11

within the meaning of Rule U-12F-2 (a) (2). However, A. C. Allyn & Company, Incorporated, has agreed to participate in the management of the underwriting syndicate of the above issue, subject to the limitations of subparagraph (d) of the said rule, which provides that the term "underwriters fee" shall not be considered to... include any fee paid to an underwriter whose participation does not exceed 5 percent of the total offering, if such underwriter does not receive any commission or remuneration (whether for originating the issue or otherwise) in addition to the fee computed at the rate applicable to other underwriters who take the same or similar participation in the offering.

Likewise, A. C. Allyn & Company, Incorporated, has agreed to forego any management fee. Out of the underwriting spread of two points, the underwriters will pay Bonbright & Company, Incorporated, and Halsey, Stuart & Co., Inc., each, a management fee of % point, and allow a concession of one point to certain selected dealers who, in turn, may reallow a concession of not in excess of 4 point to brokers, investment dealers, and banks for purchases for the accounts of customers. Under the circumstances of the case, it does not appear that the underwriting commissions are unreasonable.

Inasmuch as the proceeds of the bonds are to be used for the refunding of the outstanding bonds of the declarant, and in view of the fact that the bonds are to be a first lien on the physical properties of the declarant, the bonds qualify under the provisions of clause (B) of Section 7 (c) (1) and clause (A) of Section 7 (c) (2) of the Act.

No state commission or state securities commission having advised this Commission that applicable state laws have not been complied with, it appears that the provisions of Section 7 (g) are met.

Upon the facts of this case, the Commission observes no basis for making an adverse finding in respect to any of the matters specified in Section 7 (d) of the Act. An appropriate order will issue.

By the Commission: Chairman Frank and Commissioner Eicher were absent at the time of the Commission's consideration of this case and did not participate therein.

1 Rule U-12F-2. Payment of fees to associates and affiliates in connection with an acquisition or sale of securities.

(a) In connection with an issue, sale, or acquisition of any security with respect to which an application or declaration is required by Sections 6, 7, 10, or 12 (d), (f), or (g) of the Act, no underwriter's or finder's fee shall be paid to

(2) Any affiliate of the applicant or declarant, or of a company of which the applicant or declarant is a subsidiary.

(b) Paragraph (a) of this rule shall not apply in respect of any underwriter's fee if it appears to the Commission that

(1) Appropriate and diligent effort was made to obtain competitive bids for the securities which are the subject of the application or declaration, by publication or otherwise, and the affiliate's bid was not less favorable than that of any other bidders'; or

(2) Such effort was not practicable and (a) the fee to be paid does not exceed customary fees for similar services where the parties are dealing at arm's length, (b) the service rendered is necessary, and (c) the remuneration is reasonable in view of the cost of rendering the service, the time spent therein, and other relevant factors.

[No. 839]

IN THE MATTER OF

Application by NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., for Registration as a National Securities Association

REGISTRATION.

File No. 16-1. Promulgated August 7, 1939

An association of brokers or dealers having applied for registration as a national securities association and having filed a registration statement, pursuant to Rule X-15AA-1, and the Commission having found that the data and the rules of the association contained in such registration statement comply with the requirements of Section 15 A (b), ordered that the application for registration as a national securities association be granted.

FINDINGS AND OPINION OF THE COMMISSION

The National Association of Securities Dealers, Inc. on July 20, 1939, filed an application, pursuant to Rule X-15AA-1 and the provisions of Form X-15AA-1, for registration as a national securities association under Section 15A of the Securities Exchange Act of 1934, as amended. After due notice a public hearing was held before the full Commission on August 1, 1939, on said application. No one appeared except representatives of the applicant and counsel to the Commission. Subsection (e) of Section 15A requires the Commission to grant registration by order provided that the requirements of subsection (b) are satisfied. Hence it is our duty to examine the registration statement in the light of the provisions of said subsection (b).

Subsection (b) (1) 1 deals with the size of the association. Since the applicant has about 1,500 members, which include almost all of the major investment bankers and over-the-counter brokers and dealers, distributed over 44 of the states of the union, it appears to us that the association, as far as its size and importance of the transactions of its members are concerned, will be able to comply with the relevant pro

1 Section 15A (b) (1) reads:

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

by reason of the number of its members, the scope of their transactions, and the geographical distribution of its members such association will be able to comply with the provisions of this title and the rules and regulations thereunder and to carry out the purposes of this section;

5 S. E. C.-34-2211

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visions of the Act and the rules and regulations promulgated thereunder.

2

Subsection (b) (2) concerns itself with the internal organization and character of the association, and raises the question as to whether it is "so organized .. as to be able to . . . carry out the purposes of this section." The broad purpose of Section 15A is cooperative regulation of the over-the-counter business in the public interest and for the protection of investors. The applicant's bylaws reveal that its affairs are to be managed by a national board of governors, 14 district committees and a number of business conduct committees, all consisting of members serving as unpaid volunteers; furthermore, the board of governors may appoint a compensated chief executive officer with assistants and each district committee may, subject to the approval of the board of governors, appoint a district secretary and other employees, who are likewise to be compensated. It therefore is left to the discretion of the board of governors whether the affairs of the association are to be managed largely by a professional staff or by members serving without compensation. Should the board of governors elect the latter course it would appear doubtful whether effective enforcement of the association's rules of fair practice could be secured. It is the opinion of the Commission that such enforcement will, in all probability, require a staff of paid employees to be expanded to a nationwide scale in due course of time, headed up by a chief executive endowed with sufficient powers to render him effective. The Commission, however, in view of the facts (1) that it is not clearly demonstrable that unpaid volunteer committees will be unable to carry out the purposes of the section; and (2) that the mentioned permissive provisions of the bylaws may well be availed of by the board of governors, finds that there is minimum compliance with the provisions of the paragraph under discussion. The Commission feels that it is not jeopardizing the public interest by thus giving the applicant the benefit of the doubt since, under subsection (7) (1), the Commission is empowered, after notice and hearing, to suspend or revoke the registration of a registered securities association if, inter alia, such association has failed to enforce compliance with its own rules.

