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PBW Stock Exchange Inc. v. Securities and Exchange Commission

decided: September 28, 1973.



Seitz, Chief Judge, Staley and Adams, Circuit Judges. Adams, Circuit Judge, dissenting.

Author: Seitz


SEITZ, Chief Judge.

Petitioners here appeal directly from the promulgation of Rule 19b-2*fn1 by the Securities and Exchange Commission, effective January 16, 1973. Petitioners invoke the jurisdiction of this court under § 25(a) of the Securities Exchange Act of 1934*fn2 and § 10 of the Administrative Procedure Act. 15 U.S.C. § 78y(a); 5 U.S.C. §§ 702-04 (1971). The rule was not promulgated by an order of the Commission.

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

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

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

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

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

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

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


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

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

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

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

15 U.S.C. § 78s(b).

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

The crux of the problem posed by this procedural discretion vested in the Commission under § 19(b) lies in the terms of the statutory review powers granted this court under § 25(a) of the Exchange Act.*fn3 Although the SEC has the option to proceed either by rule or regulation or by order under § 19(b), § 25 is not similarly broad in its grant of review jurisdiction to this court. Rather, § 25(a) allows review here only when an order has been entered by the Commission. Neither any section of the Exchange Act nor of the APA vests jurisdiction in this court to review on direct appeal from the SEC rules or regulations which it has promulgated.

Despite this seeming statutory preclusion of our entertaining this appeal, petitioners steadfastly contend we have jurisdiction over this appeal. In their attempt to avoid the lack of a jurisdictional grant under the statute for direct appellate review of Commission rules, petitioners seek to show Rule 19b-2 is an order for purposes of the statute: (1) because of its substantive effect upon the business relationships between PBW and its members; and/or (2) because it was primarily aimed against one exchange, the PBW. On the former point, petitioners contend the decision of the Supreme Court in Columbia Broadcasting System v. United States, 316 U.S. 407, 86 L. Ed. 1563, 62 S. Ct. 1194 (1942), and its progeny are dispositive.

To deal with these contentions, we must first examine the structure and underlying legislative history of the Exchange Act, bearing in mind the admonition of the Supreme Court that:

We must look . . . to the language of the statute, read in the light of its purposes and its legislative history, to ascertain whether the order for which review in court is provided is contrasted with forms of administrative action differently described as a purposeful means of excluding them from the review provisions.

AF of L v. NLRB, 308 U.S. 401, 84 L. Ed. 347, 60 S. Ct. 300 (1940).*fn4 After we have completed our examination of these elements, we will turn and consider the petitioners' contentions seriatim.


The Exchange Act was carefully structured to give the regulatory commission which it established powers sufficiently broad that it could effectively oversee the securities industry. The main thrust of the operative provisions of the Act was toward regulation of the nation's stock exchanges and trading thereon. The Act was passed against the backdrop of the catastrophic financial reverses suffered by this country in the period 1929-33. It was designed to supplement the initial efforts to protect investors manifested in the Securities Act of 1933*fn5 and proscribed certain practices which had been regarded as major causes of those reverses in the securities markets. Additionally, it was left sufficiently open-ended that the regulatory agency which it established would have the power to deal with new and as yet unthought of schemes to defraud the investing public and manipulate the securities markets.

Procedurally, the Act is tailored and specific, dictating how functions delegated the Commission shall be handled. Some subsections prescribe an adjudicatory hearing with final issuance of an order; other sections mandate a rule-making proceeding with final promulgation of either a rule or regulation. In only six subsections of the entire Act is the Commission given the option to proceed either by order or by rule or regulation. Section 19(b) is one of those subsections.*fn6

Comparison of § 19(a) and (b) illustrates this careful tailoring and delegation of procedural power. Section 19(a) is the subsection which provides, inter alia, for the disciplining of exchanges which do not comply with, or do not enforce, either the statute or the rules and regulations promulgated thereunder. 15 U.S.C. § 78s(a)(1). In exercising its power to suspend or withdraw the registration of an exchange, the statute specifies that the Commission shall proceed only by order. Thus, exercise by the Commission of the power vested in it by § 19(a)(1) would be immediately reviewable in this court under § 25(a). However, § (b) -- which contains no grant of enforcement power against an exchange -- provides that the Commission can proceed either by rule or regulation or by order. Further, it can proceed by either device even as to only one exchange under the terms of the subsection.

