## Facts

- General Bond & Share Company (General Bond) was a broker-dealer and NASD member engaged in over-the-counter securities activity.
- General Bond accepted compensation from issuers in exchange for being listed as a market maker for the issuers’ OTC securities in the “pink sheets.”
- In 1990, NASD personnel advised General Bond’s president that accepting issuer-paid compensation for market-making was prohibited and referenced a prior NASD notice warning that the practice might violate antifraud provisions.
- General Bond’s president agreed to refund at least one fee and cease the practice, but General Bond did not stop accepting issuer-paid compensation.
- NASD disciplinary proceedings charged General Bond with violating NASD Rules of Fair Practice, including Article III, § 1 (requiring “high standards of commercial honor and just and equitable trade principles”), and additional violations involving recordkeeping and responses to NASD information requests.
- NASD imposed sanctions including censure, expulsion, and fines; NASD internal review affirmed.
- The SEC conducted de novo review of the NASD disciplinary record and sustained the findings and sanctions.
- General Bond petitioned the Tenth Circuit for review of the SEC’s order.

## Issues

1. Whether treating issuer-paid market-making compensation as violating NASD Article III, § 1 amounted to a “rule change” requiring SEC filing and approval under 15 U.S.C. § 78s(b)(1).
2. Whether substantial evidence supported the SEC’s findings sustaining NASD’s determinations of rule violations.
3. Whether the SEC abused its discretion in sustaining the sanctions (including expulsion and fines).

## Decision

- The court denied the petition for review and affirmed the SEC’s order sustaining NASD sanctions.
- The court accepted the SEC’s determination that General Bond’s conduct violated NASD Article III, § 1, particularly given the direct notice to General Bond and its subsequent failure to stop the practice.
- The court rejected the argument that the NASD’s position constituted an unapproved rule change invalid under § 78s(b)(1).
- Applying deferential review, the court upheld the SEC’s factual findings as supported by substantial evidence and found no abuse of discretion in the sanctions sustained.

## Legal Principles

- An SRO’s application of a broadly worded fair-practice standard (e.g., “commercial honor” and “just and equitable principles of trade”) may support discipline for conduct inconsistent with market integrity, especially after specific notice to the member.
- Not every SRO interpretation or enforcement position is a “rule change” requiring SEC filing and approval under 15 U.S.C. § 78s(b)(1); applying an existing rule to particular conduct may be treated as interpretation rather than a new rule.
- On judicial review of SEC orders sustaining SRO discipline, courts generally uphold factual findings if supported by substantial evidence and review the selection of sanctions for abuse of discretion.

## Conclusion

The Tenth Circuit upheld the SEC’s de novo determination sustaining NASD discipline against a broker-dealer that accepted issuer-paid market-making compensation after direct notice to stop, holding that enforcement under the NASD’s general fair-practice rule was not an invalid, unapproved rule change and that the SEC’s findings and sanctions withstood deferential judicial review.


Gen. Bond & Share Co. v. SEC, 39 F.3d 1451 (10th Cir. 1994)