Securities regulation in the shadow of the antitrust laws: the case for a broad implied immunity doctrine.

• Author: Kling, Jacob A.

NOTE CONTENTS INTRODUCTION I. A DOCTRINAL DEFENSE OF BILLING A. The Trio of Pre-Billing Implied Immunity Cases B. The Decision in Billing C. Billing Is Consistent with Precedent II. THE RISK OF OVERDETERRENCE A. The False Positives Concern 1. The SEC's Comparative Advantage 2. Counterarguments to the SEC's Comparative Advantage a. Is the SEC Focused on Competition? b. Agency Capture c. The Unavailability of Treble Damages B. The Excessive Liability Concern 1. The Competitive Nature of the Securities Markets 2. The Effect of the Variance of Antitrust Damage Awards III. THE OPTIMAL IMPLIED IMMUNITY STANDARD A. The Effect of Time Constraints on SEC Regulation B. The Ability of Courts To Interpret SEC Regulations Correctly CONCLUSION INTRODUCTION

In Credit Suisse Securities (USA) LLC v. Billing, (1) the Supreme Court held that an antitrust suit challenging various alleged concerted marketing activities of underwriters of initial public offerings (IPOs) was impliedly precluded by the securities laws. The Court found the underwriters, whose actions included requiring customers to agree to purchase additional securities following the IPO, immune from antitrust liability based on the incompatibility of the securities laws and antitrust laws, even though the Securities and Exchange Commission (SEC) had condenmed much of the conduct alleged in the plaintiffs' antitrust complaint. (2) The Court reasoned that the distinction between activities that the SEC permits and those that it prohibits can be very fine and is subject to change and that "nonexpert" judges and juries are likely to have a comparative disadvantage in determining on which side of the line a particular activity falls. (3) In the Court's view, the possibility that courts adjudicating antitrust claims ("antitrust courts") might "make unusually serious mistakes" in this area would have a chilling effect on the securities industry, (4) and this justified giving the SEC exclusive jurisdiction over the underwriting activities at issue. (5)

The decision in Billing has generated significant criticism. A number of commentators have argued that the Court was wrong to focus on the potential for erroneous decisions in antitrust cases even when the SEC has not explicitly given the conduct in question its imprimatur or, as in Billing itself, when the SEC has in fact prohibited the conduct. (6) These critics have argued that a finding of implied immunity cannot be predicated merely on the SEC's jurisdiction over, or even review of, a particular class of conduct unless the SEC affirmatively permits the conduct and thereby immunizes it from an antitrust challenge. (7) Several commentators have also expressed concern that, as a policy matter, the preclusion of antitrust suits may lead to the underdeterrence of anticompetitive conduct in the securities industry. (8)

This Note responds to such criticism by offering both a doctrinal and a normative defense of the Court's implied immunity analysis in Billing. The Note proceeds in three Parts. Part I presents a doctrinal argument in support of Billing. It contends that critics of the decision have mischaracterized the relevant precedents and have invoked untenable bases on which to distinguish them from Billing. Instead, it argues that the Court's interpretation of the securities laws as impliedly precluding antitrust suits even in the absence of a manifest conflict between substantive securities and antitrust law is consistent with Supreme Court precedent in this area. (9)

The subsequent two Parts map out a normative argument in support of Billing's broad implied immunity standard. Part II argues that the SEC, which has an obligation to consider competition effects when promulgating regulations, (10) possesses a comparative advantage over antitrust courts in determining the scope of permissible conduct in the securities industry and that the latter can be expected both to prohibit socially beneficial conduct and to impose excessive liability, even for activities that should be prohibited. The risk of false positives in antitrust cases stems from antitrust courts' relative lack of securities expertise and antitrust law's narrow focus on competition to the exclusion of other legitimate policy goals in the securities area. (11) In addition, the competitive nature of the securities industry (12) and the greater variability of antitrust jury awards as compared to analogous penalties in SEC enforcement actions (13) suggest that antitrust courts may impose excessive damages even in cases in which they correctly determine that an activity merits prohibition.

