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JACOBI v. BACHE & CO.

June 3, 1974

L. John Jacobi et al., Plaintiffs,
v.
Bache & Co., Inc., et al., Defendants


Ward, District Judge.


The opinion of the court was delivered by: WARD

WARD, District Judge.

This is an antitrust action brought by two former registered representatives of member organizations of the New York Stock Exchange, Inc. ("the Exchange") against the Exchange and twenty-seven of its member brokerage firms ("the firms"). Plaintiffs claim to represent the class of all registered representatives employed by the firms from April 2, 1970 through July 25, 1971 who were compensated at least in part by commissions on securities transactions which they effected on the Exchange. This was the period of time during which the Exchange required that a "service charge" of $15 or not more than 50% of the commission be added to the commission charged customers for securities transactions involving under 1,000 shares. Exchange policy, reflected in its Constitution and Rules and in its communications to the firms, required the firms to exclude the service charge from the basis upon which they calculated compensation of the registered representatives. Plaintiffs claim that the firms' concurrence with the Exchange in this policy constituted an agreement in restraint of trade in violation of § 1 of the Sherman Antitrust Act, 15 U.S.C. § 1. They seek treble damages under § 4 of the Clayton Act, 15 U.S.C. § 15, based upon the difference between their actual compensation during that time period and the amount they would have received had the service charge been included in the basis upon which their commissions were calculated.

 For the most part the factual background of this suit is undisputed. During the aforementioned period, member organizations of the Exchange charged commissions for transactions in securities at minimum rates set forth in Article XV of the Exchange Constitution. In turn, they compensated the registered representatives who actually negotiated the transactions, primarily in the form of commissions which were a percentage of the commissions which the firms charged customers. The firms also customarily compensated their registered representatives by salary, bonuses and incentive payments. The precise systems of compensation varied from firm to firm; the percentages applied for the several types of transactions executed, reliance upon a base salary to be supplemented by commission, and incentive or bonus payments were all variable.Direct comparison of the compensation of registered representatives from firm to firm is thus difficult, but the parties do not dispute that competition was in fact intense.

 During late 1969 and early 1970 the firms were experiencing a serious financial crisis, operating at increasing losses, particularly in low volume securities transactions. The minimum commission rate had last been increased in 1958, while costs to the industry had risen by some 60%. The Exchange had retained National Economic Research Associates ("NERA") to conduct studies and to assist in the development of a new commission rate structure, and in February of 1970 presented to the Securities and Exchange Commission ("the Commission") NERA's analysis together with its recommendation for a new rate structure. The Commission's response indicated certain unresolved issues and the need for additional data before approval of the new rates; it appeared that approval of a comprehensive new rate structure would require some time. In the meantime, the increasingly acute financial difficulties of some member firms threatened their continued operation. Advised by NERA, the Exchange recommended that the Commission approve an immediate interim charge, to be called a service charge, in the amount of $15 per transaction but not more than 50% of the commission, to be applied to transactions of under 1,000 shares. According to the Exchange Constitution the Board of Governors could impose such a charge immediately by rule; to levy an equivalent charge by changing the commission rate required an amendment to the Exchange Constitution, which would take six to eight weeks to effect. The Commission, the Exchange, and the firms recognized that this was to be an interim measure, pending the more comprehensive adjustment in the commission rate structure. In mid-March of 1970 the Board of Governors approved in principle the imposition of such a service charge and submitted the proposal to the Commission. On April 2, 1970, the Commission approved the service charge for a period of 90 days, subject to review at the end of that time, and upon the conditions that services to small investors not be curtailed, that the income be used wisely for the improvement of the financial position of the member firms, and that the revenue accrue to the firm effecting the transactions. Accordingly, the Exchange did not include the service charge in the basis upon which it calculated its own charge to the firms, amounting at that time to 1% of the commissions each firm collected.

 In addition, in a memorandum to the member firms announcing the imposition of the service charge, the Board of Governors of the Exchange called their attention to Article XV of the Exchange Constitution and to Rule 347(a). It stated that the service charge was not to be passed along directly to the registered representatives as part of their commission. It added, however, that the firms remained free, as always, to compensate their registered representatives according to their own individual policies. Thus, while the service charge could not be passed along directly, in effect the increased revenue could be used at least in part to compensate registered representatives if the firms so chose.

 Article XV, § 1 of the Exchange Constitution provided:

 
No bonus or percentage or portion of a commission, whether such commission be at or above the rates herein established, or any portion of a profit except as may be specifically permitted by the Constitution or a rule adopted by the Board of Governors, shall be given, paid or allowed, directly or indirectly, or as a salary or portion of a salary, to a clerk or person for business sought or procured for any member or allied member of the Exchange or member firm or member corporation.

 Article XV, § 9, which provided for service charges, contained similar language requiring that they be free of any rebate or commission unless expressly permitted by rule of the Board of Governors.

 Rule 347(a) of the Rules of the Board of Governors authorized compensation to registered representatives, in the form of salary, commission, percentage of the profit of the office, or bonus. It contained no provision for compensation directly based on service charges. Thus, unless the Board of Governors were to amend Rule 347(a), the Constitution forbade directly passing along any of the service charge income to the registered representatives.

 The draftsmen of the rules effectuating the service charge at one point contemplated such an amendment to Rule 347(a). A preliminary memorandum, not even officially submitted to the Board of Governors, did contain language to this effect. But the version considered by the Board of Governors on March 18, 1970 did not. Neither party has offered competent testimony concerning the reasons for this change. The Commission itself considered only the later draft, which contained no mention of registered representatives compensation.

 At the close of the 90-day period the Commission held public hearings to review the service charge, and conditioned its continuing approval upon additional requirements. For example, it required the Exchange and member firms to treat the service charge as part of commission income for purposes of calculating "regular-way reciprocity" with non-member brokerage firms. The registered representatives had objected to the Exchange's rule prohibiting sharing of the service charge with them. The Commission replied by disclaiming any responsibility to intervene in firms' policies concerning compensation to registered representatives, unless a showing were made that such intervention was necessary for the protection of investors. The Commission then approved indefinite continuance of the service charge, reserving the right to rescind its approval at any time that should appear necessary.

 The service charge remained in effect until March 24, 1972, when it was replaced by a revised commission rate schedule. During that time none of the member firms included the service charge in the base commission upon which they calculated the compensation due their registered representatives. Compensation practices of member firms continued to vary widely, and competition for the services of the registered representatives continued unabated. The firms retained the service charge as part of their operating revenue, and the Exchange continued to monitor the effect of the increased revenues upon their profits. The Exchange judged that while to some extent the erosion of capital and the heavy losses which had prompted the charge had been stemmed, a significant number of firms continued to sustain losses on transactions of under 1,000 shares.

 The registered representatives do not contend that the service charge was unnecessary, nor dispute the importance of enacting it quickly. Their claim is that since no additional services were in fact performed, in substance it was a commission rate increase, and should have been considered such for purposes of their compensation. The Exchange's deliberate policy of excluding the service charge from the basis upon which their compensation was calculated, in which the member firms concurred by adhering to the Constitution and Rules of the Exchange, is, plaintiffs claim, a violation of the antitrust laws.

 Defendants, on cross-motions for summary judgment prior to trial, contended that the Securities and Exchange Commission had exclusive or primary jurisdiction over this matter, and that the antitrust court was therefore without jurisdiction to decide it. For the reasons which follow, this Court rejected ...


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