From 1963 to 1973, the SEC addressed concerns about the commission rate structure, stock exchange membership rules, and problems created in processing stock sales created by the tremendous increases in market volume. Because these issues involved economic, not anti-fraud, concerns, the SEC faced a dilemma as it began to address these concerns.
The SEC had built its regulatory experience around the principles of fiduciary responsibility and full disclosure. It needed to develop an alternative approach to address economic concerns not resolved solely by resorting to principles of fiduciary duty or increased disclosure. The search for an economics-based theory of regulation would challenge the SEC throughout this entire period.
Relying on Section 19(b) of the 1934 Act, which allowed the SEC "to alter or supplement" registered stock exchange rules when "necessary or appropriate for the protection of investors or to insure fair dealing" including "fixing reasonable rates of commission," the SEC began to consider regulatory options. It took a cooperative approach in nudging the New York Stock Exchange to consider and then reform its own commission rate structure, membership rules and back-office procedures for processing stock transactions.
At the same time, a variety of private litigants initiated suit against the NYSE, challenging its fixed commission rate structure under the federal anti-trust laws. Central to the plaintiffs' complaints was an economic argument that promoted competition as a way to reduce costs to investors and promote market efficiency. While the appeals court dismissed the case in Kaplan v Lehman (1967), Chief Justice Earl Warren dissented from the Supreme Court's denial of review. Chairman Cohen read Warren's dissent as a warning to the SEC that it had better get involved in the regulation of commission rates, lest the anti-trust provisions of federal law preempt the possibility of future SEC regulation.
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