreements with the dealers who
distribute the fund's securities.
See National Association of
Securities Dealers, Inc., 9 S.E.C. at 44, 48. In view of these
requirements, and the broad remedial purpose of § 22(f), we
think that the underwriter-dealer agreements challenged in this
complaint also must be regarded as fund-imposed within the
contemplation of the statute.
[
Footnote 38]
See 1940 Senate Hearings, pt. 1, p. 293.
[
Footnote 39]
Commissioner Loomis, dissenting from an SEC determination that
an applicant lacked standing to seek an exemption from §§
17(a)(1) and 22(d) of the Act, stated:
"I would conclude that applicant is a dealer in its relationship
with the fund underwriter because to do otherwise would require us
to ignore or nullify the perfectly lawful requirement in the dealer
agreements that applicant act as a dealer. . . . I do not know of
anything unlawful about the generally accepted form of dealer
agreement used in the investment company industry."
Mutual Funds Advisory, Inc., Investment Company Act
Rel. No. 6932, p. 7 (1972) (dissenting opinion). While the majority
disagreed with Commissioner Loomis' assessment of the facts of the
case, it did not question his approval of the mentioned dealer
agreement.
[
Footnote 40]
See 1963 Special Study 98; 1974 Staff Report
104-106.
[
Footnote 41]
The SEC maintains:
"It would nullify the effect of this grant of regulatory
authority to the Commission [under § 22(f)] for this Court to
hold that a district court may apply antitrust principles to
conduct like that alleged in Counts II through VIII, when the
expert body designated and empowered by Congress to regulate and
supervise that conduct has not heretofore deemed it appropriate to
prohibit the conduct."
Brief for SEC as
Amicus Curiae 54.
[
Footnote 42]
The complaint averred that, in effectuating the conspiracy to
restrain the growth of a secondary market in mutual fund shares,
the NASD, its members, and more particularly the other named
defendants,
"(a) established and maintained rules which inhibited the
development of a secondary dealer market and a brokerage market in
mutual fund shares;"
"(b) established and maintained rules which induced
broker/dealers to enter into sales agreements with principal
underwriters, with knowledge that sales agreements contained
restrictive provisions which inhibited the development of a
secondary dealer market and brokerage market in mutual fund
shares;"
"(c) induced member principal underwriters to include
restrictive provisions in their sales agreements;"
"(d) discouraged persons who made inquiry about the legality of
a brokerage market from participating in a brokerage market and
distributed misleading information to its members concerning the
legality of a brokerage market in mutual fund shares; and"
"(e) suppressed market quotations for the secondary dealer
market."
App. 9.
[
Footnote 43]
The Government first indicated abandonment of its attack on the
NASD rules during oral argument of appellees' motion to dismiss.
See App. 328-332. Notwithstanding clauses (a) and (b) of
� 17 of the complaint,
see n 42,
supra, the Government's counsel
stated that it did not intend to challenge any NASD rule, App. 330.
Counsel ambiguously suggested, however, that the members'
compliance with those rules had aided and abetted the alleged
conspiracy,
id. at 332, and stated that informal and
secret activities of the Association likewise had tended to inhibit
growth of the secondary market,
id. at 330. Thereafter, in
response to the District Court's invitation to join in the
litigation as
amicus curiae, the SEC expressed its concern
that the action might involve an attack on NASD rules, a matter
"over which the Commission is granted exclusive original
jurisdiction by Section 15A of the Securities Exchange Act of 1934,
15 U.S.C. § 78
o-3,
et seq. (the Maloney
Act)."
Letter from Mr. Lawrence E. Nerheim, General Counsel of the SEC,
to the District Court, App. 323. The Government thereafter informed
the court that the issues it sought to raise did not represent "an
attack upon NASD Rules as such", but rather "aimed at an over-all
course of conduct engaged in by the NASD and its members going
beyond the NASD's rulemaking authority." Letter from Mr. Bruce B.
Wilson, Acting Assistant Attorney General for the Antitrust
Division, to the District Court, App. 327. It maintains the same
position in this Court.
See Brief for United States 51 n.
47.
[
Footnote 44]
Indeed, it appears that vigorous inter-brand competition exists
in the mutual fund industry -- between the load funds themselves,
between load and no-load funds, between open- and closed-end
companies, and between all of these investment forms and other
investments.
