INDEX

Page

CItATIONS ............... ....COUNTLiSTAtLNLNI Uhf JJSUJ PRESENtED ... ..........

COUNTER 2k II 1k CASE .........NASU

Ihc Operati and Finincial Crisis Confroiting

he Seruriti Industay ing th PcroC19 370

lh tcreri Against Hagen est ts ndHact

STATUtE Vt OLVED

ARCUMEI

Ut tLJ IlegatLi Pr ers LuNAt Era Err rc tic trot ion

idNot ginthattt citb at the NrdL

Board of Cc Pcw rluss to Implemertwithout Memberhip Vote Temporary Solutionsto Ccntinuing Emergency Situations Threateningthe Int rests of Public investors ............... 23

The Provision for Emergency Rules in the NASDsByLaws Is to Permit the Board of Governors to

Take Effect ye Temporary Stepc to Alleviate EmergencyConditions and Not to Limit the Boards Action

for 60Day Period after Finding the Existenceof an Emergency 27

Petitioners Interpretations of the Maloney Act

and of the Provision of the NASDs ByLawsAuthorizing Emergency Rules Incorrectly Assume

that the NASi Membership Can Repeal Protective

Provisions of the Securities Exchange Act and Just

and Equitable Prnciples of Trade 28

The Commissons Bindin tint the NASDs FailsRules WeLt Adopted in the Face of Continuing

Emergency Is Supported by Substantial Evidence

CONCLUSION 35

STATUTORY APPENDIX Ia

CITATIONS

Ca

A1aenderCoIn S.E.C 1043 1941 ......... 31

An nLvi 29 E.C 514 .w.w.... 31

Assocat ecira Sect tiecoxcbraje Cnunibaoi 293 2d 7P C.A 10 1961 3r

Brr3 Securit Excbaio RelsNo 916 An 30

3cnnct injpjjCo S.E.C 879 19f1 ..... 30

mc athl Jcr it 5.1 133 1962 30

Ch Is ue Cu Inc Secras rd4xha Conmuijn 139cntot 321 1JS

Connolc ante inn icr1 38 J.607 10

Delta Air Lines Inc Civil_AeronauticsBoard 2d CA D.C 1971 No 7P-1515 ... 27

Don Anderson Co Inc Securities andE.hags.....oaassion 423 2d 813 CA 10 1970 63035

Dnker_fluker S.E.C 386 1939 31

4jjjck 10 S.E.C 975 1942 31In the Matter of Securities

Exchange Act Release No 8859 April 1970

4jnvFmenco 4Ei3dExchEeCommission 354 2d 64 CA 10 1965 630

curitiesandjrifommission415 2d 589 C.A 1969 31

HopeG Alex S.E.C 1082 1940 31

4gnCo.4SEC 88 1962 31

11

Cases cont nied

Kee1 Ha SLS cal dalists It Federal TradeComris.ion 275 2d 18 C.A 1960 ............. 32

Market3reit y.Co Commission 324 U.S5/ 1945 ......... ............. 32

Ni jonal Assc in ior of Sec ur dc Deaerjnc1039 ....... 626

Nitiona Assoi at ion of Se cnn ies Dea LO17 5.1 459 1944 ....... .... ...... 26

Natio cii of Secur La ani9 42 Y45 25

Nassau curitics Service Secu aes and

xchang Commission 348 2d 30

Norris Hnshbcrx1 Inc 21 5.1 of aniced177 .A D.C

288 3j

Pierce

239 2d 160 CA 1956 32Samuel Franklin Co i4esandExcne

Commission 290 2d 719 CA certioraridenied 3ER US- 889 1961 30

itiedExchane Commission pjalGaingfeau Inc 375 U.S 180 1963 23Silver ipikSt2skExch1ag 373 U.S 341 1963 24

ctainlessSt1Ijs Federal TradeCommission 187 2d 693 CA 1951 32

Bankers

Life Casualtj_ 404 U.S 1971 23

Tcherepnin Knight 389 U.S 332 1967 23

United States

327 U.S 515 1946 32

Udall Ialiman 380 U.S 1965 26

fli

scs contituec

icy Sec ti 486 1963 30

rnr Bcrjanu /b/ CocctritYc Re 9242 July 19/1 if lfrnom

1113 .vLLU 51

IC ...... .. 31

UI I923 31

tt

xnitr SC et

rr32

12

cit IiLI LI

Dreayible UI Ict 238677 at 107

Section iSA 78o 2321SectonlAa US.C o3Se tion 5/ 7S b6 .. 924

ctU. bB Jt 3ns\Sec io 15Ab9 U.S 78o-3b9Sect on I5AN1I 8o 3N11 21Section ISA iJ 3il ... 25Sc tior SA 78o 928Sect on i4 -3 k1Se Lion VAk2 15 78o 3k2 10Sec FAk /8 IcSection 151I U.S.C 78o3k2CSection iSA1 73o 31Section 25 15 S.C /8ya ... 22532

Secutities tj PcI ii U.S.C7Reaa et 17

Natiorai_Asso ia ior oiSecuritics Dealer Inc

Certiiicate of icorratiArticle Ihird CCII NPSD Maui 100

rdtutes and Ru1e continued

ix Set 01 2r CCII NASD Manral 1402tele 9o rn 3ah CCII NASD Manual 1403tcle IV Scct xi CCH NASD Manual 1408

dc Section CCH NASD Manual 11 145221 ection CCH NASD Manual 1501 1821

222833

cf Prcc ice

ecti CCII NASD Manual 2151 3111821 28293031

Ia co

tt1ncy Cn Miur on the/lu iistratveP1 ccdiJe 19

JJ oecuUtyR

23 11 org 13U

rep L33 rng Csn th

He argpnFnancia1 and Qpat ional Prob lemsinthe Securities Industrx Before the SubcommitteeurS ecurities of the Senate CommiLosiHousjHnd Urban_Affairs 92d Cong 1st Sess 1971 1034

Hearirigs1_onSeuri tie rketsAggri9iesBe fore theSubcommittee on Commerce and Finance of the House

Commit tee onin rstate andjjn Commerce91st Cong 1st Sess 1969 10l1i31429

Hear1psn the 4Lfyhe Se cur it ej4strBefrgtho Subconmitte on Commcrcc and Finance of the HouseCommittee on Interstate and gnCommerce 92dCong 1st Scss 1971 1011131415

Flearingpons 3255 Before the Senate Committee on

Bancingd Curreny /5th Cong 3d Sess 1938 25

Heeiqgpons.3235 andhR 9634 Before Subcommitteeof the House ommitteojerstatndF1einCommerce 75th Cong 3d Sess 1938 25

Report of the Attorney Generals Committee on

Admiristrative Procedure Administrative Procedure

Doc No 77thCong 1st Sess 1941 .. .. 32

eon continued

ii Ale SecUri ies IndUsfljSL otiein and Urban

tin 92d rg 2c Sess Comm Irant Feb 1972. 101217

ale of the Den cf ected

oke Fe ii Staff Studj7 fo the callubomm tcc liv jadonsofth Honommitt- alters alte ndforngal onvere

yi as ubcomm Ire eal 16i 10111633

9L Fall 9et 2d Sess 670 .... 1/

Ic sO 7ihCng 138 ... 5621Nc Cong 2d A34

Ertle xcharoe CnnrsiSecll 3L2t SCCU eM

10 rg Sess 9033 27

attic rid Txhi Conr ron Steal ofUrisai and Un.ouid ceo of Brokrs ridDealers H.R Doe No 92231 92d Cong 1stSess 1971 .. 101315

Securities and Exchange Commission flyFthAniualPeport 1968 ............... 13

Securities and Exchange Commission jyFiftAnnual 1969 .. 1516

Securities Exchange Act Reiease No 8335 June 17 1968 14

ScuriLies Exchange Act Release No 8363August 1968 ............. ...n. 1431

Senate Resolution No 109 92d Corg 1st Sessii7 Cong Rec Jute 21 1971 ..................... 34

Statement of the Securities and Exchapgp Commission

on the Future Structure of the Seenralies Markets1ebruary 1972 137 BNA Securities RegulationLaw Report Pt Ii February 1972 ................... 34

Westwood Howard SelfGovernment in the_SecuritiesBusiness i7 Law Contemp Probs 518 1952 ..........

vi

IN THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

No 7ll658

HAGEN INVESTMENTS INCORPORATED

EDWARD HAGEN

Petiti lers

SECURITIES AND EXCHANGE COMM1aaION

On Petition for Review of an Order of

the Securities and Exchange Commission

ANSWERING BRIEF OF THE SECURITIES AND

EXCHANGE CONNISSION RESPONDENT

COUNTERSTAIEMENTOF THE ISSUE PRESENTED

Did the Securities and Exchange Commission err in holding that

pursuant to the statutory scheme of flexible self regulation of brokers

find dealers in the over-the-rounter markets embodied in the Securi tiec

Exchange Act of 1934 the Board of Governors of the National Association

of Securities Dealers tINASDU correctly sanctioned petitioners for their

inability promptly and properly to consummate executory securities

transactions in violation of emergency rules of the NASD where the

genera1 inability of brokers and dealers to consummatE such rransactions

was resulting in late or no delivery of securities to customers who

already had paid for them financial instability for some brokers

and dealers and loss of nvastor confidence in the overthecounter

markets

COUNTERS TATENENT OF THE CASE

Hogan Investments Inc Hagen Investments formerly registered

with ti Securities and Exchange Commission as broker and dealer in

ecuritie Edward Hagen Hagen Hagen Investments presi1/

dent iave petitioned this Court presumably pursuant to Section2/

23y oi cc Securities axchange Act oi 1934 15 U.S.C 78ya to

While the instant proceeding was pending before the Commission

petitioners consented to the entry of an order in another

administrative proceeding whereby Hagen Investments registration as broker and dealer in securities was revoked and

