date of the rule (the effectiveness of which has been suspended to the present time by subsequent orders) 15 was to provide an opportunity for discussion with over-the-counter dealers and their organizations as to a more precise formulation of prohibitions against manipulative practices in the over-the-counter markets. If we had said no more, the form of Rule X-10B-4 might have caused the industry to be less sharply aware of the scope of Section 15 (c) (1) and Rule X-15C1-2. However, the release of May 3, 1938, contained the following statement: "The Commission at the conference pointed out that the rule as originally adopted in no way altered its prior policy, but was a mere codification of interpretations of the Securities Exchange Act of 1934 as reported in opinions of the General Counsel which had been issued from time to time."

Section 15A (popularly referred to as the Maloney Amendment) became law on June 25, 1938. Thereafter, on November 1, 1938, we postponed indefinitely the effectiveness of Rule X-10B-4. 16 In that release it was stated that

This postponement was occasioned by the Commission's anticipation that one or more national securities associations composed of over-the-counter dealers will become registered as such under Section 15A of the Securities Exchange Act of 1934 (The Maloney Amendment). If these associations complete their registrations within a reasonable time, the Commission will then collaborate with them with a view to determining the most effective measures to deter manipulative practices in securities not admitted to trading on exchanges.

It was also again pointed out that despite the continued suspension of the rule "certain activities with respect to a security not registered on any national securities exchange which would violate Section 9 (a) of the Securities Exchange Act, if they related to a security registered on a national securities exchange will, generally speaking, violate Section 15 of that Act as well as Section 17 (a) of the Securities Act of 1933." Thus, the releases were intended to make it clear that Rule X-10B-4 in no way affected the prohibitions against manipulation of unlisted securities contained in Section 15 (c) (1) and the rules promulgated thereunder." However, since it does not appear that the

15 Securities Exchange Act Release Nos. 1771, 1809, 1925.

10 Securities Exchange Act Release No. 1925.

17 A summary of the history of Rule X-10B-4, its purpose, and effect was given in an address by Francis T. Greene, assistant director of the Trading and Exchange Division, before the National Association of Securities Dealers, Inc., on February 19, 1941. This address includes the following statement:

"Prior to 1938 the Commission's General Counsel on numerous occasions had rendered opinions to the effect that the statutory prohibitions against fraud and the use of manipulative, deceptive or other fraudulent devices or contrivances prohibit raising prices or quotations of a security in the over-the-counter market for the purpose of inducing others to buy that security. As early as August 1937 the Commission had promulgated a rule-Rule X-15C1-2-which expressly prohibited brokers and dealers from engaging in any act or (Footnote 17 continued on p. 331.)

rule will be helpful as a clarification and since its present status may lead to confusion, we shall repeal the rule and it will be stricken from our next revised compilation of Rules and Regulations under the Securities Exchange Act. The repeal of the rule will in no way affect the present status of over-the-counter manipulation of an unlisted security. Such manipulation will continue to be as it always has been—a violation of the common law, of Section 17 (a) of the Securities Act, and of Section 15 (c) (1) of the Securities Exchange Act and Rule X-15C1-2 thereunder.

As we have pointed out, the question discussed above was not specifically raised on behalf of any of the respondents in this proceeding. However, in view of the possibility that the form of Rule X-10B-4 might have caused the respondents to be less sharply aware of the scope of Section 15 (c) (1) and the rules thereunder, and since this is the first proceeding before us involving a manipulation of the over-the-counter market for an unlisted security, we believe that we may properly impose upon the respondents penalties in keeping with their relative culpability but less severe than would otherwise be warranted. At the same time, we wish to emphasize that such leniency will not be regarded by us as a precedent in future cases of this character. Accordingly, we find that it is neces

Footnote 17 continued:

The

practice which operates or would operate as a fraud or deceit upon any person. Commission has always considered that this prohibition is broad enough to embrace manipulation.

"Since the General Counsel had expressed this view on several occasions, the Commission in the spring of 1938 promulgated a rule, then known as Rule GB4, which specifically provided, in line with this well settled view, that the express antimanipulative provisions of Section 9 (a) of the Exchange Act against wash sales, matched orders and transactions designed to stimulate buying or selling by others should be applicable to the over-the-counter market, regardless of whether the security was or was not registered on a national securities exchange. However, at the request of certain representatives of the over-the-counter securities industry who claimed that some portions of the language of Section 9 (a) of the Act were not appropriate to over-the-counter markets, the application of this rule, now known as Rule X-10B-4, to those markets was indefinitely suspended.

"During our conferences with your representatives about this rule and its suspension, I do not recall that any claim was made by them that the basic principles of Section 9 (a) (2) of the Act were not, and should not be, just as applicable to the over-the-counter market as to exchanges. The viewpoint of the industry, as I understood it, was limited to the contention that certain of the wording of Section 9 (a) (2), which had been enacted with the mechanics of stock exchange trading primarily in mind, would create doubts, confusion and uncertainty if applied verbatim to the counter market. In other words, the dispute was confined to a question of drafting, not to questions of substance. It was mainly for this reason that Rule X-10B-4 was suspended in relation to securities not traded on any exchange. The rule, however, has been in full effect so far as exempt exchanges are concerned.