See 1974 Staff Report 20
et seq.
[
Footnote 45]
As SEC Chairman Garrett observed in his letter submitting the
1974 Staff Report for congressional consideration: "No issuer of
securities is subject to more detailed regulation than a mutual
fund." Letter from Ray Garrett, Jr., SEC Chairman, to the Honorable
John Sparkman, Chairman of the Committee on Banking, Housing, and
Urban Affairs, United States Senate (Nov. 4, 1974), contained in
1974 Staff Report, at v.
[
Footnote 46]
The Commission can, for example, require amendment of the NASD
rules regulating the conduct of its membership,
see 15
U.S.C. § 78
o-3(k)(2), or exercise the more general
rulemaking power conferred by § 38(a) of the Investment
Company Act, 15 U.S.C. § 80a-37(a), to contain any of the
challenged activities that might in any way frustrate its
regulation of the restrictions it authorizes under § 22(f)
MR. JUSTICE WHITE, with whom MR. JUSTICE DOUGLAS, MR. JUSTICE
BRENNAN, and MR. JUSTICE MARSHALL join, dissenting.
The majority repeats the principle, so often applied by this
Court, that
"[i]mplied antitrust immunity is not favored, and can be
justified only by a convincing showing of clear repugnancy between
the antitrust laws and the regulatory system."
Ante at
422 U. S.
719-720. That fundamental rule, though invoked again and
again in our decisions, retained its vitality because, in the many
instances of its evocation, it was given life and meaning by a
close analysis of the legislation and facts involved in the
particular case, an analysis inspired by the "felt indispensable
role of antitrust policy in the maintenance of a free economy. . .
."
United States v. Philadelphia National Bank,
374 U. S. 321,
374 U. S. 348
(1963). Absent that inspiration, the principle becomes an archaism,
at best, and no longer reflects the tense interplay of differing
and at times conflicting public policies.
Although I do not disagree with much of the Court's opinion in
its construction of §§ 22(d) and (f) of the
Page 422 U. S. 736
Investment Company Act, 54 Stat. 824, as amended, 15 U.S.C.
§§ 80a-22(d) and (f), its ultimate holding, which, in
contrast to the earlier portions of its opinion, is devoid of
detailed discussion of the applicable law, I find unacceptable.
Under that holding, in light of the context of this case, implied
antitrust immunity becomes the rule where a regulatory agency has
authority to approve business conduct whether or not the agency is
directed to consider antitrust factors in making its regulatory
decisions and whether or not there is other evidence that Congress
intended to displace judicial with administrative antitrust
enforcement.
I
If Congress itself expressly permits or directs particular
private conduct that would otherwise violate the antitrust laws, it
can be safely assumed that Congress has made the necessary policy
choices and preferred to permit, rather than to prevent, the acts
in question. There is no dispute in this case, for example, that
compliance with § 22(d)'s requirement that open-end funds and
dealers sell at the public offering price is not subject to attack
under the antitrust laws.
It also happens that, in subjecting areas of commercial activity
to regulation, Congress frequently authorizes a regulatory agency
to approve certain kinds of transactions if they conform to the
appropriate regulatory standard such as the "public interest" or
the "public convenience and necessity" and correspondingly provides
that, when approved, those transactions will be immune from attack
under the antitrust laws. Section 414 of the Federal Aviation Act
of 1958, 72 Stat. 770, 49 U.S.C. § 1384, for example, provides
that any person affected by an order issued under §§ 408,
409, or 412 of that Act, 49 U.S.C. §§ 1378, 1379, 1382,
is "relieved from the
Page 422 U. S. 737
operations of . the
antitrust laws,'" including the Sherman
Act, "insofar as may be necessary to enable such person to do
anything authorized, approved, or required by such order."
Hughes Tool Co. v. Trans World Airlines, 409 U.
S. 363 (1973), thus involved acts and transactions
expressly immunized from antitrust scrutiny. Section 5(11) of the
Interstate Commerce Act, 24 Stat. 380, as amended, 49 U.S.C. §
5(11), similarly provides that carriers and their employees
participating in a transaction approved or authorized under §
5 "shall be and they are relieved from the operation of the
antitrust laws. . . ." Also, the Clayton Act itself provides that
§ 7's prohibitions will not apply to transactions duly
consummated pursuant to authority given by certain named agencies
under any statutory provisions vesting power in those agencies. 38
Stat. 731, as amended, 15 U.S.C. § 18.
