the member's bank asserts that the bank valued the stock at $3.00 per share for loan purposes during 1962 and that it would have been willing to loan money on the stock on that basis. This letter states, however, that it was the understanding of the bank that the block of 10,988 shares was registered and that they were "subject to clearance for sale by a post-effective amendment." Respondent Benson has stated in his testimony before the Subcommittee of the Board that the post-effective amendment did not take place until sometime after the period of the violations. Thus, since the bank apparently misunderstood the true status of the shares as of the dates here in question, the letter is insufficient to prove value for the shares for net capital purposes. Further, while the loan value of shares might be properly utilized in some circumstances as a means of ascertaining value for net capital purposes, before such can be permitted the shares themselves must qualify as an asset which can be utilized in computing net capital. We, therefore, find that the loan value of the 10,988 shares cannot be utilized in computing net capital ratio, and we also find violation of the net capital rule as of June 30, 1962, July 31, 1962, August 31, 1962, and September 30, 1962.

Respondents made several assertions in respect to the Committee's findings of unfair underwriter's compensation, however, we believe it unnecessary to consider these arguments individually since the member was not required to file the underwriter's compensation arrangements in the issues in question with the Association. The issues were purely intrastate in nature and the Association's requirement that underwriters' compensation arrangements be submitted to the Executive Office did not apply to intrastate offerings until April 1, 1963, which was after the effective date of each of the three issues in question. The District Committee's findings in respect to unreasonable underwriter's compensation are reversed for want of jurisdiction at the time of the offerings in each instance and the complaint in respect thereto is dismissed.

In respect to the Committee's finding of failure to disclose common control with Homemaker Savings Corporation, the record reflects that during the period of the violation, September 15, 1962, to December 31, 1962, the individual respondent Benson owned 33.7% of the shares of the company, was a director and vice president thereof and that the member maintained the only market in this speculative security. We, therefore, affirm the findings of the District Business Conduct Committee in this respect.

The Committee found unfair markup violations as to all respondents as noted above during the period August 1, 1962, to December 31, 1962, in 268 transactions with markups ranging from 25% to 200%. Respondents contest the basis used for computing the markup percentages but even using respondents' own computations which were submitted subsequent to the hearing before the Subcommittee, the markups are 20% and above and, hence, excessive.

There is no proof in the record, however, that the individual respondents, aside from Benson and Alm, had anything to do with the markup policy of the member. Further, Benson and Alm both testified that the only one who had anything to do with setting markups was Mr. Benson. In addition, in almost all instances of sales in the same issue the markup percentage is identical thereby indicating that the markup was established by the firm's officers as a matter of policy. In view of these facts, we hereby reverse the findings of violation of the markup policy and dismiss the complaint in respect to all respondents with the exception of the member, Benson and Alm. The latter two individuals must bear the responsibility of the violations of the markup policy because of their status as officers of the firm. Therefore, we affirm the findings of violations of the markup policy as to them and as to the member. We also find that the conduct of the member and respondents Benson and Alm was inconsistent with high standards of commercial honor and just and equitable principles of trade.

Notwithstanding our reversal of the findings of the District Business Conduct Committee in respect to unfair underwriter's compensation, we do not believe that the penalties imposed by the District Committee are inconsistent with the seriousness of the violations found. We, therefore, affirm the penalties imposed by the District Business Conduct Committee upon the member and respondents Benson and Alm. In addition, we hereby assess costs of the proceedings before the Board of Governors in the amount of $874.11 one-third each against respondent member, and respondents Benson and Alm. The penalties imposed upon the other respondents are hereby reversed and the complaint as to them is dismissed, On Behalf of the Board of Governors: ROBERT W. HAACK,

President.

EXHIBIT 5

(Securities Exchange Act Release No. 7856)

SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C., APRIL 8, 1966

FINDINGS AND OPINION OF THE COMMISSION

In the Matter of the Application of

C. A. BENSON & Co., INC., 529 GREENLEAF DRIVE, MONROEVILLE, PENNSYLVANIA

AND

CARL A. BENSON, JAMES H. ALM

For Review of Disciplinary Action Taken by the

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

File No. 16-1A199

Securities Exchange Act of 1934-Sections 15A (g) and 15A(h)

REGISTERED SECURITIES ASSOCIATION-REVIEW OF DISCIPLINARY PROCEEDINGS Violations of Rules of Fair Practice

Sales of Securities at Unfair Prices

Failure to Comply with Net Capital Requirements

Misleading Advertising

Failure to Disclose Common Control

In proceedings for review of action of registered securities association expelling member, revoking registrations of member's president and secretary-treasurer as registered representatives, and imposing fines and censure on applicants, association's findings that member sold securities to customers at unfair prices, failed to comply with net capital requirements, used misleading advertising material and failed to disclose to customers that member and issuer of securities sold by member were under common control, sustained, and penalties imposed against member and its president affirmed.

