ANALYSIS: Securities Markets Face Scrutiny Under Antitrust Bill

Under the proposed Competition and Antitrust Law Enforcement Reform Act of 2021 (CALERA), conduct in regulated securities and commodities markets that has enjoyed a complete pass from antitrust scrutiny for decades would be subject to lawsuits seeking treble damages.

That could be a bigger shift than some are expecting. While much of the analysis of CALERA to date has focused on its likely impact on technology markets and merger enforcement, the potential impact on securities markets is profound. Financialization has meant that markets regulated by the securities acts have an outsized impact on the overall economy, and the impact of permitting full antitrust enforcement in those areas likely would be sizeable.

Narrowing the Antitrust Exception

With CALERA (S 225), Sen. Amy Klobuchar (D-Minn.) has proposed sweeping changes to antitrust law. Among CALERA’s provisions are new legal standards that would radically change merger enforcement and reinvigorate enforcement against dominant companies.

But also tucked into CALERA are sections that would all but end a fairly obscure judicial doctrine called “implied immunity.” The doctrine currently disallows antitrust complaints about conduct that is regulated under another complex federal statutory framework. In other words, where Congress is silent on the issue of antitrust law overlapping with another statute, courts have occasionally stepped in to close off areas from antitrust scrutiny.

The defense of “implied immunity” doesn’t come up that often, and it is mostly successful in securities markets. Defendants have long argued that applying antitrust law to conduct that is legal under the securities laws infringes on the regulatory authority of the Securities and Exchange Commission and harms financial markets. Core functions of the securities market, like participating in exchanges and listing and selling stocks and options, should only be subject to one set of rules, they argue.

Right now, if the securities acts apply to conduct related to core securities market functions—and the SEC doesn’t explicitly forbid that conduct—then that conduct can be immune from antitrust claims. CALERA would greatly narrow that rule: Instead, implied immunity could only attach to conduct that other laws “explicitly require or authorize.” In short, conduct within the vast gray areas of the securities law wouldn’t qualify for implied immunity under CALERA; only conduct that the securities laws “explicitly require or authorize” would.

Furthermore, CALERA says that the antitrust laws “shall be applied fully and without qualification or limitation, and the scope of the antitrust laws shall not be defined more narrowly on account of the existence of Federal rules, regulations, or regulatory agencies or departments.” That language counters a Supreme Court statement in Verizon Comm. Inc. v. Law Offices of Curtis V. Trinko LLP that a regulatory framework designed to deter anticompetitive harm probably doesn’t warrant the addition of antitrust scrutiny, even if Congress explicitly preserved the application of the antitrust laws to that regulatory framework.

Together, these provisions mean that courts can’t second-guess whether the antitrust laws should apply to conduct in regulated markets, or water down the antitrust laws when applying them to that conduct. Unless the regulator explicitly permits or requires the conduct, market participants can challenge it under the Sherman Act.

What Conduct Is at Risk?

In practice, few antitrust defendants have successfully pleaded implied immunity from the federal antitrust laws in court. Nevertheless, a wide variety of defendants have argued that their conduct should be immune from the antitrust laws.

Cases in which the defense was raised have included not only antitrust claims against financial market conduct, but also complaints about anticompetitive conduct in, patent infringement, horse racing, merging hospitals, and seeking FDA approval for a generic drug.

Most successful cases have been in the securities or commodities context. The current test for implied immunity comes from Credit Suisse Securities (USA) LLC v. Billing, a 2007 Supreme Court decision that dismissed claims that underwriters colluded to drive up prices for initial public offerings (IPOs). Specifically, the plaintiffs complained about underwriting contracts that required them to buy shares at prearranged escalating prices in the aftermarket in order to get access to an IPO, a practice called “laddering.” Laddering isn’t currently permitted under Regulation M (and was at best disfavored in 2007 when the Court decided Credit Suisse); however, the Supreme Court held that it can only be addressed by the SEC and not by those harmed by inflated share prices under the Sherman Act.

Other financial markets practices shielded under the doctrine have included underwriting contractual provisions prohibiting “flipping” (immediately reselling) of IPO shares, restricting trade in stock options, charging fixed commission rates for stock trades, and restricting trade in mutual funds on the secondary market.

In short, if the myriad kinds of restrictive conduct that are explicitly intended to boost prices for stocks and derivatives become subject to the antitrust laws, many practices, at all levels of the financial system, are likely to come under scrutiny. That scrutiny could include enforcement actions by federal or state regulators or private actions for treble damages under the Sherman Act.

Narrow Wedge, Big Shift

For decades, the markets around the offering and listing of stocks have been largely a walled garden, protected from pruning by the Sherman Act. There is likely a lot that would interest plaintiffs in that overgrowth. That’s an issue that investment bankers, brokers, compliance professionals, and lawyers may need to assess.

All of that depends, of course, on whether CALERA looks likely to be enacted. The key issue, therefore, is which parts of Klobuchar’s proposals have enough bipartisan support to get through the Senate.

More fundamentally, however, the implied immunity provision of CALERA expresses a belief that the antitrust laws should be at least on equal footing with other federal statutes. Aside from shining a light on financial markets, therefore, ending implied immunity would remove a tool that Klobuchar believes judges have used to de-fang the Sherman and Clayton Acts. If that sentiment survives in CALERA’s text, it could signal a new phase of antitrust enforcement.

With assistance from Peter Rasmussen, Legal Analyst, Bloomberg Law.

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