The courts have, of course, recognized express exemptions such
as these, but the invariable rule has been "that exemptions from
antitrust laws are strictly construed,"
FMC v. Seatrain Lines,
Inc., 411 U. S. 726,
411 U. S. 733
(1973), and that exemption will not be implied beyond that given by
the letter of the law. In
Seatrain, the Maritime
Commission was authorized by statute to approve and immunize from
antitrust challenge seven categories of agreements between shipping
companies, including agreements "controlling, regulating,
preventing, or destroying competition." The Court, construing
narrowly the category arguably embracing the merger agreement under
consideration, held that merger agreements between shipping
companies were not subject to approval by the Commission, and
consequently were not entitled to exemption under the antitrust
laws.
Absent express immunization or its equivalent, private business
arrangements are not exempt from the antitrust
Page 422 U. S. 738
laws merely because Congress has empowered an agency to
authorize the very conduct which is later challenged in court under
the antitrust laws. Where the regulatory standard is the "public
interest," or something similar, there is no reason whatsoever to
conclude that Congress intended the strong policy of the antitrust
laws to be displaced or to be ignored in determining the public
interest and in approving or disapproving the questioned conduct.
This has been the consistent position of this Court. In
United
States v. Radio Corp. of America, 358 U.
S. 334 (1959), the approval of the Federal
Communications Commission of an exchange of television stations was
sought as required by statute. The Commission approved the
exchange, finding, in accordance with the statutory standard, that
the public interest, convenience, and necessity would be served.
The United States brought an antitrust action to require
divestiture. It was urged in defense that the Commission had been
empowered to consider and adjudicate antitrust issues and that its
approval immunized the transaction. The Court rejected the defense,
Mr. Justice Harlan concurring in the judgment and summarizing the
Court's holding as follows:
"[A] Commission determination of 'public interest, convenience,
and necessity' cannot either constitute a binding adjudication upon
any antitrust issues that may be involved in the Commission's
proceeding or serve to exempt a licensee
pro tanto from
the antitrust laws, and . . . these considerations alone are
dispositive of this appeal."
Id. at
358 U. S.
353.
In
California v. FPC, 369 U. S. 482
(1962), the question was whether the authority in the Federal Power
Commission to approve mergers in the public interest foreclosed
antitrust challenge to an approved
Page 422 U. S. 739
merger. The Court held that agency approval did not confer
immunity from § 7 of the Clayton Act, even though the agency
had taken the competitive actors into account in passing upon the
application. A year later, in
United States v. Philadelphia
Nat. Bank, supra, the Court rejected the contention that
"the Bank Merger Act, by directing the banking agencies to
consider competitive factors before approving mergers . . .
immunizes approved mergers from challenge under the federal
antitrust laws."
374 U.S. at
374 U. S. 350
(footnote omitted). More recently, we applied this principle in
Otter Tail Power Co. v. United States, 410 U.
S. 366 (1973). There, the Court held that the authority
of the Federal Power Commission to order interconnections between
power systems of two companies did not exempt company refusal to
interconnect from antitrust attack.
Under these and other cases, it could not be clearer that
"[a]ctivities which come under the jurisdiction of a regulatory
agency nevertheless may be subject to scrutiny under the antitrust
laws,"
id. at
410 U. S. 372,
and that agency approval of particular transactions does not itself
confer antitrust immunity.
The foregoing were the governing principles both before and
after
Silver v. New York Stock Exchange, 373 U.
S. 341 (1963). There, stock exchange members were
directed to discontinue private wire service to two nonmember
broker-dealers, who were given no notice or opportunity to be heard
on the discontinuance. The latter brought suit under § §
1 and 2 of the Sherman Act, but the Court of Appeals held that the
stock exchanges had been exempted from the antitrust laws by the
Securities Exchange Act of 1934. This Court reversed. The Act
contained no express immunity, and immunity would be implied "only
if necessary to make the Securities Exchange Act work, and even
then only to the minimum extent necessary."