It is against this background that the grant of jurisdiction in § 25(a) must be examined. As with most sections of the Act, it is specific in the type of Commission action over which it allows direct appellate review in the court of appeals: it grants this court only the power to directly review orders of the Commission. Was the exclusion of rules or regulations promulgated by the Commission a deliberate omission? The answer is found in a review of the legislative history of the Act.


Examination of the Congressional history reveals that the omission of rules or regulations from the terms of § 25(a) was no mere oversight on the part of Congress. Rather, it was part of their specific intendment in drafting this legislation. This is most clearly revealed in the House floor debates on H.R. 9323 [73d Cong., 2d Sess.], the bill which eventually became the Securities Exchange Act of 1934.

Although § 19(b) was then numbered § 18(b), the procedural portion of the subsection was practically identical to its current form. The one difference of any notice is that the section at that point specified that the Commission would carry out its duties under § 19(b) only by rule or regulation.

Particularly relevant to our inquiry are the floor debates surrounding the proposed amendment of Rep. Fish of New York to delete the phrase "by rules or regulations" and substitute in the phrase "by order." Rep. Fish stated the purpose of his amendment was to "permit recourse to the courts by the exchange [affected by Commission action], whereas under 'rules or regulations,' the . . . Commission can do about anything it wants to the exchange and its members . . . without the exchange having any recourse whatever to the courts." 78 Cong. Rec. 8087 (5/4/34).

A supporter of the Fish amendment, Rep. Wadsworth, in seeking support for the amendment, clearly defined the purpose of the amendment:

Under this section [as presently drafted], there is no recourse to the court. The final regulation of the Commission cannot be appealed from, and the amendment offered by the gentleman from New York [Mr. Fish] is merely for the purpose of allowing an exchange, in case of an extreme ruling which threatens to injure its legitimate business and the business of buying and selling securities all over the country, the right to appeal.

There are several other instances . . . in which the Commission may, "by order", suspend or put into effect its regulations. The use of the phrase "by order" automatically gives a person or an exchange thus to be regulated the right to appeal.

78 Cong. Rec. 8092 (5/4/34). Rep. Wadsworth contended the Fish amendment additionally would make § (b) consistent with § (a), in which it was specified that the Commission would proceed only by "order." Id.

Opponents of the proposed amendment, who eventually won out, replied that indeed, it was the express intention of the section as drafted to preclude direct appellate review of rules or regulations promulgated by the Commission under § 19(b). Rep. Snell, in response to Rep. Fish stated:

The proposal here is whether there shall be an appeal from the action of the Commission requiring a change in the rules of an exchange.

The section provides that an interested exchange be given the right to a hearing, and after the hearing the Commission by rules and regulations determines whether or not the change in rules shall be made. The practical question is whether or not the exchange shall be given an appeal to a court of law from the ruling of the Commission.

It is important that we shall not give the exchanges the right to appeal and go into court from the action of the Commission in making the rules and regulations. It would subject the Commission to endless harassment.

When we give the Commission the right, by rules and regulations to require that an exchange shall have a certain rule governing its functions, that is a quasi- legislative power of Congress. The Commission acts for Congress in establishing such rule or regulation. No one living ever heard of a claim that an interested party should have the right to restrain the action of Congress in passing laws to regulate the affairs of our country.

78 Cong. Rec. 8090-91.

Similarly, Congress did not mean to make direct appellate review available under § 25 by requiring rules and regulations to be promulgated by order. Rep. Rayburn, the floor manager of the bill, made this clear in opposing Rep. Fish's amendment. He stated:

In my opinion, we have a good bill, a fine, reasonable, sane bill; but if we adopt the amendment offered by the gentleman from New York [Mr. Fish], we shall defeat practically everything we have done in the preceding 40 pages.

In my opinion, the question involved in the Fish amendment is whether or not after writing a law you are going to give the administrative body the power to make the law effective and the power to enforce it.

78 Cong. Rec. 8093.

By later compromise in the Senate-House conference, the option to proceed either by rule or regulation or by order was granted the Commission. However, that in no way vitiated the Congressional feeling as to the insulation from review under § 25(a) enjoyed by a rule or regulation promulgated by the Commission.

Reinforcement on this point is provided in the legislative hearings on § 25(a) before the Senate Committee on Banking and Commerce. The New York Stock Exchange proposed redrafting § 25(a) (§ 24(a) in the bill) so as to give standing to appeal under that section to any party aggrieved by a rule or regulation of the Commission, as well as by an order. The NYSE contended that otherwise, rules or regulations of the Commission would be totally insulated from judicial review.