Hagen was barred from being associated with any broker or

dealer That proceeding brought pursuant to Sections 15b5and of the Securities Exchange Act of 1934 15 U.S.C78ob5 and was based on other allegations which werenot admitted by the petitioners herein including charges of

violations of antifraud provisions of the federal securities

laws See Invesents Inca Securities Exchange ActRelease No 8859 April 1970

2/ Although petitioners fail to specify the statutory provision

pursuant to which the instant petition for review is brought

we aasume that Section 25a of the Securities Exchange Act-the sole judicial review provision contained in that Actis the intended authority for this petition inasmuch as the

Commissions oversight of NASD activities arises solely byvirtue of Section l5A of the Securities Exchange Act 15U.S.C 78o3

review an cider of Lie Securities and Exchange Comnision ntcr3/

on September 19/1 App l8 The order appealed from dismissed

pi ceeding fo view by the Com-aiss on disciplinary actioo

takci agaLnst ne by Ltio AssJation of be uritcs

Dealers inc NPD pivate .oiprof corpo in orinizcd

under the laws Delat are ard regmtcred tic Gomms as

at ionas un is anon ur ct ti ection 5A of ti

Securities ic 15 mm 1n at

sometimes hc errea

Foitirpo sithspit rci

Br CJ rd 1iCI2 iii PC 500

orders for t1c ais If

nevertheless continued to accept buy and sell orders as to dose4/

securities the rnndrt subsequently fond by both the NASD App

910 and the Comaiss on App to have bee in ntravertion of

Article III Section of the NASDs Rules of Fair Practice This5/

provides

3/ References to the apperdix filed by the petitioners in this

action are cited as App References to petitionersbrief are cited as Br References to the Recordbefore the Commission are cited as The record will

be lodged with the Cerk of the Court

In the pr.r ns .e re the Commissioo hefnne the NASD anbetore tne iattcrs DistrlcL Committee petltioncrs Fad urged

that their conduct did not in tact violate the emergency rules

here under scrutiny App 10 13 Petitioners have notrenewed this contenton in this Court

X/ CCII NASD Manual 912151 Petitioners assert Br thatdisciplinary action taken by the Association was based

upon alleged violations of Emergency Rule Nos 684692 and 694 In fact thc NAsDs Distiicc CommitLeealso fou.d and the NSD affirmed pp 10 that neFltioneiriconduct was inconsistent with just and equitable pr iciplesof trade and also violated Article III Sectfon cf the

Associations Rules of Fair Practice

member in the conduct of his business shall observe

high standards of commercial honor and just and equitable

principles of trade

Specifically petitioners were found to have contravened the provision

by violating the NASDs Emergency Rules of Fair Practice 684 692

and 694 Petitionerst only argument in this Court is that the NASD

lacked appropriate authority to prosrlbe without full membership

vote the activities for which they were sanctioned

The NASD

Although Congress in 1934 provided for selfregulation of

nationai securities exchanges when it adopted the Securities Exchange

Act Congrs did not at that time extend this concept of selfregulation

to brokers and dealers who operated exclusively in the overthecounter61

markets It recognized that effective regulation of the exchanges

requires as corollary measure of control over the overthecounter7/

markets but initially it left to the Commission the job of policing

6/ The overthecounter markets have been described as follows

Transactions in securities not taking place on an

exchange are referred to as overthecounter transactions The overthecounter markets unlike theexchanges have no centralized place for trading

registered brokerdealers are entitled to

participate The brokerdealers vary in sizeexperience and function the securities differ in

price quality and activity

Securities and Exchange CommissionSecurities Markets 541 1963 hereinafter cited as

H.R Rep No 1383 73d Cong 2d Sess 1516 1934 Seealso Rep No 792 73d Cong 2d Sess 1934

8/

those markets By 138 however ongress determined that

qualified sli -regu ation of the over-thacounter marie was appro

pilate in so ring hn tie tverthe- ou t-r ma ts couid most

effectively be teg td Congrass ta ed three maj tives

Firct to protect the investo ad thc hone dcaiciclikc trom dhonest and fdi practice by subar5i fl ment 11 he ii uctry cosltc coplit tole cUrd of doing bust ecu wind yrtcchn 11y Ic the ret of efinite iiiare verhcLecs infar boLh cstmet ncdc cIt competitor and are sc cus damati ste hauls the free ml cu statIcto ri to tU nvestoi ercffcecyai qeiwilLb cnn

om fl alce -o thi ci

t.itcon stark cill Xc to svcid the rcdircc-

ton nrtiorU0 say ng nn tr Icpowert tocrI cLonortc depresics cc cUdistrust of out financial processes 9/

To attain these objectives Congress adopted the Maloney Act the

primary purpose of which was to provide for the establishment of

mechanism of regulation among over-tnecuunter brokers and dealers

operating in interstate and foreign commerce or through the mails

to prevent acts and practices inconsistent with just and

10/

equitable principles of trade The mechanism chosen by

Congress as reflected in the Maloney Act was cooperative regu

lation in which the task will be largely performed by representative

8/ See Rep No 1455 75th Cong 3d Sess 1938 Seealso Westwood Howard SelfGovernment in the Securities

Business 17 Law Contemp Probs 518 526 1952

9/ Rep No 1455 75th Cong 3d Sess 1938 1-hR RepNo 2307 75th Cong 3d Sess 1938

10/ Act of June 25 1938 C.677 52 Stat 10/0

organizations of investment bankers dealers and brokers with the

Government exercising appropriate supervision in the public interest11

and Exercising supplementary powers of direct regulation

The Maloney Act provides that subject to certain conditions

association of brokers or dealers may be registered with the

12

Commission as national securities association As matter

of fact the NASD is the only organization which has registered with

the Coinmiss on By its terms the Act prohibits the Commission

from registering an organization as national securities association

unless the association has adopted tules designed to prevent

fraudulent and manipulative acts and practices to promote just and

equitable principles of trade and in general to protect13/

nvestors and the public interest The Act also

requires registered national securities association to adopt

rules which provide that members of the association shallbe

11/ Rep No 1455 75th Cong 3d Sess 1938 H.R RepNo 2307 75th Cong 3d Sess 4-5 1938 See also Don

Inc_________________

423 2d 813 814 C.A 10 1970 ij4jyjemeniQgLsiities and Ex2 na mmi2.ion 354 2d 64 65 CA

10 1965

12/ Section 15Aa of the Securities Exchange Act 15 U.S.C78o3a

13/ Securities Exchange Act Section 15Ab8 15 U.S.C 78o3b8When the Commission allowed the NASD to register with it as

national securities association it found that the NASDs rulessatisfied all the requirements of Section 15A National

S.E.C 627 1939

appropriatciy scipline nuspensi fire rrure14

it ig iy violaJi it nile

Cli NA cata ccrpn ni by a- rel

t-u- di i-ti Nb

cntiii at purr 0CC

be ir i-nit Pt din i-u ti-i-

ticeand nit td

and ii i- tp jj

fortheì V-ui

thNAD

from time to ime ior ibunisici to tie mambership rules of fair

practnce dni0 al to mi an nfc nc iuc at eqi e5e

principles of nde and ousiness to maintain high

standards of commercial honor aid iitegrity among members

It is pursuart to is autlorlty that the NAD adopted rules to

the effect that its menbe mi-nit in the conduct of their business

14/ Section 15Ab9 cf the Act 15 U.S 78o 3b9 Inaddit in the Commission is uthorized to suspend forperiod not exceedig vlve months or to revoke theregistratio rationa urities association if it

rind nr nilri-li-n has failed to enforceomplian wCti ts or rui.ni Section 15A1

15 /8c 1015/ CCLI NASD Manual 1003

16/ CCLI NASD Manual 111501 Api 32

observe high standards of commercial honor and just and equitable17

principles of trade

Article VII Section of the NASDs bylaws also authorizes

18/

its board of governors where that body finds an emergency to19

exist to adopt by twothirds vote of the board rules of fair

practice or amendments thereto if rules are not disapproved

by the Commission without submission the rules to the

members for vote emphasis supplied As it existed during

the tin pcnods relevant here this bylaw provision also stated

that no such rule of fair practice or amenent shall be effective

tor mci- than sixty days or the duration of the emergency as declared

20

by the Board of Governors whichever is the less App 32

17/ CCH NASD Manual 2151

18/ Of the 27 members of the board of governors the NASDs bylaws

require that 21 be elected from various districts bythe mem

bers in those districts Art IV Section 2a CCIINASD Manual1402 Art IV Sections 3ae CCHNASDMaai 1403

be elected by the board and designated governorsatlarge idSection 3b ard the board elect additional members oneeach from among the mutual fund underwriter members and the

insurance company or insurance company affiliated members

id Sections 3f The board of governors also electsthe president of the NASO who then becomes member

of

tFe board Article Section of the NASDs bylaws CCIINASO Manual 1452

19/ Where Rules of Fair Practice are to be submitted to the

membership for vote they need only be adopted by malorityof quorum of the board of governors

