## Facts

- Bateman Eichler, Hill Richards, Inc. (BEHR) acted as managing underwriter for a Jhirmack Enterprises, Inc. offering and as a market maker in Jhirmack’s over-the-counter stock.
- The underwriting syndicate sold more shares than it held, leaving BEHR short and needing shares to cover sales and fill customer demand.
- On March 25, 26, and 29, 1977, BEHR accepted 56 customer market orders totaling 23,875 shares.
- BEHR purchased only 12,375 shares during that period, insufficient to fill the accepted market orders.
- BEHR did not raise its bid to attract enough shares to complete execution of each market order; instead, it maintained its bid near the prevailing market and allocated the limited shares among customers at an average price.
- BEHR did not disclose in advance, and did not obtain informed customer consent, that market orders might not be filled as ordinarily understood or would be handled through BEHR’s allocation method.
- The NASD disciplined BEHR and individuals including Peter Eichler and Basil Witt; the NASD Board of Governors upheld sanctions; the SEC affirmed; Eichler and Witt petitioned for judicial review.

## Issues

1. Whether substantial evidence supported the SEC’s affirmance of NASD findings that BEHR’s undisclosed allocation of limited shares after accepting market orders violated NASD Rules of Fair Practice.
2. Whether BEHR’s asserted rationales (avoiding price increases, avoiding market domination, maintaining an orderly market, and claimed customer benefit) legally excused accepting market orders it could not execute as market orders or failing to obtain informed consent to different handling.

## Decision

- The Ninth Circuit denied the petition for review and affirmed the SEC’s order sustaining NASD sanctions.
- The court held that accepting customer market orders required BEHR to make a bona fide effort to execute them fully and promptly at the best available price, or to disclose material execution limitations and obtain informed consent.
- The court rejected BEHR’s justifications as insufficient to excuse undisclosed deviations from the customary meaning and handling of market orders.
- The court upheld the SEC’s determinations under substantial-evidence review for factual findings and deferred to the SEC’s reasonable interpretation and application of NASD rules in the broker-dealer context.

## Legal Principles

- A broker-dealer accepting a customer market order must make a bona fide effort to execute the order fully and promptly at the best available market price consistent with market conditions.
- If the broker-dealer intends to handle a “market order” in a materially different way (including partial allocation based on an internal method), it must clearly disclose the departure and obtain the customer’s informed consent.
- A firm may not substitute its own view of customer welfare for the customer’s chosen order type through undisclosed execution practices.
- Market-maker status and asserted concerns about price impact, market domination, or market orderliness do not justify failing to meet basic customer-facing execution and disclosure obligations.
- In reviewing SRO disciplinary actions, SEC oversight receives deference; SEC factual findings are upheld if supported by substantial evidence.

## Conclusion

The court sustained SEC-approved NASD discipline because the broker-dealer accepted market orders it could not execute as market orders and instead allocated limited shares without disclosure or informed consent, and its market-making and customer-protection rationales did not excuse that conduct.


Eichler v. Securities & Exchange Commission, 757 F.2d 1066 (9th Cir. 1985)