APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
Burger, Douglas, Brennan, Stewart, White, Marshall, Blackmun, Powell, Rehnquist
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. § 78o-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.
An "investment company" invests in the securities of other corporations and issues securities of its own.*fn1
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.*fn2 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, 547 (1973).
The initial distribution of mutual-fund shares is conducted by a principal underwriter, often an affiliate of
the fund, and by broker-dealers*fn3 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.*fn4
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
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.*fn5 Named as defendants are the National Association of Securities Dealers (NASD),*fn6 and certain mutual funds,*fn7 mutual-fund underwriters,*fn8 and securities broker-dealers.*fn9
The United States charges that these agreements violate § 1 of the Sherman Act, 15 U.S.C. § 1,*fn10 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
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 interdealer transactions by allowing each broker-dealer to sell and purchase shares only to or from investors.*fn11 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
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. § 78o-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, 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.*fn12
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, 348 (1963), the United States urges that the antitrust immunity conferred by § 22 of the Investment Company
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.
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
over the business practices of investment companies.*fn13 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.
The most thorough description of the sales and distribution practices of mutual funds prior to passage of the
Investment Company Act may be found in Part III of the Investment Trust Study.*fn14 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.*fn15 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
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,*fn16 although this advantage
was obtained at the expense of the existing shareholders, whose equity interests were diluted by a corresponding amount.*fn17 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
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.*fn18 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
the NASD and the SEC to regulate certain pricing and trading practices in order to effectuate that goal.*fn19 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
question of potential antitrust liability for the practices here challenged.
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).*fn20 By its terms, § 22(d) excepts interdealer sales from its price maintenance requirement. Accordingly, this section cannot be relied upon by appellees as justification for the restrictions imposed upon interdealer 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.
The District Court's decision reflects an expansive
view of § 22(d). The Investment Company Act specifically defines "broker" and "dealer"*fn21 and uses the terms distinctively throughout.*fn22 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 ...