Page 422 U. S. 740
373 U.S. at
373 U. S. 357.
Conceding that there would be instances of permissible
self-regulation which otherwise would violate the antitrust laws,
the Court concluded that nothing in the Act required that the
deprivations there imposed be immune from the antitrust laws. In
arriving at this conclusion, it was noted that the Securities and
Exchange Commission had no authority to review specific instances
of enforcement of the exchange rules involved, and that it was
therefore unnecessary to consider any problem of conflict or
coextensiveness with the agency's regulatory power. The Court
observed, however, that, if there had been jurisdiction in the
Commission, with judicial review following, "a different case would
arise concerning exemption from the operation of laws designed to
prevent anticompetitive activity. . . ."
Id. at
373 U. S. 358
n. 12.
Such a different case, we said, was before us in
Ricci v.
Chicago Mercantile Exchange, 409 U. S. 289,
409 U. S. 302
(1973). That case arose in the context of the Commodity Exchange
Act. We held that a district court entertaining a private antitrust
action should stay its hand while the Commodity Exchange Commission
exercised whatever jurisdiction it might have to adjudicate
specific claims of violation of exchange rules; but that
adjudication, we said, was not a substitute for antitrust
enforcement, and the fact that the Commission had jurisdiction to
approve or disapprove the challenged conduct and might hold the
conduct to be consistent with exchange rules would not, in itself,
answer the immunity question.
Id. at
409 U. S.
302-303, n. 13.
On occasion, however, Congress has authorized an agency to
adjudicate the legality of specifically defined transactions or
commercial behavior in accordance with a competitive standard
inconsistent with the controlling criteria under the antitrust
laws. In these circumstances, the
Page 422 U. S. 741
Court has concluded that Congress intended to replace normal
antitrust enforcement with the administrative regime provided by
the statute, subject to judicial review.
Pan American World
Airways, Inc. v. United States, 371 U.
S. 296 (1963), involved certain business conduct within
the jurisdiction of the Civil Aeronautics Board. Under the Federal
Aviation Act, various transactions by air carriers, if approved by
the Board, were expressly immunized from antitrust attack. Also,
the Board was given explicit authority under § 411 of that
Act, 49 U.S.C. § 1381, to investigate and bring to a halt all
"unfair . . . practices" and "unfair methods of competition," the
power under this section to be administered in the light of the
"competitive regime" clearly delineated elsewhere in the Act.
See 371 U.S. at
371 U. S.
308-309. The Court concluded that Congress, having
directed itself to the matter of competition in the airlines
industry and having provided a competitive standard to be
administered by an agency, had intended to displace the usual
enforcement of the antitrust laws through the courts, at least
insofar as Government injunction suits were concerned.
United
States v. Philadelphia National Bank, supra, made it plain
that
Pan American had not disturbed the usual rule that,
without more, agency power to approve, and agency approval itself,
do not confer antitrust immunity. 374 U.S. at
374 U. S.
351-352.
Gordon v. N.Y. Stock Exchange, Inc., ante p.
422 U. S. 659,
decided today, is another instance where Congress has provided an
administrative substitute for antitrust enforcement. Section 19(b)
of the Securities Exchange Act of 1934, 48 Stat. 898, as amended,
15 U.S.C. § 78s(b), contemplated the fixing by the exchange,
and approval or prescription by the Securities and Exchange
Commission, of "reasonable rates of commission" to be charged by
exchange members. Price fixing
Page 422 U. S. 742
by competitors, however, is wholly at odds with the Sherman Act;
under that statute, prices fixed by agreement are inherently
unreasonable, whatever the level at which they are set. This was
the law long prior to the Securities Exchange Act:
"The aim and result of every price-fixing agreement, if
effective, is the elimination of one form of competition. The power
to fix prices, whether reasonably exercised or not, involves power
to control the market, and to fix arbitrary and unreasonable
prices. The reasonable price fixed today may, through economic and
business changes, become the unreasonable price of tomorrow. Once
established, it may be maintained unchanged because of the absence
of competition secured by the agreement for a price reasonable when
fixed. Agreements which create such potential power may well be
held to be, in themselves, unreasonable or unlawful restraints,
without the necessity of minute inquiry whether a particular price
is reasonable or unreasonable as fixed, and without placing on the
government in enforcing the Sherman Law the burden of ascertaining
from day to day whether it has become unreasonable through the mere
variation of economic conditions."
United States v. Trenton Potteries Co., 273 U.
