In re National Association of Securities Dealers, Inc.

Exchange Act Release No. 17371 (1980)

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In re National Association of Securities Dealers, Inc.

Securities and Exchange Commission
Exchange Act Release No. 17371 (1980)

Facts

A mutual fund had an investment adviser. The adviser was also an underwriter and registered broker-dealer with the National Association of Securities Dealers (NASD). The mutual fund’s shareholders sued the adviser for not using a technique called underwriting recapture to benefit the mutual fund. The shareholders argued that the adviser could have used its underwriting and broker-dealer status to buy discounted securities during underwritten offerings, sell the securities to the mutual fund at the required fixed price, and use its gain from the sale to offset the management fee it charged to the mutual fund. The adviser argued that the NASD’s Rules of Fair Practice did not allow underwriting recapture, but the court ruled for the shareholders. The adviser asked NASD for clarification about its rules. Ultimately, the NASD asked the Securities and Exchange Commission for permission to amend some of the NASD’s rules to clarify that underwriting recapture was not allowed. The amendments did this, in part, by forbidding broker-dealers from selling securities that were part of new fixed-price offerings to anyone who was related to the selling entity. The Securities and Exchange Commission accepted public input and considered the proposed amendments.

Rule of Law

Issue

Holding and Reasoning ()

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