Excessive Penalty

Penalty of revocation of registration as registered representative imposed on member's secretary-treasurer, held, excessive and reduced to 30-day suspension, in view of facts that applicant occupied a substantially more limited position and was less experienced in securities field than member's president who was its active operating head, had no proprietary interest in member and had not previously been the subject of disciplinary sanctions.

Appearances:

Carl A. Benson, for C. A. Benson & Co., and pro se.

James H. Alm, pro se.

Marc A. White and Frank J. Wilson, for the National Association of Securities Dealers, Inc.

This is an application pursuant to Section 15A (g) of the Securities Exchange Act of 1934 ("Act") by C. A. Benson & Co., Inc. ("the firm"), Carl A. Benson, its president and controlling stockholder, and James H. Alm, its secretarytreasurer, for review of disciplinary action taken against them by the National Association of Securities Dealers, Inc. ("NASD"). The NASD, on the basis of findings that applicants violated certain of its Rules of Fair Practice, expelled the firm from NASD membership, revoked the registrations of Benson and Alm as registered representatives, fined the firm $2,500, Benson $1,500 and Alm $750, censured them and imposed costs. Applicants and the NASD filed briefs with us, and we heard oral argument. On the basis of our review of the record we make the following findings:

I

The NASD found that in 268 sales of stock of Wyoming Nuclear Corporation ("Wyoming") during the period August 1 through December 31, 1962, applicants, in violation of Sections 1 and 4 of Article III of the Rules of Fair Practice, charged customers prices which were not reasonably related to the current market

price.' These prices which ranged from 50¢ to 75¢ per share, included mark-ups ranging from 25% to 200%, computed by the NASD on the basis of the firm's contemporaneous cost. More than 60% of the sales involved mark-ups of 100%

or more.

Applicants assert that the mark-ups should have been computed on the basis of the firm's inside offering price as reflected by its asked quotations in the daily sheets published by the National Quotation Bureau, Inc. We cannot agree.

The NASD's mark-up policy expressly provides that, absent other bona-fide evidence of the prevailing market price of a security, a member's own contemporaneous cost is the best indication of that price. We have frequently held, both in cases involving violations of the NASD's Rules of Fair Practice and in broker-dealer proceedings where it has been charged that mark-ups were violative of the anti-fraud provisions of the securities acts, that in the absence of countervailing evidence a dealer's contemporaneous cost is the best evidence of current market price,* and the use of this standard has been judicially approved. This rule merely reflects a recognition of the fact that the prices paid for a security by a dealer in actual transactions closely related in time to his sales, whether or not he has a position in the security, are normally a highly reliable indication of the prevailing market price."

It is clear that in the circumstances present here the firm's quotations did not provide a reliable guide to the prevailing market price and that the firm was not entitled to have its mark-ups computed on the basis of its asked quotations. During the five-month period involved here the firm and one other dealer, Gearhart & Otis, Inc. ("G&O"), regularly entered quotations for Wyoming stock in the sheets. The offers quoted by G&O and the firm were identical during most of the period in question, and were 5% from August through November 1, 1962 and 1⁄2 thereafter. While the firm purchased Wyoming stock from a number of other dealers, its sales were exclusively at retail and it was not as it claimed a wholesale dealer. During the time that such quotations were 5%, the firm bought a total of 3,000 shares of Wyoming stock at 5/16 and % from G&O, which were G&O's only sales. In December 1962, G&O sold 300 shares of Wyoming stock to the firm at 4, one-half the then quoted offering price, and 700 shares to another dealer at ." Thus, during the entire period at issue here neither the firm nor G&O sold a single share of Wyoming stock to another dealer at their inside offer in the sheets, the price which applicants claim is the appropriate base for computing mark-ups. Under these circumstances, we conclude that the NASD properly disregarded the offering price in the sheets.10

Applicants also assert that a survey made by them of the quotations for 6,000 securities appearing in a single day's sheets revealed spreads between the bids and offers (characterized by applicants as "profits expected") or from 5.1% to 900%, and that it was unfair for the NASD to single applicants out for disciplinary action. The spreads referred to, however, relate only to wholesale quotations and do not reflect mark-ups taken in retail transactions or even actual inter

1 Section 1 of Article III requires NASD members to "observe high standards of commercial honor and just and equitable principles of trade." Section 4 provides, in pertinent part, that where a member sells for his own account to his customer, the price must be fair, taking into consideration all relevant circumstances including the fact that the member is entitled to a profit.