S. 392,
273 U. S.
397-398 (1927). Thus, Congress could not have
anticipated that the antitrust laws would apply to stock exchange
price-fixing approved by the Commission. In this respect, there is
a "plain repugnancy between the antitrust and regulatory
provisions,"
United States v. Philadelphia National Bank,
supra at
374 U. S. 351
(footnote omitted).
The rule of law that should be applied in this case, therefore,
as it comes to us from these precedents, is that, absent an express
antitrust immunization conferred
Page 422 U. S. 743
by Congress in a statute, such an immunity can be implied only
if Congress has clearly supplanted the antitrust laws and their
model of competition with a differing competitive regime, defined
by particularized competitive standards and enforced by an
administrative agency, and has thereby purged an otherwise obvious
antitrust violation of its illegality. When viewed in the light of
this rule of law, the argument for implied immunity in this case
becomes demonstrably untenable.
II
Section 22(f) of the Investment Company Act provides that
"[n]o registered open-end company shall restrict the
transferability or negotiability of any security of which it is the
issuer except in conformity with the statements with respect
thereto contained in its registration statement nor in
contravention of such rules and regulations as the Commission may
prescribe in the interests of the holders of all of the outstanding
securities of such investment company."
The majority concludes from these words and their sparse
legislative history that the "funds and the SEC" have the authority
to impose "SEC-approved restrictions on transferability and
negotiability,"
ante at
422 U. S. 724,
422 U. S. 725,
including the restrictions involved here effecting resale price
maintenance and concerted refusals to deal, all aimed at stifling
competition that might come from the secondary market. The majority
concludes that "[t]here can be no reconciliation of [SEC] authority
. . . to permit these and similar restrictive agreements" with
their illegality under the Sherman Act, and that, therefore, "the
antitrust laws must give way if the regulatory scheme established
by the Investment Company Act is to work."
Ante at
422 U. S. 729,
422 U. S.
730.
For several reasons, the majority's conclusions are infirm under
the controlling authorities. It is plain
Page 422 U. S. 744
that the Act itself contains no express exemptions from the
antitrust laws. It is equally plain that the Act does not expressly
permit the specific restrictions at issue here in the way that it
deals with the public offering price under § 22(d). It would
be incredible even to suggest that Congress intended to give
participants in the mutual fund industry, individually or
collectively,
carte blanche authority to impose whatever
restrictions were thought desirable and without regard to the
policies of the antitrust laws. The majority does not contend
otherwise, and rests its case on the power which it finds in the
Commission to approve, or to fail to disapprove, the practices
challenged here and to immunize them from antitrust scrutiny.
It is immediately obvious that the majority has failed to heed
the teaching of our cases in several respects. It ignores the rule
that "exemptions from antitrust laws are strictly construed," and
that implied exemptions are "
strongly disfavored.'" FMC v.
Seatrain Lines, Inc., 411 U.S. at 411 U. S. 733.
Lurking in the prohibition of § 22(f) against any
restrictions on "transferability or negotiability" except those
stated in the registration statement, the Court discovers the
affirmative power to impose resale price maintenance restrictions,
as well as the authority to engage in concerted refusals to deal
and similar practices wholly at odds with the antitrust laws. Never
before has the Court labored to find hidden immunities from the
antitrust laws; and the necessity for the effort is itself at odds
with our precedents.
The Court's holding that Commission approval automatically
brings with it antitrust immunity is also contrary to those cases
which have consistently refused to equate agency power to approve
conduct with an exemption under the antitrust laws. Those cases, as
demonstrated above, uniformly held that actual agency
Page 422 U. S. 745
approval of the very transaction which the statute empowers the
agency to approve is not, in itself, sufficient to exempt the
transaction from liability under the Sherman Act, absent express
exemption, or its equivalent, under the regulatory statute itself.
This is true even where the agency is required to take antitrust
considerations into account in approving the transaction or
agreement and,
a fortiori, where there is no evidence that
such factors played any part in agency approval.
Here, the Court finds authority in open-end funds, subject to
Commission approval, to impose restrictions on "negotiability and
transferability"; construes those words generously to include
price-fixing and concerted boycotts; and then concludes that
Commission approval -- rather, its failure to disapprove --
automatically and without more confers antitrust immunity on the
selling practices followed by the particular open-end funds in this
case. This result disregards the fact that there is no express
provision for immunity in the statute, no direction to the
Commission to consider competitive factors, no statutory standard
provided for the Commission to follow with respect to competition
in the investment company business, no indication that the
Commission has considered the competitive impact of the
restrictions at issue here, and no other basis for concluding that
Congress intended the unilateral business judgment of an investment
company, followed by Commission approval, to substitute for and
supplant the antitrust laws.