Part III draws on the inferences from Part II to argue for the efficiency of a broad implied immunity doctrine under which antitrust suits are precluded whenever the SEC has jurisdiction over a particular activity and is actively engaged in reviewing its merits. But whereas the Court's opinion in Billing focused primarily on the possibility that antitrust courts might reach the wrong result ex post, Part III shifts the focus to the SEC's regulatory decisions ex ante. In particular, it argues that under a narrower implied immunity standard, the SEC might forgo a superior and more nuanced regulatory approach in favor of a blanket authorization of a particular practice in order to preempt errors by antitrust courts. The principal benefit of the Court's broad grant of immunity in Billing is that it frees the SEC from having to regulate in the shadow of the antitrust laws in this manner. Paradoxically, this analysis also suggests that a broad implied immunity standard may actually lead to more antitrust enforcement than would a narrower rule.

1. A DOCTRINAL DEFENSE OF BILLING

   Billing has spawned a fair bit of academic criticism. The principal critique leveled against the decision is that the Court was incorrect in finding the securities laws and antitrust laws incompatible given that both regimes appeared to condemn the challenged conduct. (14) This Part argues that such criticism is based on a mischaracterization of the relevant Supreme Court precedents, which instruct that SEC disapproval of an activity is not dispositive to the implied immunity analysis. Billing is therefore consistent with prior cases.

   1. The Trio of Pre-Billing Implied Immunity Cases

      Prior to Billing, the Supreme Court had decided three cases involving assertions of implied antitrust immunity under the securities laws. The first was Silver v. New York Stock Exchange. (15) Silver involved a decision by the New York Stock Exchange to prohibit the use of direct telephone wire connections between exchange members and nonmember broker-dealers. A nonmember brokerage that was unable to obtain price quotations quickly as a result of the rule alleged that the prohibition was a conspiracy in restraint of trade in violation of the Sherman Act. (16) The Court first explained that the removal of the wires would normally constitute a per se violation of section 1 of the Act, since it functioned as a group boycott. (17) However, the presence of a parallel regulatory scheme in the Securities Exchange Act of 1934, and its policy of self-regulation by the national exchanges, meant that the antitrust laws could be applied only if they were reconcilable with the securities laws. (18) Emphasizing the "'cardinal principle of construction that repeals by implication are not favored,'" the Court explained that "[r]epeal is to be regarded as implied only if necessary to make the Securities Exchange Act work, and even then only to the minimum extent necessary." (19) At the time, the Exchange Act required exchanges to register with the SEC and to submit a copy of their rules, which were required to be "'just and adequate to insure fair dealing and to protect investors.'" (20) Although the SEC had the power to disapprove of an exchange's rules, it did not have the authority to review particular instances of the Exchange's enforcement of those rules. (21) Because the SEC lacked such jurisdiction, it was incapable of performing an "antitrust function" sufficient to displace the antitrust laws. (22) Thus, the Court declined to read an implied repeal of the antitrust laws into the Exchange Act. But the Court emphasized the limited reach of its decision, commenting that "[w]ere there Commission jurisdiction and ensuing judicial review for scrutiny of a particular exchange ruling ... a different case would arise." (23)

      Just over a decade later, the Court was presented with such a case. Gordon v. New York Stock Exchange involved a challenge under sections 1 and 2 of the Sherman Act to the fixing of the brokerage commission rates charged by members of the New York Stock Exchange for smaller transactions. (24) As recently amended, the Exchange Act contained a general prohibition against the fixing of commission rates by an exchange but also empowered the SEC to make exceptions permitting an exchange to fix commissions provided that the rates set were reasonable in relation to brokers' costs and did not impose an unnecessary burden on competition. (25) The SEC, moreover, had been continuously engaged in the process of reviewing the practice of rate fixing by exchanges. (26) The Court held that the antitrust claims were impliedly precluded by the securities laws and declined to issue an injunction prohibiting the Exchange from fixing commissions going forward. It distinguished Silver on the ground that the Exchange Act gave the SEC explicit regulatory power to review exchange rules fixing brokers' commission rates, and the SEC had engaged in such review during the preceding years. (27) Given the SEC's clear jurisdiction to regulate the conduct at issue, the Court expressed concern that if the antitrust suit were permitted to proceed, then the exchanges and their members might be subject to conflicting standards. The likely cause of a conflict, the Court reasoned, was that, while the antitrust laws' exclusive objective is to promote...