Art IV Section ofthe NASDs by-laws CCII NASD Manual 1408

20/ Subsequent to the occurrences here the NASD membershipapproved modification in this bylaw provision which amongother things extended the initial emergency period to

months App 33

fi add ruut tulc got xi act thor

the oncy Act haL tie tu gist rti

a5cCi asur afar cp un

ado tiox cy ii ior

clt Cçf5 ad1 St

iiit Ii

.1

se1fr ii

ar ten rtt nit

LCLto assure fa dcaFng by th membe of sun associatiOr

fa4r reprcsercao treibcrs 1I dmri Ii of

affairs or henti to protect inves ors effectuat th nurpo2/

of Maloiey Actli Ihe miiisaion al tao gi en tt

authority to rjucs gis accu itic0 as iation to

or suppleme it ru itI to pact to in or au th mc

for adoptiot ny nige in or ddit to th tam ofiT

asso-iation ard the mcth of hoosing officer an oct

if the asso lation fails to tot supj.rmtnt rul

21/ Soctior 15Ab6 15 /C 78o3b6 nor Lho -964amendments to the Securitics Lxchango Act of 1934 Pu No88 467 78 Stat 565 this subsection was numbered

22/ Section 15Aki 15 78o ha Cocaxisnon aJsohas the authority to disapprove ny it oioscd charges in or

add4t4o.s Vc xitJng tales ecn

25/ Section 15Ak2B 15 78o31224/ Section 15A1 2C .5 2C

10

manner requested the Commission is authorized to order such alteration

or supplement if after appropriate notice and opportunity for hearing

it appears to the Commission that such alteration or supplement is

necessary or appropriate in the public interest or for the protection25/

of investors

flj2perationai and

IndustghePeL lod 196 71970

As the Commission recently reported to Congress in the years

19671970 occu red the most prolonged and severe crisis in the

securities industry In forty years Securties and Exchange Commis

sion oi lj of Unsafe and Unsouna Practices of arokers and Dealers

Doc No 92231 92d Cong 1st Sess 1971 hereinafter26

cited as Unsafe and Unsound The report continued

Widespread failures of brokerdealer firms and concernfor the funds of their customers had followed prolongedperiod of easy business veritable explosion in

trading volume clogged an inadequate machinery for thecontrol and delivery of securities Failures to deliver

25/ Section 15Ak2 15 U.S.C 78o3k2

26/ For detailed analysis of the operational problems confronting

the securities industry during this period seeFinancial

Before the Subcommittee on Securities of the Senate Committee

92d Cong 1st SessPt 1971 hereinafter jjjerateHeHi.fl3ga

on Commerre and Finance of the House Committee on Interstate

Iiacogii 92d Cong 1st Sess pt 1971hereinafter 1971_House ewings

sAenciesBeforetheSubcommitteeonCommerceandFinanceof91st Cong

1st Sess 1969 hereinafterontheSecuritiesIndustrStudoftheSenateottee

92d Cong 2d SessComm Print February 1972 hereinafterSee also Review of SEC Records of the Demise of Selected BrokerDealersof th Hou 92 Cong1st Sess Subcommittee Print July 1969 hereinafter 4fitud

Baruch tjecurjt Risk 1971

recur es and wake peymen rcocieted through the

industry ad firms lost control of their records and ofthc scuri en ii their poscecs or charged them

Operitror 01 ition0 deterinatrd nel thatife narkr wer ef tr rg fl

cc ejit sate to imi altr ding in

id .e1c gulat autlo

its tionr ightigtoai Htr1jmc ic ti ir thy tad

Do ns ad made ripidly cU n1 or

el car1 2Opcrc it ic.

tidi

ihiour

coun er marke rougil ouparable itagcs

The result was chaos at some firms and loss ofrecord Keeping control Thlb turn ld ta lassof physical control over certificates and their movement And most firms threw into the Ireach newlyrecrui ed and inadequately trained men who not onryincreased operational errors in geometrical proportion

but also exposed the industry CO cerrain kind of

risk not previously experienced in substantial waythe risk of loss of control over securities 29/

The loss of contr1 over Fcurties becamc evident

by the inabLilty of brokers and dealers successfully to complete tter

7/ SLaffSj4y at

28/ While precise volume igures for trading in the overthecountermarkets are not maintained it is estimated that at equals tiecombined volume on the New York and American Stock Exchanges tIenatios two largest stock exchanges Securities Markets Agencies

at

29/ 1971 House Hear gs at 50 State so it of Irving Pcilacl

Director and Shel on Rappaport Associate Dire tor egulaof the iaxmiiisions Dirisiar cf IriAin5 ariA Markets

l2

customers transactions as indicated by the growing dollar amountsof

fails eliv fail to deliver represents the obligation

of oVer to deliver securities it has sold to another broker but

win for some reason the selling broker is unable to deli en As

ncted in the 1972 Senate RcLort 10

The increase in fails ml related nroblems importantirdu- ry-wide effects upon the securities markets Mary

investors became frustrated with the paperwork problems

nd rrsolved to avoid or reduce investments in securitiesExcessive falls to deliver have an unfavorable effect

upon the brokerdealers working capital sellervh delivered his securities to his broker is entitled

ment by his br ker on settlement date regardless of

icr the bronr has transmitted the securities to the

yr Yet the broker is nor reimbursed by the purchasingurtil he divers Thus in fail situation the

llers broker has often advanced funds to his customerwhich could otherwise be employed as working capital in

the business emphais in original footnotes omitted 30/

Throughout tie period 1967l970 the Commission and the self

euiatory authorities the NASD and the stock exchanges were

30/ ha 1972 Senate çpprt also ponted out 10 thatokerdedera iailu to deliver secuiti infects not only

ow-i financial position but also that of the purchasing

broker This is because for every fail to deliver there must

corresponding fail to receive The latter is airiedoi i.e books of tie urchasing broker as liability because

wi-rn and if tie securites are finally delivered it will have

to pay the contract price to the selling broker Since

fail to receive is liability for purposes of the Commissions

capital requirements---which prohibit broker dealer from

incurring aggregate indebtedness which exceeds 20uu percent or

the brokers net capitalit must be included amoig thebrokers items of aggregate indebtedness and therefore mustbe supported by firms net capital It has been noted

Among brokerdc lers of limited capital thi

might result in limitation of their

business activities

Sj cThl Stud at 417

13

ing to acoid catast opf In 1961 through jrid-l96b tho

actiois taken by the Coimnssion and sefregulatory authoriti to

cc cith thc hick olf cc proilca re nYilly in cr.rgciy32

ii er Thc actios iiciu ed tcnacr

cur aLnart thE rc1ing horn in t3e sccui as rics gi33

ci cf pc nr an ppct or procc bickioof miodat rcporti tire cn

4/

outco aU theirttt cii ii35

tnqucry by ome sirn

prog am ti ru iatotv an

wevcr in apprccii mu or of

problems primarily because trading volume continued to increase

thus genere mg er were pperw Irk Because the paperwork cri

was getting worse rather than better even more restrictive actions

were taken Thus for example in June 1968 the NASD adopted

Emergency Rule 68l which in effect closed the overthecounter

31/ Unsafe and Unsound at For chronology of the actionstaken by the Commission during the period 19671971 se idat 226237 For summary of the actions taken by the NASDsee at pp 198 203Exhibit at 323442 And for summary of actions takenby the New York Sto Exchaigc see i971 House Hear4g9 atpp i4-29 3032

j/ Securities and Exchange Commission17 1968

33/ Id at 16

34/ See Unsafe and_Unsound at pp 226227

35 Id at 227

36/ See Se curl ties Mark enciesHeajjgg at p- 99

14

37/

markets on Wednesdays and in late summer of 1968 the New York

38

and American exchanges adopted series of changes in their rules

39

whict nter alia required mandatory buyins to complete contracts

whicJ were not fulfilled for period of 50 calendar days and pro

hibited members from executing custcmcrs sell orders unless the

member had a$onable assurances that the customer would promptly40

deliver tie securities At the same time the Commission

cautio cc biokerdealers that they must comply with applicable

req iii sen regarding the maintenance of current books and records

fina ci respoisibility and prompt delivery of securities and41

tt en it of transactions The Commission also warned brokers and

dcalers that it is violation of the antifraud provisions of the

federal securities laws for broker or dealer to accept or execute

any order for the purchase or sale of any security if that broker

dealer does not have the personnel or facilities available promptly42

to execute and consummate all its transactions

37/ Id at 387

38/ See at 17

39/ Under the buyin procedure broker which has not receivedthe securities contracted for can go into the market to

perchase those securities and charge the broker which failed

to deliver the difference between the euntract price and the

purchase price

40/ The NASDs board of governors interpreted Article IIISection of the NASDs Rules of Fair Practice to impose

similar requirement See CCHNASD Manual 2151 at pp 20362037

41/ Securities Exchange Act Release No 8335 June 17 1968

42/ Securities Exchange Act Release No 8363 August 1968

196 thece act iad rificantly

crisis ci ad the o.s of control over

to contin ed to ineacae and the do

ii Je rchigcnemb

Ii ittot

4/sU 1163 mc en

13 wi dEl

io1 ii

192 1p 131t ctn ty

Ii

II

January 31 1969 and the third eoruary Ia 1969

Rule 63 and 692 rh bit intel ala the aceptanceof customer pu chase orde by okers particalar securities if ti

broker had

fail to deliver in that security 60 days old or

olde and any one of he following coiditiors ext ts

his otal do Ia lume of fails to deliverover 30 days are 30% or more of his total dollar

volume of fails to delave or

43/ Leu itt aid Ex1 gc Commissior ThirFifthAniualGe sehciijs at 4/ staFatmnt

Jr ang ilacc

46/ 1971 Mc scHearin at 43 This figure based on the fallsreports of NASD members who cre not also members of the New

rk or Anericar exciangis In fiscal year 1969 July 1968Jur 30 169 tn 02 tre.nbc of the NASD Securities and Exciange Commission IhjrtyFifth Annual Ret104 1969 Many howevet were also ibers of some

change sc that their fail figures pr aoiy wouid be mci dedthe erchiig ctatst rs rather than tie