"Some confusion appears to exist, at least judging from certain newspaper comments, as to the effect of the Commission's partial suspension of the rule. Therefore, I should reemphasize that the suspension of this particular rule does not render lawful any over-thecounter manipulation which would otherwise be unlawful under the general fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. At the time of the initial suspension of the rule, the Commission sought to make it clear that the statutory prohibitions against fraud or the use of 'any manipulative, deceptive or other fraudulent device or contrivance' were alone effective prohibitions against over-the-counter transactions which violate the principles of Section 9 (a) (2) of the Act."

sary and appropriate in the public interest and for the protection of investors and to carry out the purposes of Section 15A of the Securities Exchange Act of 1934 to order the suspension from the National Association of Securities Dealers, Inc., of Barrett & Company for a period of 6 weeks, of Satterfield & Lohrke for a period ́of 4 weeks, and of Bond & Goodwin, Inc., for a period of 2 weeks.

There is also before us a petition filed by Bond & Goodwin Incorporated of Illinois which is a subsidiary of, and is controlled by, respondent Bond & Goodwin, Inc., of Massachusetts. The petitioner is a member of the National Association of Securities Dealers, Inc., and it is alleged that, if an order is entered suspending the membership of respondent Bond & Goodwin, Inc., petitioner will, on the effective date of such order, also be suspended from membership in the Association under Section 15A (b) (4) of the Securities Exchange Act and the bylaws of the Association, unless the Commission approves or directs that petitioner be continued in membership.18 The petitioner requests an order approving or directing that its membership should not be suspended by reason of any suspension order directed against Bond & Goodwin, Inc., of Massachusetts. The Association has filed a document in which it "consents" that the relief sought in the petition be granted.

It appears that the business of the petitioner is conducted as an independent entity, entirely separate and distinct from Bond & Goodwin, Inc., of Massachusetts. None of the charges directed against respondent Bond & Goodwin, Inc., is directed against or applies to the petitioner and the record does not indicate that the petitioner was in any way involved in the transactions heretofore discussed. Moreover, the petitioner has stated that, if the relief sought is granted, it:

will not, directly or indirectly, use the rights or privileges accruing to it by virtue of its membership in said Association to enable said Bond & Goodwin, Incorporated, directly or indirectly, to avoid the effect of any order of the Commission suspending or expelling said Bond & Goodwin, Incorporated, from membership in said Association.

Accordingly, we find that it is appropriate in the public interest to grant approval that petitioner, Bond & Goodwin Incorporated of

18 Section 15A (b) (4) provides, in part, as follows:

(b) An applicant association shall not be registered as a national securities association unless it appears to the Commission that

(4) the rules of the association provide that, except with the approval or at the direction of the Commission in cases in which the Commission finds it appropriate in the public interest so to approve or direct, no broker or dealer shall be admitted to or continued in membership in such association, if indirectly controlling

order of the Commission
securities association

any person directly or such broker or dealer is subject to an suspending him from membership in a registered

Illinois, should not be suspended from membership in the National Association of Securities Dealers, Inc., by reason of the suspension order to be entered against respondent Bond & Goodwin, Inc., of Massachusetts.

Appropriate orders will issue in accordance with this opinion.

By the Commission: (Chairman Eicher, Commissioners Healy, Henderson and Pike).

9 S. E. C.

APPENDIX A

Order for Proceedings and Notice of Hearing on the Question of Suspension or Expulsion from Membership in the National Association of Securities Dealers, Inc.

I

The Commission's public official files disclose that:

(a) Barrett & Company, of Providence, R. I., a partnership, is now and at all times herein mentioned has been registered as an over-the-counter broker and dealer under Section 15 of the Securities Exchange Act of 1934 and is now a member of National Association of Securities Dealers, Inc., a national securities association registered under Section 15A of said Act;

(b) W. Stanley Barrett, of Providence, R. I., is now and at all times hereinafter mentioned has been a partner of said Barrett & Company;

(c) Bond & Goodwin, Incorporated, of Boston, Mass., a corporation, is now and at all times herein mentioned has been registered as an over-the-counter broker and dealer under Section 15 of the Securities Exchange Act of 1934 and is now a member of National Association of Securities Dealers, Inc., a national securities association registered under Section 15A of said Act;

(d) Satterfield & Lohrke, of New York, N. Y., a partnership, is now and since July 19, 1939, has been registered as an over-thecounter broker and dealer under Section 15 of the Securities Exchange Act of 1934 and is now a member of National Association of Securities Dealers, Inc., a national securities association registered under Section 15A of said Act;

(e) At all times mentioned herein American Wringer Company, Inc., a corporation, had only one class of authorized capital stock, to wit, 135,000 shares of $10 par value common stock, of which over 100,000 shares had been issued and were outstanding. Said stock is not now and at no time herein mentioned has been registered on or admitted to unlisted trading privileges on any national securities exchange;

(f) On January 8, 1940, American Wringer Company, Inc., filed with this Commission a registration statement, under the Securities Act of 1933, covering 32,915 shares of its stock to be offered to the public at $12.50 per share by Barrett & Company, Satterfield & Lohrke, and Bond & Goodwin, Inc., as underwriters; of this amount about 23,715 shares represented stock authorized but presently unissued, 4,200 shares were outstanding and owned by Henry Salomon, a director of said corporation, and 5,000 shares were outstanding and owned by said Barrett & Company; and

(g) Said registration statement never became effective and on February 12, 1940, said American Wringer Company, Inc., requested permission to withdraw said statement, to which the Commission, by order, consented on February 14, 1940.

II

Members of its staff have reported to the Commission that, as a result of an investigation of the activities of Barrett & Company,