General Bond & Share Co. v. SEC

39 F.3d 1451 (1994)

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General Bond & Share Co. v. SEC

United States Court of Appeals for the Tenth Circuit
39 F.3d 1451 (1994)

  • Written by Sharon Feldman, JD

Facts

General Bond & Share Company (GB) (defendant) was a member of the National Association of Securities Dealers (NASD), an association registered with the Securities and Exchange Commission (SEC) (plaintiff). Issuers paid GB for entering its name in the pink sheets as a market maker for the issuers’ over-the-counter securities. In 1990, the NASD advised GB’s president that members were prohibited from accepting issuer-paid compensation for market-making and provided a 1975 notice advising members that the practice might violate antifraud provisions. Neither the notice nor any similar document was filed with the SEC. GB agreed, but failed, to refund a fee and stop accepting issuer-paid compensation. The NASD brought disciplinary actions, alleging, inter alia, that GB’s acceptance of fees after being notified it was improper and representing it would stop violated Article III, § 1 (§ 1) of the NASD’s Rules of Fair Practice, which required members to observe high standards of commercial honor and just and equitable trade principles. The NASD censured, expelled, and fined GB. The SEC upheld the sanctions. GB asked the Tenth Circuit to vacate the sanctions, arguing, in part, that the NASD’s interpretation that accepting issuer compensation violated § 1 was a rule change and its enforcement against GB was invalid under 15 U.S.C. § 78s(b)(1), which prohibited rule changes from taking effect without SEC approval. The SEC maintained that it was not until after the 1975 Securities Act amendments defined an association’s rules to include stated policies, practices, and interpretations that the issuance of an NASD interpretation was considered a rule change.

Rule of Law

Issue

Holding and Reasoning (Brown, J.)

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