45/ Unsafe and Un ound 229 230

his total dollar volume of fails to deliver

over 30 days in that security are 7% or more of his

total dollar volume of fails to deliver oier 30 daysor

he has any fail to deliver in that security120 days old or older App 23 emphasis inoriginal

These rules also required members to review their fail positions once

month Where upon such monthly review memhr discovered any

fail to deliver or fail to receive 120 days old or older the rules

requited that the appropriate District Committee be apprised within

10 day of th end of such month of the detaiis and any efforts

uidrta1cr to effect deliery App 23 27 Finally these rules

ov di hat good cause shown and in exceptional circumstances

member could request exemption from the rule where the member

could demonstrate among other things that application of the rule would

rk hardship upon public customers and/or the member App 2327

Emergency Rule 694 required members to clear fails before

they were 150 days old whether or not the broker accepted orders

for transactions in that security App 31 Failure to comply with

requirement was stated to constitute se qiolation of

Article III Section App 31

By the end of the first half of 1969 the total amount of46

fals to dliver had declined to approximately $22 billion41/

This reduction apparently resulted from decreased market volume

46/ Securities and Exchange Commission

1969

47/ Trading volume once again increased in the latter part of

1970 and the number of fails Increased at least in proportionto the trading volume Increase and possibly more so because of

reductions In backoffice personnel during the financial crisis

precipitated by the market decline in 1969-4970at

l7

rding iue ii rv to

dcl gent ted ie stni csve ails

ti ii III

ipi beenNc cell idcr ii

Cit gavi do O55 ci

fey hlor tnt

lyE id

11 11 ii

an nETcc

tI CLIc mit

it

tirancial problems wb ch fatd the securit ndus 48

vgrs -4r tie Se unties Icvlstor 01

rovi oac fo of rmarcat protect on to miatcri is ci ockcr gi

ft me whicI bccoae iv ævent as result of the l969 970 crftis

In Ii cuas ng the ned fc such gist on tie mite Cormrittee

or Banking and ur ency noted that the exstennv of tai had toe

rabuted to the deal macy arokc ge firms over the ocdiatci50

ecedivg our yemi pe iod

8/ iQ/2c Pscr f-rn--itq ran

49/ jr daaa et seq

50/ No l7l3 91st Coeg 2d mi 2-3 1970

18

The Proceed ainst Ha en Investments and jjpn

As noted above pp 1516 gypa in the midst of the 19671970

findr cal and operational crisis the NASD employed its emergency

powers to adopt interim measure to assist in alieviating

the problems generated App 22 Pursuant to Rule 684 petitioners

in January 169 began filing monthly statements with the regional

NASD District Committee for the purpose of apprising the Committee

oi thei ironthly fail situation App 11 18 6364 Thereafter

and direct result also of special examination of Hagen

Invcstinerts conducted by the NASD in February 1969 App 11

compla cgainst petitioners was filed by the NASD District Business

Co duct Committee for District No charging that petitioners had

failed to observe high standards of commercial honor and just and

cquitable principles of trade as required by Article III Section

of tIe NASDs Rules of Fair Practice by repeatedly soliciting

and entering into transactions of sale for firm account and/or

purchases for the account of customers in eleven different securities

at time when the tirm carried tails to denver in those

securities in excess of 120 days old App l3conduct proscribed

by Fuergency Rules 684 and 692and by repeatedly failing to

clear or settle fail items which were at least 150 days old App 13conduct proscribed by Emergency Rule 694

After an evidentiary hearing the District Committee found that

petitioners had repeatedly violated each of these emergency rules App

19

16 19 etit oners thereupon challiged the NASD board of govsnors

tv orcmc1at such ri es App 14 and ii dhallengoo the

Di it oiimitt oH aLlegation that many of the aged and uncleared

re-n tu II 4up 15 Both c5alilng cure co Id

te ctCoimittc ciii rotduunruo

Lit ily cv riiy fine sf $5 00 at cS ccts in thc

also -LI- Thc bord ocr NA

1370 affirm Sc ci Corn

ici re ct oi 10 ii ad F1

En es It oisilertd ti sir to Tp

iC ILLV-O ru

cv Ipp 10 s.c

acd tie one un imp sd upon pctitio ic

suspen ion of Hagen Investments Inc from the NASD for three

days and suspension of Edward Hagen from associating with

any member of the NASD for thre days In light of its impositior

01 suspension upon petitioners the noard of governors recucec

the fine imposed by the District Committee from $5000 to $3000

and mp c1 ad3.tonal osts $15.30 the ccsts nf tha appea to

the Board of Governors App 10

Upcn rviow of the NASDs findings and order the Commisior

found a4 on 77 par to ior the pet4 tlcnerr fad sclic

and ent red into transactions cc var ous secur ties when the

firm carried fails to liver in those securities in excess of

51/

120 days old Apu and that in 64 separate instances tie

51/ ur these 77 vioiatons of Emergency Rules 6o4 and 69270 ocurrej he ween December lY6ft and January 30 1969the effective period oi the first emergency rule Rule 68

325337

20petitioners had not cleared or settled fails which were 150 days

old App All of the violations were found to have occurred

during the period December 1968 through February 1969 at the peak

of the increased volume which generated so many of the Industrys

problems see pp 1216 supra

The Corission rejected petitioners arguments that the NASDs

Emergency Rules were not validly enacted and that in any event no

emergency existed stating

Under the circumstances presented here we do not behive that it was Improper for the NASD to deal throughits emergency rule procedures with the back officesituation that it Initially found to exist In June

1968 We also consider that the need for flexibilityof action justified the NASD In determining periodic

ally thereafter at least until it could be ascertained

what the conditions that existed required on longterm basis whether extraordinary restrictions onmembers activities were still needed rather than

undertaking to incorporate such restrictions into

its permanent rule structure

We cannot say that the 1USD was not justified In its

determinations incident to the enactment of the rules

here under consideration that the emergency originallyfound to exist still persisted App

In response to petitioners argument that the NASDs bylaws

which limited the effectiveness of an emergency rule to 60 days or

the duration of the emergency as declared by the Board of Governors

whichever is less App 32 rendered the emergency rules in issue

invalid the Corission stated

we do not read the bylaw provision under whichthe Board acted as limitIng the duration of an

emergency to maxitum of 60 days In our viewthat provision merely represented limitation onthe life of the particular rule and did not predude the NASD from re-enactin sane rule foranother 60 day period or adopting new rule

.1

dsg ei npe with the same emergenty urovidedoily that it trade new determination that tie

etergen conditions still existed App52

ihe Ccmmision upicid he sanction impesed by the NAST and53/

casm ed th pzcreccings rview kp Petiti ncr ha

no ap1i ci for of thc Commi sons order

STAIIJiES AND RULFo NVOI TED

Ii 25a of the Sccuiti 1xctan ire

relevant this tc ling and cct tie

opendix gt ji iclus ot It bre ii

ich Sc .r of 1c IAn ly La

rccda jec .i .i

Luergency Ru 684 Ape 23 692 App pp

Article III Section of the NASDs Rules of Fair Practice is set

forth in the statutory appendix to this brief at 8a infra

52/ In its opinion the Commission noted App that the sanctionsimposed by the NASDs Board of Governors were rendered lesssevere than those imposed by the District Committee in lightof the fact that the Commission during the pendency of this

proceeding had entered an order in an unrelated case revokingthe broker-dealer registration of Hagen Investments Inc andbarring Edward Hagen from associating with any broker or

dealer See n.l

53/ Petitioners in their brief Br and in their petition forrAv...v before this Court character4ze the Cnmm4scians nct4as dibmissal of their request for review of the NASDsdiscipiinary action and in their petition for review urgethis Court to order the Commission to review suchdiscipiinary proceedings Section 15Ahl of the SecuritiesExchange Act 15 U.S.C 78o-3hl requires the Commissionin reviewing NASD disciplinary proceedings to consider all

the evidence in the matter and conduct fuIiscale adjudicatory

proceeding to determine the propriety of the NASDVs a.tion

When the Commissioii finds the NASDs actioi to have bccr supprLby the record before the association and such other evidence asit Commission may deem relevant the statute

requires the Commission by order dismiss the proceeding emphasis supplied

22

ARGUMENT

Petitioners who are not contesting the Commissions finding

that tiey failed to conform to the NASDs Rules of Fair Practice by

141 separate violations of its emergency rules urge this Court to

reverse the $3000 sanction imposed by the NASD and affirmed by the

Commission the ground either that the NASD was without power

to adopt the specific emergency rules involved because the emergency

had been found to exist by the board of governors more than 60 days

prior he violations found or that seven of the 141 violations

occurred during period when one of the emergency rules had been

reenact Petitioners contend that no other result may flow from

the proviso to the authorization in the NASDs by-Jaws for adoption

of emergency rules by its board of governors without submission to

the membership of the NASD That authorization is as follows

In any case however where the Board of Governorsfinds an emergency to exist such rules of fair practiceor amendments thereto if adopted by twothirds voteof the Board of Governors and not disapproved by the