The position of the Securities and Exchange Commission, as
described and embraced by the Court, is that "its authority will be
compromised" if industry practices which the Commission has the
power to approve are subject to scrutiny under the antitrust laws.
See ante at
422 U. S. 729.
But the Commission has made no effort to analyze and
Page 422 U. S. 746
explain the need for these seriously anticompetitive
re-restrictions in the mutual fund industry. It has never
affirmatively and formally approved the specific practices involved
in this case, by rule or adjudication. Until recently, it has
seemingly left investors and the public to the tender mercies of
the industry itself. In fashioning antitrust immunity for these
practices, the majority acts in complete disregard of the basic
approach mandated by our cases, including the principles approved
by the unanimous Court in
FMC v. Seatrain Lines, Inc.,
supra:
"The Commission vigorously argues that such agreements can be
interpreted as falling within the third category -- which concerns
agreements 'controlling, regulating, preventing, or destroying
competition.' Without more, we might be inclined to agree that many
merger agreements probably fit within this category. But a broad
reading of the third category would conflict with our frequently
expressed view that exemptions from antitrust laws are strictly
construed,
see, e.g., United States v. McKesson & Robbins,
Inc., 351 U. S. 305,
351 U. S.
316 (1956), and that"
"[r]epeals of the antitrust laws by implication from a
regulatory statute are strongly disfavored, and have only been
found in cases of plain repugnancy between the antitrust and
regulatory provisions."
"
United States v. Philadelphia National Bank,
374 U. S.
321,
374 U. S. 350-351 (1963)
(footnotes omitted). As we observed only recently:"
"When . . . relationships are governed in the first instance by
business judgment, and not regulatory coercion, courts must be
hesitant to conclude that Congress intended to override the
fundamental national policies embodied in the antitrust laws."
"
Otter Tail Power Co. v. United States, 410 U. S.
366,
410 U. S. 374 (1973).
See also Silver v. New York Stock
Exchange, 373 U.S.
Page 422 U. S. 747
341 (1963);
Pan American World Airways, Inc. v. United
States, 371 U. S. 296 (1963);
California v. FPC, 369 U. S. 482 (1962);
United
States v. Borden Co., 308 U. S. 188 (1939). This
principle has led us to construe the Shipping Act as conferring
only a 'limited antitrust exemption' in light of the fact that
'antitrust laws represent a fundamental national economic policy.'
Carnation Co. v. Pacific Westbound Conference, 383 U.S. at
383 U. S. 219, 218."
411 U.S. at
411 U. S.
732-733 (footnotes omitted).
III
Exempting the NASD from antitrust scrutiny based on the
existence of Commission power to approve or disapprove NASD rules
is likewise unacceptable under our cases for very similar reasons.
The majority relies on
Hughes Tool Co. v. Trans World
Airlines, 409 U. S. 363
(1973), and
Pan American World Airways v. United States,
371 U. S. 296
(1963). But in
Hughes, exemption for the transactions
there involved was based on the express immunities conferred by
§ 414 of the Federal Aviation Act, and in
Pan
American, immunity followed from the Board's authority to
adjudicate unfair competitive practices in accordance with the
distinctive competitive standard Congress itself supplied in the
regulatory statute. Nothing comparable is to be found in the
relevant provisions of the statutes involved here.
It is especially interesting to find the Court, on the one hand,
concluding that the selling practices under scrutiny here are
essential to the working of the statutory scheme, but, on the other
hand, recognizing that the Commission itself has requested that the
NASD rules be amended to prohibit agreements between underwriters
and broker-dealers that preclude broker-dealers, acting as agents,
from matching orders to buy and sell fund
Page 422 U. S. 748
shares in . a secondary market at competitively determined
prices and commission rates.
Ante at
422 U. S.
718-719, n. 31.
The majority's opinion, as a whole, seems to me to reject the
basic position found in our cases that "antitrust laws represent a
fundamental national economic policy. . . ."
Carnation Co. v.
Pacific Conference, 383 U. S. 213,
383 U. S. 218
(1966). I cannot follow that course, and, accordingly, dissent.