Section 15A (b) (2) reads:

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

such association is so organized and is of such a character as to be able to comply with the provisions of this title and the rules and regulations thereunder, and to carry out the purposes of this section;

Bylaws, Art. IV, Secs. 1-3, 10, 19, 20; Art. VI.

Bylaws, Art. V, Secs. 2, 6.

6

Subsection (b) (3) deals with the membership rules of the association and permits membership to be limited on certain bases. The applicant's rules limit membership geographically to the 48 states of the union; such limitation appears to the Commission appropriate in the public interest since the applicant might well have difficulty in exercising control over members located in far distant territories or insular possessions. Furthermore, the applicant's rules, when read together with the definition of the term "investment banking or securities business" limit membership to those who carry on the various phases of this business as brokers or dealers; these two terms, again by definition, exclude banks; therefore, banks are not eligible for membership in the applicant association. This limitation presents no basis for denial of registration.

Subsection (b) (4) 10 requires that the applicant's rules provide that, except with the approval of the Commission, no broker or dealer

Section 15A (b) (3) reads:

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

the rules of the association provide that any broker or dealer who makes use of the mails or of any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security otherwise than on a national securities exchange, may become a member of such association, except such as are excluded pursuant to paragraph (4) of this subsection: Provided, That the rules of the association may restrict membership in such association on such specified geographical basis, or on such specified basis relating to the type of business done by its members, or on such other specified and appropriate basis, as appears to the Commission to be necessary or appropriate in the public interest or for the protection of investors and to carry out the purpose of this section. Bylaws, Art. I, Sec. 1.

Bylaws, Art. I, Secs. 1, 3 (c).

Bylaws, Art. I, Sec. 3 (a, b.).

⚫ Cf. Banking Act of 1933, as amended, 48 Stat. 162, 49 Stat. 684.

10 Section 15A (b) (4) reads:

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

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 (1) such broker or dealer, whether prior or subsequent to becoming such, or (2) any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), or any person directly or indirectly controlling or controlled by such broker or dealer, whether prior or subsequent to becoming such (A) has been and is suspended or expelled from a registered securities association (whether national or affiliated) or from a national securities exchange, for violation of any rule of such association or exchange which prohibits any act or transaction constituting conduct inconsistent with just and equitable principles of trade, or requires any act the omission of which constitutes conduct inconsistent with just and equitable principles of trade, or (B) is subject to an order of the Commission denying or revoking his registration pursuant to Section 15 of this title, or expelling or suspending him from membership in a registered securities association or a national securities exchange, or (C) by his conduct while employed by, acting for, or directly or indirectly controlling or controlled by, a broker or dealer, was a cause of any suspension, expulsion, or order of the character described in clause (A) or (B) which is in effect with respect to such broker or dealer.

may be admitted to membership if laboring under certain specified disabilities. Since the applicant's bylaws incorporate this subsection almost verbatim,11 the provisions of this paragraph have been satisfied. Subsection (b) (5) 12 requires that the rules of the association assure each member a fair representation in the various phases of the administration of its affairs. The applicant's rules provide that each member shall have one vote in the election of the governor (or governors) from the member's district 13 and in the election of members to the local district committee; 14 and that amendments to the bylaws 15 and rules of fair practice 16 must be submitted to the whole membership for a vote and will become effective 30 days after such submission only if at least a majority has voted and a majority of those voting has signified its approval. The provisions of this paragraph, therefore, appear to have been satisfied.

17

Subsection (b) (6) 18 requires that under the association's rules dues be equitably allocated to defray reasonable expenses of administration. Under the schedule of dues attached to the bylaws 10 it seems to the Commission entirely arguable that firms with a large personnel will pay a disproportionately small share of the expenses of the association.20 Even though such schedule may not appear to the Commission to be ideal, the Commission is not of the opinion that it can be said to be sufficiently inequitable to fail to meet the statutory requirement. The Commission recognizes the difficulty of foretelling in advance the precise incidence of the proposed method

11 Bylaws, Art. I, Sec. 2.

12 Section 15A (b) (5) reads:

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

*

the rules of the association assure a fair representation of its members in the adoption of any rule of the association or amendment thereto, the selection of its officers and directors, and in all other phases of the administration of its affairs. 18 Bylaws, Art. IV, Sec. 6 (c).

14 Id., Sec. 12 (c).

15 Bylaws, Art. IX.

10 Bylaws, Art. VII, Sec. 1.

17 The schedule of dues, however, may be amended by the board of governors without membership approval, but subject to a veto on the part of the Commission. See bylaws, Art. III, Sec. 1.

18 Section 15A (b) (6) reads:

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

the rules of the association provide for the equitable allocation of dues among its members, to defray reasonable expenses of administration.

19 Bylaws, Schedule A.

20 The membership of the association has expressed itself by a majority of about two to one in favor of the said schedule of dues. This expression of opinion was obtained in a poll conducted jointly by the Commission and the applicant's predecessor, the Investment Bankers Conference, Inc.