Commission pursuant to Section l5A of the Act may becomeeffective as of such time as the Board of Governors may

prescribe without submission to the members for voteas hereinbefore required provided however that nosuch rule of fair practice or amendment shall be effec-

tive for more than sixty days or the duration of the

emergency as declared by the Board of Governors whichever is the lessi 54/

54/ See Article VII of the NASDs bylaws set forth at App 32

3-

Contrary to petLtioiers issertions -tow oclow that their

restrictive Literrretaion of this authorization is required neither

55/

by the nebling -a ute Br nor by the plaii language

Br ii of tu by lat prov uo uotd aovee

cluo Art Delesated Broad Ew rs to the NDn1Ye Ensure tTOLCcCOl ox turi

Jnvcosanc lottinln tica Aç_or ttSi-14Fitcr ftj3p of Go inc

loq ijjemeLi .t1m rafl co ncb Cont ar us onsflu tn tie lntcrets 11 iv

Ma Wa

0c thE giJ tiol

Securities a- 1034

from listing on exchanges and by transferring trading therein to

overthecounter marke where manipulative evils could continue56

to flourish But Congress explicitly rejected the concept

of leaving such regulation solely in the hands of this Commission

for it recognized the limitations oi direct governmental regulation

engendered by limited staff limited funds and perhaps most importantly

55/ As the Supreme Court has noted with respect the Securities

Exchange Act remedial legislation should be construed broadlyto effec uate ts purposes IcJ pnin 389 tI.S332 336 1967 Cf flppndent of Insurance of New York

Bankers_LiFe Casualty_Co. 404 U.S 12 1971 Securitiand Excge Commission p3ta1 Gains Re se arch Burea%jgc375 U.S 180 195 1963

56/ H.R Rep No 2307 75th Cong 3d Sess 1938

24

the difficulties inherent in the governments attempt to define ethical

57and moral as opposed solely to legal standards of conduct

Petitioners place primary reliance Br 812 upon Section

l5Ab6 of the Securities Exchange Act which requires the NASD

inter alia to assure fair representation in the adoption of any

rule of the association or amendment thereto They argue

that their right to vote on the emergency rules here involved stems

from this statutory provision Apart from the fact that the statute

cannot be deemed to contemplate any circumstances under which the

membersi-ip of the NASD may abrogate basic standards of conduct estab

ii bed uy the Securities Exchange Act see pp 2831 infra there is

ro reason to assume that the fair representation standard meant

direct vote by the NASD membership on all phases of its operations

Rather Congress explicitly stated that the statutory language meant

58-/

reasonable representation The legislative history of the

Maloney Act including that cited by petitioners Br 812 indicates

57/ Id at 24 As stated by Mr Justice Stewart dissenting inSilver New York

ft xchange 373 U.S 341 371 1963

The purpose of the selfregulation provisions ofthe Securities Exchange Act was to delegate governmental power to working institutions

exchanges and national securities associatiorswhich would undertake at their own initiative toenforce compliance with ethical as well as legalstandards in complex and changing industry

5g/ Rep No 1455 75th Cong 3d Sess 1938 HR RepNo 2307 75th Cong 3d Sess 1938

HI ii ai

whobeanc cu ti itfe acre

donna

member

at CU

aJ

abi ii 10 Ltot/8 LIt th II on

iii odt on La tie

couit ct Cd in it viLh

nemb La ion lat oi of

19 dJ L1d1 St oOIhi is th he gi ativ ose The hocEn nd ormi cd ea

Ti it 11

troi sil attndcd

ci Tilt ly an ot Cifi is Fe omcal

in euhc oi wud

oi1 La chIc scIc

60/ 11 in loan Ia Li

Cu 98 tt CornLa pTlfl at

96 fore cot aP Co in to Intersaeocs La L938 tatem

ot 1liS3 Ma is

61/

26-

of the NASD selected in the manner set forth in note 18 has

been found by the Commission to satisfy the test of reasonable or62

fair representation with respect to the adoption of emergency rules

Any right of the petitioners to vote directly on the adoptionof

emergency rules therefore must derive from the NASDs bylaws rather

63/

than the Maioney Act

62/ The Commission has viewed the test of fair representationas rcquiring that factors such as geography size of firm and

type of business be considered 2ialStudud 608Sinc the NASDs rules were approved by the Commission in

1939 National Associ pnofSecniritADealers Inc S.E.C627 1939 the NASDs board of governors always has had thepowcr with Commission concurrence to adopt emergency rulesby twotnircs vote And the Commission had early taken theview that the right of NASD mcmbers to vote for rules is

derived from the NASDs ByLaws See National Associationof_Securij4 a3rs Inc 17 S.E.C 459 461 1944 Thissettled and contemporaneous administrativc interpretation is

entitled to deference Sep

United States 288 U.S 294 1933 Udali Tallman 380U.S 1965

As the Supreme Court reiterated in Udall 380 U.S at 16citations omitted

To sustain the Commissions application ofthis statutory term we need not find that itsconstruction is the only reasonable one or eventhat it is the result we would have reached had the

question arisen in the first instance in judicial

proceedings Particularly is this respectdue when the administrative practice at stake involves contemporaneous construction of statute

by the men charged with the responsibility oi

setting its machinery in motion of making .heparts work efficiently and smoothly while they

are yet untried and new63/ Petitioners seemingly concede Br 13 that the

derivation of right to vote on emergency rules stems ifat all from the NASDs ByLaws by their apparent acknowledgmentthat the recent revision effected in the NASDs ByLaws topermit twothirds of the Board of Governors to adopt emergencyrules for longer periods than 60 days without membership votewould alter their arguments

The Prcr on ft rEy rj3ljLIs to Peim-t tic ca 0L nors ft tivE

IerngrrL JaISa E.viL eyj adin to mt thc Bo icraile iVs LIcE tLIL anncI5

rUt 10 to he auho .zs ci Nh soard

gU LtiJib eLi it IL

eto -c 1oth tttou

cvidence rc ti quit nts ti uic

reiin c.tt Ife cl 31 cC

and ooir ilot

ncrI .1 yt

rule to as ncU cICI tc

by different emergency rule This reading of ti proviso as ia

in accord with its plain larguage Br 13 as is petitioners

and permits the NASD more responsively to fulfill its ob gaions

to protect the public interest

To hold as petitioners urge that the NASD was not entrtlcd

to adopt emergency rules where emergency conditions had peru cd

beyond 60 days would seem to place premium upon precipitous dccisioi

making and encunber that bodys efforts rationally tc sift out exper

mest with and refiic tom rreaures tiat might resolve or allevi te

4/

the existing problem Aid hou1d the NASD urder constrain oi

64/ Cf Delta Air Linerc Civil Aeronau ics Board2d C.A 1971 No 71l5l5 Clip op at

petitioners theory be compelled to submit interim rules designed to

alleviate an emergency condition of uncertain duration to full

membership vote it could run the risk of delaying for minimum of

65/30 days the implementation of needed restrictions on membership

activities believed to be inimical to the interests of public investors

__________ ___________ ______of the Pr

Lme

Sc

The NASD as we have seen pp 4b 23-24 is requiredby law to enforce the concept of just and equitable principles of

trade

Whether or not the board of governors adopted the emergency rules

in question the conduct of the petitioners involved here was subject

to the imposition of sanctions by the NASD as violative of high standards

of commercial honor and just and equitable principles of trade in

contravention of Article III Section of the NASDs Rules of Fair

Practice Thus on August 1968 more than three months prior to

the effective date of Emergency Rule 68-4--- the earliest of the challenged

rules--the NASD notified its members that it intended to institute

65/ The NASD membership has 3Q days in which to cast votes upon the

adoption of rule by the board of governors Art VIISection of the NASDs bylaws App 33 Pursuant to Section 15Aj of the Securities Exchange Act 15 U.S.C 78o3jthe NASD also is required to submit copy of any proposed

rules to the Commission and such rules become effective

unless disapproved by the Commission 30 days after filing or

upon such earlier date as the Commission determines The

Coimnission normally will make emergency rules effective prior

to the expiration of 30 days

29

disc olirry oce dings under Articic III Section of its hums

of Ia against any ncmbcr t1 it an unreasonable far

iin ir rmitI dcl sect tes cutcre dh

canot tt rn bco ci CT3 ti

the SaC rulc

T1 SmcL on tly

di nib as eli

i3t 511 11IiV WIL

Tn oLI JILL JTnI

11 prp

cr

of the emergency tul here challenged Lhe NASh brought discapa no

cases againL.Lt ncmbcr firmc for thc types of vio atrons tar whici

6L/were sanctioned This was consister with many other in anc

the NASD has proceeded against members for conduct alleged to be ii

inconsistent with ji st and equitable inciples of trade no iith tandi

the absence of specific rule defining the proscribcd conduct NASD

indrngs of violation of Article Ill Section in sucl cfrcnsta

66/ Securities Marketgencies_Hearigj at 380

67/ Ibid Specificnily the NASD indicated that any membcr nat ncin busin ss at Lanc time had inter alsa si rilnumber of outstanding fails on its hooks high fail poortiolone or more specrfic securities or preponderancc of failcof Jo days old would be thc subject of such disciplinary act

68/ Id at 381

30

have been sustained by the Commission whicn in LUEII has been sustained

69/

by the courts

Here the purposes of the challenged emergency rules were

to deter members from entering into transactions where there was

doubt that the transactions could be completed and to induce

vembers to settle or otherrnse deer aged failtcrdeliver items

Except for setting down definite guidelines for the benefit of members

these emergency rules established no new standards of conduct Emer

gency Rules 684 and 692 in effect codified the NASDs prior inter

pretation that conduct inconsistent with those rules would be considered

viol tion of rticle III Section App 24 28 And Emergency

Rule 694 stated that conduct inconsistent with that ruie would be

considered se violation of Article III Section and of that

ruie as well App 3i

Moreover the concept of Ujust and equitable principles of

trade which the NASD is statutorily mandated to enforce encompasses

70/at least the legal standards of the Securities Exchange Act

2I .1 bj narain Werner CoSecurities Exchange Act Release No 9242 July 19 1971

subnom flWernerNo 711591 CA DC Jan 24 1972 jeinvestment Co 354

2d 64 CA 10 191i5 Nassau Securities Service348 2d 133 CA

1965 Samuel FranklinCoCommission 290 2d 719 CA certiorari denied 368US 889 1961

70/ See And cg CoIncCommission 423 2d 813 CA 10 1970 BarracoCoSecurities Exchange Act Release No 9149 April 16 1971ygyj2asuri1e2Inc 41 SE 486 488 1963