The committee rejected this change. Senator Barkley, in discussing the proposed change with the NYSE representative, made clear that avenues of review were open. For example, parties who did not wish to comply with the SEC rule could wait for enforcement proceedings to be instituted, and then challenge them in that proceeding. However, the dialogues make clear that although some might feel directly aggrieved by the application of the rule or regulation promulgated by the Commission, appeal under § 25(a) to the court of appeals would not lie. See Hearings on S. Res. 84, S. Res. 56, & S. Res. 97 before Senate Committee on Banking & Currency, 72d Cong., 2d Sess., and 73d Cong., 1st & 2d Sess., at 7568-7572 (1934). In fact, the committee expressly foresaw the type of situation arising where, as here, a party might be equally aggrieved whether the Commission acted by rule or regulation or by order. Even with such recognition, however, they refused to change the provisions of § 25(a).

The worry repeatedly expressed by Congress in these attempts to subject rules and regulations of the Commission to review under § 25(a) was that courts would be substituting their judgment for that of the Commission. While it was recognized that judicial review of some nature of Commission rules or regulations would be possible, particularly on the questions of whether they were constitutional or within the statutory authority of the Commission,*fn7 Congress did not intend to make § 25(a) the vehicle for such review.

Examination of § 25(a) reveals the reason for the Congressional reservations. That section allows the court of appeals, in reviewing a final order entered by the Commission, "to affirm, modify, and enforce or set aside such order, in whole or in part." Further, if the court finds the record deficient, it can remand to the Commission for the taking of further evidence. Thus, under the drafting of § 25(a), the court of appeals, in reviewing Commission orders, has considerable discretion as to the terms under which it will enforce that order.*fn8 Congress did not want such a substitution of the court's view for that of the Commission on legislative policy matters.

At the time of the enactment of the Exchange Act, there was neither the APA nor the Declaratory Judgment Act. Thus, as to legislation, no preenforcement declaratory review was available. However, judicial review of federal legislation was always available, even if only in the enforcement proceeding itself; parties could challenge the constitutionality of an act or the regularity of its enactment. Consequently, when Congress stated that it intended to insulate rules and regulations of the Commission to the same degree that acts of Congress were insulated from judicial review, it was circumscribing very closely the limits of judicial cognizance of quasi-legislative action by the Commission.*fn9 Allowing judicial review of the type established under § 25(a) of Commission rules and regulations was totally incompatible with the legislative powers delegated to the Commission and which Congress intended to be shared by the Commission only with Congress itself.

Despite the bulk and substance of the legislative history of the Exchange Act against their position, petitioners take solace from an isolated remark of Rep. Rayburn concerning the availability of appeal from Commission rules or regulations whose promulgation "exceeded its jurisdiction and its authority under the act." 78 Cong. Rec. 8091. However, his later amplification of this remark makes clear he was referring to the limited right to challenge the rule or regulation as one would challenge an act of Congress. 78 Cong. Rec. 8093. Although petitioners would have us equate the word "appeal" with the right to appeal under § 25(a), it is clear from the whole of the history that the appeal which he was referring to in that context was appeal to the courts for judicial review of the statutory or constitutional basis of an action. As with Congressional action, such "appeal" would only lie in an enforcement proceeding or, as postulated by Senator Barkley, after a secondary consideration of the matter as to a particular party by the SEC.

Finally, it is worth noting that Congressional statements about the intention to insulate SEC quasi-legislative action from judicial review was even more imperative at the time than such statements would be considered today. That was because of the aforementioned lack of available alternatives -- such as the APA and the Declaratory Judgment Act -- for seeking judicial review of congressional or quasi-legislative action.

Thus, an examination of the legislative history reveals a clear and unequivocal intention to insulate Commission rules or regulations from review under § 25(a). Having the benefit of this history, we can now turn to relevant Supreme Court decisions to determine whether intervening precedent has modified the impact of the legislative history as it relates to the question of § 25 review of Commission rules and regulations.


We believe the starting point for our discussion must be AF of L v. NLRB, 308 U.S. 401, 84 L. Ed. 347, 60 S. Ct. 300 (1940). There, the Court was faced with a petition by the AF of L and its affiliated unions seeking review of a Board certification of the CIO-affiliated union as bargaining representative for the West Coast longshoremen. Petitioners contended that the certification was a "final order" of the Board, that they were aggrieved by the "final order," and that the ...

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