## Facts

- Holly Uranium Corporation filed a registration statement on February 10, 1955 for a public offering of common stock; Franklin, Meyer & Barnett acted as a co-underwriter and broker-dealer.
- Before the registration statement became effective (effective April 23, 1955), the firm circulated a preliminary prospectus and cover letter stating it could not solicit or accept orders until effectiveness.
- A partner instructed salesmen at internal meetings to accept only “indications of interest,” not orders; other partners attended.
- Between April 1 and April 22, 1955, customers took steps reflecting commitment to purchase Holly shares before effectiveness, including:
  - selling other securities to raise cash, sometimes at salesmen’s suggestion;
  - sending checks or postal money orders in amounts matching the intended purchase, sometimes with notations indicating they were for Holly stock;
  - sending securities to be sold with written instructions to use proceeds to buy Holly shares.
- A salesman sent customers a note stating his allotment was “running low,” implying urgency to secure shares despite the offering not yet being registered as effective.
- The firm did not implement controls to review customer checks/instruments or monitor whether “indications of interest” were becoming funded or otherwise committed purchases.
- The SEC instituted an administrative disciplinary proceeding to determine whether the firm violated Securities Act § 5 and whether certain partners and salesmen were a cause of any sanction; the firm proposed a limited suspension, citing corrective steps and lack of prior discipline.

## Issues

1. Whether pre-effective customer conduct (funding purchases, earmarked payments, and sale-and-repurchase instructions) constituted “sales” or “contracts of sale” prohibited by Securities Act § 5.
2. Whether the broker-dealer and underwriter was responsible for salesmen’s conduct where partners issued written and oral directives against taking orders.
3. What disciplinary sanction was appropriate, and whether particular partners and salesmen were a “cause” of the violations for purposes of imposing sanctions.

## Decision

- The SEC found that the firm engaged in unlawful pre-effective “sales” or “contracts of sale” in violation of Securities Act § 5.
- The SEC held the firm responsible for its salesmen’s conduct and for inadequate supervision that permitted pre-effective customer commitments to occur.
- The SEC concluded that certain partners and sales personnel were a cause of the violations, based on supervisory failures and sales practices.
- Considering mitigation (prompt remedial action, indirect partner involvement, and an unblemished disciplinary record), the SEC accepted a comparatively short suspension (described as a 10-day NASD membership suspension) rather than a harsher sanction.

## Legal Principles

- Section 5 is applied based on economic substance: transactions that create binding or practically irrevocable investor commitments before effectiveness can constitute prohibited “sales” or “contracts of sale,” even without formal purchase contracts.
- “Indications of interest” are permissible only when they remain non-committal; accepting or inducing earmarked funds or securities transfers tied to an offering crosses into § 5-prohibited conduct.
- Written disclaimers and general directives not to accept orders do not negate § 5 liability when sales practices effectively complete the investor’s purchase decision before effectiveness.
- Broker-dealers and underwriters must implement effective supervisory controls, not merely issue general instructions, to prevent pre-effective sales activity by associated persons.
- In assessing sanctions, the SEC may weigh mitigation such as corrective action, limited direct involvement by supervisors, and lack of prior disciplinary history, while still treating negligent supervision leading to § 5 violations as sanctionable.

## Conclusion

The SEC disciplined an underwriter-broker for § 5 violations where customers were induced or allowed to commit funds or assets to an offering before the registration statement became effective, holding that substance controls over labels like “indications of interest” and that firms must maintain effective supervision to prevent premature sales activity.


In re Franklin, Meyer & Barnett, 37 S.E.C. 47 (1956)