41 SEC 133 136 1962 cf Bennett40 SEC 879 882 1961

ti-c NIS adop thcc rctdct iti

ia ied da1 Lild ctr

erga nt tFj i-c

that tnt

v1c1at nf ud provii of do is

icr oj

Ii in naccci

tri at fall

yt Thi- art

uC IS

ij -i

provisions ij ics Lycharc tcL ic tic

of Aitici aeti of thc NJ Ri cc of

Under ti-cse rcimstances the Ma may ot mcar

read cqu rirg he ii nbershr ic

involvedaditvouidbepoitlc as

imposirg uch icquiremert

5cc ritics ian At Ruic 363 Aui-u 19o3based on the oig st pri

11 Iiiself çof onalcar U- iive trg bI roVer violat aorulas if is unabl cc iport iich tint ir1icJ

ar Sc ti rd ..i.n cii

58 LA 069 No chItiss_beta i-Iaffiracd 7/F 2d 228 CA 1949 Ci-r1tnHujsIn Sec irities and xchaCommisot t39certic cd 321 8a 143 len AolS.E.C 514 516 1949 Iukr Diktn 6SF 386Accord Alcxqga 1082 l90 ALe ider

1043 194 Ja-IcCcldbr 0/5William Stelanack Cop 19Co 41 s.s.C 88 196z

32

DDsFailsRules WMotejnteiceaLa2ntin1n

or ed Subst ant ial Lv id en ce

WI-ether or not an emergency exists is basically question of fact

Sect on 2Sa of the Securities Exchange Act provides that the findings

of the Commission as to the facts if supported by substantial evidence

shall be conclusive Accord U.S.C 7062E The courts have

consistently held that an administrative agencys findings of fact are

presumed to be supported by substantial evidence and that petitioner

who ci allenges them must specifically designate those findings for which

72

he lai that there is no substantial evidence reviewing courts

function not to determine where the weight of the evidence lies but

rather is to determine whether there was in fact substantial evidence to

support the Commissions findings Consolo Federal Maritime Commission73

83 U.S 607 6l862l 1966

72/ kg Jgje HairScal Secialistsjnc Federal TradeCommission 275 2d 18 21 CA 1960 Steelco StainlessSteejjj Federal Trade Commission 187 2d 693 694695 CA 1951

73/ Accord e.g Pierce239 2d 160 162 CA 1956The Commissions conclusion that an emergency did exist was

predicated in large part on matters of official and publicrecord of which the Commission appropriately took officialnotice See United States

327 U.S 515 529 530 1946Commission 324 U.S 548 56l562 1945 Report of the

Attorney Generals Committee on Administrative ProcedureDoc No

77th Cong 1st Sess 72 1941 Petitioners did not requestan opportunity to rebut any of these matters by way of rehearingor otherwise cfProcedure Act 80 1947Commission 324 U.S at 561-562 Section 7d of theAdministrative Procedure Act now codified as U.S.C 556eand we do not understand them to challenge the Commissionsreliance upon these matters before this Court

33

Petitioners do not contest that as found by the Commissio

App from June 1968 through Febiuaiy 1969 the pe iod of

repeat violatiors the bakof4e prob1

arokers id calera reached alarmirg roon 053

petitLcnE.s rhailet th fact tlat these back OtOLCfl

cr at cc xpc ct trading vo1uir and mp cdd

in sul ed the demise Juidaa on lip tir

hrckcrrt ris or cudered -rastic upi

14 ty tntetd petitioner ar ht vcr

ri ion rn tcanng of 4t.cLc li

bj ecu dci sJn 968 den Ti dof go

adopted an emergency rule designed to deal with the back-office

problem of wbch members fal we but par tlis conditionbecame more or less permanent by December 1968 thereby invalidating the

boards adoption of the emergency rules dealing specifically with memb

fails But as we have seen pp 1047 the situation during

the period involved did not remain stable and continuous emergercy acio-i

was required

In affirming the NASDs authority to adopt the emergenc rules in

queor under the circums ancec faced by the securities industry tIe

74/ Whether oi not emergency conditions originally cited by

the NASD have persisted for three years as petitioners state

Br 19 we submit that the only relevant question hereis whether an emergency continued to exist at the time the

energeucy rules uider elallerge were onacted and petitioners

violations occurred--nine months after the original declaration of

an emergency

75/ .LaLix at

4-

Commission cautioned App that it would not permit unjustified

resort to emergency rules by the NASD in contravention of its bylaws

as ireans of solving industry problems But the Commission held that

the NASD properly could continue to alleviate emergency conditions by

the use of emergency rules at ieas until it could be ascertained what

the conditions that existed required on qflg Angebasis

App The securities industry today is in great upheaval

Legislative and regulatory efforts to control occurrences such as

thosc invoivcd here and to revamp the structure of the securities

76

markets resently are in formulation but are by no means complete

At prescnt the NASD has begun implementation of national clearing

facility which may provide one permanent solution to the fails77/

problem and obviate the need for emergency rules It is the

Commissions judgment that the adoption of the emergency rules here in

isste not only was justified but was mandated by the circumstances

76 See Senate Resolution No 109 92d Cong 1st Sess117 Cong ReL June 21 1971 at 9506-9507 Statement

curities and Ex chan Comm iss ion on he Fut ure

Structure of the Securities Markets February 1972 137

BNA Securities Regulation Law Report Pt II February1972 Special Report

77/ For discussion of the NASDs efforts in this respect see1971 Senate Hearings at 259265 statement of Mr GordonMackim President NASD

35

pending development of permanent solutions As this Court has noted

The evaluation of facts and the exercise of judgmentfor the protection of investors dealing in overthecounter securities is function assigned by Congressto the Commission rather than the courts and the

exercise by the Commission of its discretionary powerswill not be upset by the courts except for

cogent reasons 78/

CONCLUS ION

For the foregoing reasons the order of the Commission

affirming the NASDs sanctions against petitioners should be affirmed

Respecttuliy submitted

BRADFORD COOK

General Counsel

DAVID FERBER

Solicitor

HARVEY PITT

Special Counsel

DAVID RONANSKI

APRIL 1972 Attorney

78 ___________________mission 293 2d 738 741 C.A 10 1961 Accord Don____ ______ap 423 2a at 817

ec nbA of the Sec ur it ies xchan Act

rcric association of hokeis or

let len iiia gistci cd with the Connuission as

at 1111 ii it in tion pin suant to sub

io lj oi ii tlihat SLCUI itin asso iat ion

-uai to sri ti under the terms and

cn liti iii iii niCk ithi cectim

ii ith unission c-ti ation state

it ii nd fori the Coimnisio may pie-ttiii forth the information and iccom

ICC dcc nIL CS ii specifiEd

cia to itt rT ii iOii incin

ii id Pc p1 ud ci nd other

for iiit oI Ii imuus ac may byuid re at cu reqia ccc sary or apprO

pint fit nIP Ic in rest or for the cttioi

olin and

pi wi cu tti toi hartcr

ntihof men nritm om- c1 tinii ncliui ud of inc nt ci lyL

anyiuh in in tm ci cone ling

to th 01 lie tr the 111 hei emafter

in thi title co Cu ely referred to is the nhs

of the ssoeiation2

Such reaistiation shall not be construed as

waii cv hr such association or an nieniber thereofof ny contltufional ght or of any right to con

test tI1e vatichty of any rule or regulation of the

oinniission under this title

Vn applicant association shall not he registered as national securities association unlessit

appears to the Commis ion that

by reason of the number of its membersthe scope of their transactions and the geographical distribution of its members such associationwill he able to comply with t1e provisions of

this title and the rules and regulations there

under and to carry out the purposes of this

section

such assoeiatioir is so organized id is

of such charater as to he able to oniply with

the lO\ ision of 11 is title and the ruleR and

regulations tli emicler and to rai ry out the pur

poses of tIns ccci ion

the rules of the associationproi ide

tlnat

any hi oker or ilc aler who makes use of the nia il

or any means or inctruinentahitv of interstate

commerce to effect any transaction in or to in

dimce the urchc se or sale of any security othei

Vs ih50 on national securities cxci ange niay

hccoiue mimber of such associat on CE Ptsuch as are excluded pursuant to pare ra Iior of this subsection or Pc of the asso

ciatio permitled under this cragiaphi The

rules of mu ciatioa inty Ic cnl hipuch amoc iat ion 01 2uch sj ne ca hi

cal basis or on ich pe Phcd -i tothe type of business done by cc ci or

such oilier pu cihcd ai cl 0f 01 ri iSappe in ic lic Cia miss In uc

ippro te iii thc pub nitc

ccticn of ii ton ai Ito

of tiPs sceti ii Ic adom

nayproib -nciitc

Couci5no sc

the Coia pc th it appi Ic

lip itcn-e ict dcny ac

Ii tu cull

ii aTtn ii

si ii io

or cnl qc IC tc cc

hi in I-ccn it cibroker or dealer whether prior or subsequent

to becoming so associated

has been and i0 suspended or expellad funnational securities excltanga or has been and is

barred or mnpcndecl from being ascocictd with

all muenihers of such exchange for violation of

any rule of such exchange

t4 the rules of Pie asmciation lO% ide that

except with tIm approval or at the direction of

the Commission in cases in which the Commission finds it appropriate in the public int rest

so to appi Ui 01 diiec no broker or dealer shall

be admitted to or continued in membership in

such association if such broker or dealer

lies been and is sinpended or expelled

from registered securities association

whether national or affiliated or fmoni national securites exhangt or has been 00d is

Iarred or suspended from being associated

with all members of such asclatiou or from

being associated with all brokers or dealers

which are memhers of such exchange for i-rn

lation of any rule of such assocmat4on oi

exchange which prohibits any act or transac

tion constituting conduct ineonistent with

p1st amid equitable pi inempic of ado 01

quire any- act the omnissi si of which eonsti1a

Section iSA continued

tutes conduct iriflontflnt with just and

quit able p1 n1cipies of trade

subject to an order of the Comnils

mon di suspending for period not

exceeding twelve months or mi oking his

regiein1 ursuant to section 15 of this title

or Hling or suspending him from member

siii

ii egistered cecurities association or

nation cavities exchtnge or barring or

susp Ii him from being associated with

liIOl ti Of deale1

hell prior or subsequent to becom

in brol 01 dealer by ins conduct while

assocr ted ith broker or dealer was cause

of any supen ion expulsion or order of the

chara bed in clause or

wh Ii ir with respect to such broker

or alcr entering such suspension

ulsiom or owlet the Commission or any

such cx ngc or association shall har juris

dtcrmime whether or not any

per on is as cauce thereof

has associated with him any personwho is known or in the exercise of reasonable

care should be known to him to be person

uho if such per.on were broker or dealerwould he ineligible for admission to or con

tinuance in membership under clause

or of this paragraph

the rules of the assocation provide that

excer with tne approval or at the direction of

the ommnms on in cases in which the Commis

sion finds it appropriate in the public interest

so to ai pm ove or direct no person shall become

member and no natural 1ierson shall become

iereon associated with member unless such

person is qualified to become member or person associated with member iii conformity with

specified and appropriate standards with re

spect to the training experience and such other

qualificatiom of such person as the association

finds neeessars or desirable and in the case of

member the financial responsibility of such

member For the purpose of defimung such stand

ards and the application thereof such nmles

mayappropriately classify prospective

members taking into account relevint mat

tems including type of business clone amid nature of securities sold and persons proposedto be asniatecJ ith members

specify that all or any portion of sueh

standards shall be applicable to any such

clas

require persons in any such class to

pass examinations prescribed in accordance

with such rules

provide that persons in any such class

other than prospective members and partners

officers id supervisory employees which lit

ter term may be defined by such rules and

as so def1ned ehall include branch managers of

members of iii mbers may he qualified solelyon the basis ef compliance with specified

standards of training and such other qualifications as the asociation finds appropriate

pros ide that applications to become

mnenmber or person associated with mciii-

her shall set forth such facts as time association

may preccrihe as to the training experienceand other qualifications including in the

case of an applicant for membership financia1

responsibility of the applicant and that the

association may adopt procedures for verifica

tion of qualifications of the applicant

require any class of per ons associated

with member to be registered is ith the asso

ciation in accordance with procedures speci

fied by such rules and any application or doe

umnent suppiemmmental thereto required such

rules of persomm seeking to he rcgisterecl with

such asbociatiUn shall for the purposes of

subsection of section 39 of this title be

deemed an application required to be filed

under this title

the rules of the assoeiatien assure fair

represemmtation of its niemuhers imm the adoption of

any rule of time association or amendmnent

thereto the selection of its officers and directors

and in all other phases of the administration of

its affairs

the rules of the association provide for

the equitable aflocation of dues among its

mneinbers to defray reasonable expenses of

adniinist ration

the rules of the association are designed

to pres ent fraudulent and manipulative acts

and practices tim proniote just amid equitable

pm inemples of tmade to provide safeguards

against unreasonable profits or unreasonable

rates of comnmmim ions or othei charges and imm

general to protect invdtors and the public in-

Section ISA continued

titist ii to rerrct ii ipediments to and per

ne In usi ol and oi en muketin IcUifluc tc Ci in nfan dscrimi

tttio hr veeu custot ra or iSSUE is or brokers

01 to 11 mini nun fits to it ipoce

tile ci ue or in pi fly schedule 01fix in ii of mm ii allowanccs

lsont ml reIntin in cn tion pros ide that

it ii ii niatad %vltl its

nenb slid hr ap ml ii tell clscmpiic by

iL iii sit in in ii en or heniire from bci ass mend is id

II mcuibn ai th percilt

ii tint of isi tcs

1O\ of tim oside

fair rcleI lie itli rctpe th

iiifluf ml asc id

smhicmb lr cii menibrrrjii tim or ti eclrtti flit iberslnt

ii co hir mm in mc inn mm

_ocr itlr ii ni ny oc iideter rnmc is het ocr any me br or other per sonshall lie disciplined such rules shall require

thc specific charges he brought that such inem

b-r on chall be notified of suet be givenan opportunity to defend against such chugesthat record shall be kept and that the deter

mutation hail inclu he

statement cutting forth auy act or

practice in which cuch member or other pef

so may lie foiuicl to has eng iged or which

such member or other person may be found to

ave omitted

statement setting forth time specific

rule or rules of the asociatiou of ii inch anysuch act or practice or omission to act is

deemccl to he in violation

statement whethc the acts or lactiers pm oluhited by Ii vi Ic tiles or the

otmini c5 en in reqii lii ejmt tie

deemed tc constitute con met inconsistent

is ith just and equitable principles of ti ade

tatct tent settin forth the peualty

inpocdIn rn pi oceeciinr to deter nunc ivhmethet

broker dealer shall lie denied membership

or ivlit lit any Pemuon shall be hart ccl front be

big uit tated ith ci et11br sin rules shall

pros ide tint the broker or dealer or peraox shall

The pro ru rc of

to the date of enactment ml ihc uecunties ts

Amendments of 1964 shall be applicable fit

trilns if ny reqictcred ecpntic souiatwhich was reguttet ed on such date until July1964 After Ji ly 1964 1on ad mci

after notice each opportunity for heat

the registration of any srrclm associat ion it ft

hat tire rules tuereof do trot comrfo mu to tl

requirements of thus subsection as intended by

tion of tIre Securities tcts Amendments of 1d64

and any such suspension shall remain in cif ct

rnitd tIre ommnmisslon Issues en orcl dctermrni

that such rules has been modified to coafoi

with such requirements

The Commmuston in ry Imerirmit or quire time

rules of art issocrrrtion ai plying for rcgi tr ion

pursuant to sabsect ion to pt ovide for the

adrrrissrotm of air its ociat ha regisrc ta mtiit

at ed ceur tties association ir uaut to sub cctio

to lmartieilmation in said almImI at as nit men

as an affilia thereof nuclei terms imci immrtt ng such

pots er rmtmd responsibilities Icr atcli afluliite- rich

tinder such other approprn te tenus and conch

ions as may lie pm ovicle by the rules of si

applicant association tf such rrmlem appear to tile

be notifi of venar por unity me

hea on tIm rt ccitmc grori id for de or

bar wbicl re it icr mmrde on hat ccord shall lx l-epc and at left riam ti

shrill set forth if grc mH ur oi ich

the ia ha

ri rcyir ininsofar as Ihc ii ic

icim II in rc

snu vcrngt totat Oii tic

011Li

clime an it ii ny ii inabso

ci

uc

imrodi mm

tica or Iy tic

ubhi

3a

Section iSA continued

Commission he 11CC my or app opriate in thepublic interest oi for the protection of investors

and to carry out the pnrpos of this section The

dcii ics and pos ers of the Commission with respect

to any naticnaI secnritics association or any affil

iatecl scc tiea association shah in no way be

limited it son of any such affiliation

Au appficant association shall not be registt ed as an aft hated sccuritics association unless

it ap ears to the Commisio that

such ess iatic notir ibstanchng that

it does not icfy the reqa rement set forth

of subsection hi willforthwith nec the cgistratioir thereof be

admitted aihliation ith an association regrc ia on ii cnrities association pur

iant to iid lbsecti in the manner

and uadc tI iii and conditions provided bsthe inlc of said national sccniitic association

in oid with snbsection and

asselation end its jules satisfythe rcoo lena nts set forth iii paragraphs

tc 10 inclusive and paragraph 12 of subsection hi except that iii the case of any suchassociat ion am restrict ions upon membershiptherein of the

lie anthorized by paragraphsubsecticn shall not be less stringent than

in the ca ef the national secnrities association

ith which such association is to be affiliated

Upon the filing of an application for registration puisuaot i-o subsection tb or subsection

the Commission shall by order grant such

registration if tile requirements of this section are

satisfied If afte appropriate notice and opportnlliPi to heaung it appems to the Commissionthat any rcqumreaient of this section is not satis

fied the Commission shall by order deny such

registration If ally association granted registra

tion as an affiliated securities association pursuant

to hection shall fail to be aclnntted

prompt l\ tlr5aft to athihiation with registerednational seen rities association the Commissionshall revoke the reistration of such affiliated

securities association

registered securities association whethernut iouai or affiliated may upon such reasonablenot icc the Commission may deem necessary illtime public interest or for the protection of in es

tors withdraw from registration by filing with

tIle Comnusio written notice of withdrawal

in such form as the Comnnlission may by rules and

regulations prescrihe Upon the withdrawal ot

national scunties association from registration

the registration of any association affiliated there

with shall automatically terminate

If any registered securities association

whether national or affiliated takes an disci

phnary action agaim st any member thercof or any

person associateC with snch member or denies

adnussion to au broker or dealer seeking member

ship therein or bars any person from being asso

ciateel with melnber such action shall be subjectto review by the Colnnussion on its own motionor upon application by any person aggrieved

thereby filed within tlurty clays after such action

has been taken or within snch longer period as the

Commission may determine Application to the

Comulmssron for rem Jew or the institution ot

review by the Conuuission on its own motion shall

operate as stay of such action until an ordem is

issued upon snch review pnrsuant to subsection

hi unless the Commission otherwise orders afternotice and opportunity for hearing on the question of stay which hearing may consist solelsof affida its and oral arguments

In proceeding to rem iew disciplinamy

action taken by registered securities association

against member thereof or pcrsom associated

with member if the omumission after appropriate notice and opportunity for hearing uponconsideration of the record before the association

and such other evidence as it may deem relevant

finds that such member or person has

engaged in such acts or piactices or has onnt

ted such act as the association has found him

to have engaged in or omitted and

II determines that such acts or practicesor omission to act are in violation of such ru1es

of the assueiatior as hace been designated in

the determuination of the association

the onuuission shall by order elisnliss the proccech

wig unless it appears to the Cnnmnission that such

action shmothel lie audi tied iir ac oldanee with parlgraph of this subsection Time Conmuissiomm shall

likewise eleternimne whether tile acts or practices

proli ibiteel or the emmuissmoml of amn act reqnneel

Section continued

nit to titn nduct nconsistent iLl

nil qnf pi in ijk of tiade and ci ill so

ri it qpta heonnssiontl at the

dc Cs not ant the hi ng reqnired in

in ii tI Conu iop dct mm that

cci ice LOt am have bern

do nchni ci by the dccirna ednit asson thaten iaita

umid 1n inc nit iecpiredlydc Ic ii Ii omnisdon hhdi

in oi ii cdatio

di If nil ii otic ii 01 porhIn lie no Al Mi Lrd it city

it mc in cmo 1mmiit1i iii c.C sue opt iV

ci ii tic inteiccc th

Ly oic talc ieducc oi

tO 1nmn pcnrlty

viewtlc dii

ii ii it ii thu11 ie YL utteii II cc

tIC icc incocci heft ft jation and uch otkci

iclc nrc it no tic in ide ant determines that

tin pcci Fur pro ft on ii id in denie or bar

ftci cxi in far4 and an alid under tlic section

the oiu tOil ion clviii by order dismiss the pi oceed

uthc 11 the Commission shall by order scmii Ic hc actio of the association and iccluire it

to admit the appli nnt bioker or dcaler to member

therein or to permit inch person to bc asso

ciated ruth ueinbei

The rules of registered secnricies asso

mtion pros idc chat no inenuber tlmcicof shall

it nuicanhei broker oi dealci as defined ni pau igrmph 01 tIns snbscction exceptit thc imc prices foi the same commissions or

and cii the on IN ms and conditions is aresuch niher arc or ded to the eeneral pnhhc

Fo the pui p0 of tins sobsecu in ti

nn men hoc 1a di ii ncludc

lily broke 01 deal rho makes use of the ni us 01

of all means or ins rmimnentahity of interstate corn

mom to effect ins Iran action ni or to ii clnce the

nii Ii cc oi sale of mix securuts othcrsu ise than

01 ii ii semi it sinuige ivlio is not

member of any registered securities an xmation

cept broker or dealer iv io ciuso ni

onumunci al papei hr them acccpta ci

ncrcal bills

hothing thus subsection sh ii co

ci rued oi pplmcx us present ai ml cc

rcjmstercd Iccu Pta Pt ci in

my oil cc iv of rcg ski iionation ii

ni 10 ua tcir

tj Is tereci uitic

cc imLio ii

ad alP ssthedi

idc siy or qmo itiune or fir tie 1eot

ins di in aoditio

ci ii di it ci at

mr 15

ru it

ii iidcc

iii lie

th

as ti nunisno Ic ni

imussuon shall enter an oiclem din

change aclditicn nd lie Co

enter such an order unless such titan

appears to the Counnnsion he oit ito

the requir emncrui of cmii section cvii

diThe Commissiom an ri

ti abiogite ai nit of rcgmstcicd it

sociation if after app opriate uiotce iii up

tunity foi hearing it appear to thc Cc inn si

that such abrogation ncccssa or ip im op

to assure fair dealing the unemnbers of

sociation to ansi re fair rcpreentatiou

unenubers in the ucimim istration of aftcu

otherwise to iiotect investor üi efi in

purposes of th titic

Thtu omnmnisaiomu mnac 1i niiegistcured securities ann iaiinu to ad pLfit alteration of oi sq tilemnen te its ales iii

respect to any of the mumattei luereinaftei mu

ated If suclu associatk mm fails to acloi iv

temati in or supplemnemut mvitlnn remnon tic

clue Conunuission is ammthuoi izeci hi ordei to dl iv

sup Iemumc it thu miles of sad mouse ion tim

muuam II lictoforcl ieqimes ti or sit sat

heatuons of such alteratmomi oi it

Ecfr9_iª continued

deenis nece ary if after appropriate notice and

oiiportu tilt fc lien iii it appears to the Con

mission tI such alt ion or supplement is nec

esc ry 01 up si ml iate in tbc pnhliu hiterest or for

the prote of ins estor or to effectuate the pus

poses of ction with respect

11 basis as and procedure in connec

tion is it it th nial of emhcrslnp or the

bar fv ii beinx asmciated with member

or sciplining of members or pcisc ii

assuci tied tb uieiiibers or lie quali fkatrous

rqu eel fo sibers or nat oral isons asso

ciate itli no tabers or any class thereof

th method for adoption of any change

in er dc ion to the rules of the association

lie in 1liocl of choming officers and

direct

fbI abc bctssecn rci creel securitiesas ocat

ri iuinission is authorized if such action

ppeats necessary or appropriate in the

pul lie nit leo oi for the protection of investors oi

to ca out tIn purposes of this sect ion

aftar appropriate notice and opportunit

foe lice ring by order to su 1end for peuod

not cxc ecling twelve months or to res oke rue

regktt at ioa of rc r4ered securities associat ionif hc oinnii ion fu tl at such association has

iolatecl an provision of tIns title or any rule

Oi iguLnioii tliei etindet or has failed to en force

conipli cc with its ow ii rules or has engaged ii

an cliei activits tending to defeat the purpoccsof tlu section

after appropriate rotice and opportunitfor brariug by order to -aip nd for periodnot exccedn to dye months to expel from

registered securities asmciation any member

tlicr of or to suspend for period not exceeding

twels inc it as or to bui any person from being

asociacd dh member thereof the Coiii

mission find5 that such mneniher or person

has violated any provision of this title

or any rule or regulation thereunder or has

effected any transaction for any other person

who lie had reason to believe was iolatingwith

reRpect to such traii action any prow

sion of this title or any rule or re gidat ion

therer nd13 has uhf ally violated an provision of

the Scnrities Act of 1933 as amended or of

any rule or regulation thereunder or has ef

fected any tranoaction for us other pci on

who lie had reason to belies is as wih1fullviolatnig with respect to such transaction any

provision of such Act or nile or regulation

after appropriate notice and opportunity

for hearinr hi order to remnos from office anc

officer om director of registered securities asso

ciation is ho the Commission finds has is lllfulls

failed to enforce the rules of the association or

has is illftill- abused his authority

in Nothing in tIns section shall be construedto apply with respect to any transaction by

hroker or dealer in an exempted securityii Tf any pros iion of tIns section is in con

flict with an\ pro ision of any law of the nited

States forre on tb date this section takes cJthe pros ision of this section shall pnor ad

Court Review roers

hECTIC 2-i Any person aggreved by an

order issue by tin Ccmr i-no in proceeding

urde tbs title to hich Si 15 rtyhiai re of sue er the Coui if

pals tiel at vthn yen utwhet uci per oi ieid ha fn 1frc prpla of usineos or in the TJnited States Court

of kj Is for the Dist ret iluini by fit

insuchoi nithmsxr rife burysuch er is attcr ho ayi ig th tire

or imssioi if ed te ii

nutol partAi 5lc iiiforth it trans auth lb lrk ii us

my of the Cot inhss curthe uon hal1 fie curt Fe

riou rI thcordrcry ii ieLo pos dcd SOC 01Stat Ip digcourts Ia ear us lu ant Thu

plus to afhr

id _r it Si uolIn ibji eta in oie lOt the Co nmi

sion shafl he 01 sidered the ourt unless such

ohjer Ic all ten bee before he in

mission The finding if the Commission as to the

facts if suppo ted it substantial idence shell Ic

conciusne either pall sh app toll ooart

for kate to adduce additional idence and shall

sFosv to the satisf action of th mu thut such additlonal evidcr is matenal md fbis thtre musrereasonable wounds fo failure to adduce ueh

denee in the hearing befote th Commission the

murt nay der ich add rtiou al evidence tobe

taken Plots the Con su me id to Th ad luced upon the hearing such irrai nit and up in such

terms and conditioi as to tb court may seem

proper he Conimis iou may midify ito finding

as tb fact- son of the additiosal es idence

so ken md it 11 hI such modified new

findIngs ilncll pctd hf cnhs intialdeuce sli ill be conclusive md reco icndationif any -for tI niodification or setting adde of the

original den The judgment and dcci cc of the

court afhnnm1c odlf ing and enforcing 01 set

ting asbe in hole or ii irt my ni1 order of

the Commi non shall ho final sal icct to res icw

by the Supreme Court of time lJnit ci States upon

cer joiCa 01 cc4 IlK lt Ill tS irut I4 ii

239 and 210 of flue Jndici Cud us mended

U.SC ttlc 28 sees 316 ml 341

7a

1eIttSection1oftheNASDsRu1egofFafrpractjce

ARTICLE III

Rules of Fair Practice

Business Conduct of Members

Sec member in th conduct of his busuies shall observe high stan

dards of comnieichl honor and just and equitable prindples of trade

Sa