2 During the hearings before the Board of Governors, Alm pointed out various minor errors in the NASD's mark-up schedule, and it was agreed that applicants would submit a corrected schedule. The corrected schedule reduces the number of transactions to 259, but does not otherwise affect our findings.

3 NASD Manual, G-3.

See Managed Investment Programs, 37 S.E.C. 783 (1957); Wm. H. Keller, Jr., 38 S.E.C. 900 (1959); Boren & Co., 40 S.E.C. 217 (1960); Naftalin & Co., Inc., Securities Exchange Act Release No. 7220 (January 10, 1964); J. A. Winston & Co., Inc., Securities Exchange Act Release No. 7337 (June 8, 1964).

Barnett v. U.S., 319 F. 2d 340 (C.A. 8, 1963).

Naftalin & Co., Inc., supra.

Only two other dealers appeared in the sheets with two-way quotations, one on four days and the other on three.

During the same period the firm sold Wyoming stock to retail customers at % and Its mark-ups based on its contemporaneous cost during that period ranged from 25% to 200%.

During that month, the firm sold Wyoming stock to customers at 2, representing a mark-up over contemporaneous cost of 33% to 100%.

10 Cf. General Investing Corporation, Securities Exchange Act Release No. 7316 (May 15, 1964); Samuel B. Franklin & Company, Securities Exchange Act Release No. 7407 (September 3, 1964); Costello, Russotto & Co., Securities Exchange Act Release No. 7729 (October 22, 1965).

dealer mark-ups. As we pointed out in Naftalin & Co., Inc.," quotations for securities with limited inter-dealer trading activity, particularly low-priced speculative securities, frequently show wide spreads between the bid and the offer, and are likely to be subject to negotiation, and therefore may have little value as evidence of the prevailing market price."

Applicants further argue that the NASD disregarded various relevant factors set forth in its interpretation with respcet to mark-ups," including the low price of the securities, and the assertedly low dollar amount of individual transactions, and urge that consideration should also be given to the risk involved in the maintenance of a substantial position in Wyoming stock. Applicants' assertion as to the size of individual transactions is not supported by the record, however," and the other factors adverted to could not justify the grossly excessive markups found here.15

38 S.E.C. 908 (1959), aff'd 290 F. 2d 719 (C.A. 9, 1961), cert. denied 368 U.S. 889. We therefore conclude, as did the NASD, that applicants charged prices that were not reasonably related to the current market price and were unfair.

The NASD found that as of the four month-end dates from June 30 through September 30, 1962, the firm in violation of our net capital rule," engaged in business with net capital deficiencies ranging from $4,775 to $9,427." In making its computations, the NASD excluded from the firm's net worth, as not readily convertible into cash,18 10,988 shares of stock of Copter Skyways, Inc. ("Skyways") registered under the Securities Act but which could not be publicly sold pending the effectiveness of a post-effective amendment to a Skyways registration statement, and an accounts receivable item of $6,006 which had been due from another broker-dealer since the latter part of 1960. The NASD also rejected applicants' claim that an accounts payable item for legal fees and expenses, recorded on the firm's books as $11,217, should have been reduced to $5,000, the amount for which it was subsequently settled.

We agree with the NASD's treatment of these items, with the exception of the exclusion of the Skyways stock in the instance of the computation as of September 30.

19

We think it is clear that the Skyways stock did not meet the test of ready convertibility into cash as long as its public sale was subject to legal restrictions. Nor can we accept applicants' contention that no deficiencies should be found because the firm assertedly could have at all relevant times obtained a bank loan, using the Skyways shares as collateral, in an amount which would cure the deficiencies. We have recently held that the fact that securities can be pledged as collateral for loans does not as such render them includible as assets for net capital purposes." While we recognize that the firm could have brought itself into compliance by obtaining a loan, the fact remains that it did not do so and that the shares were therefore properly excluded from net capital during the period prior to the effectiveness of the post-effective amendment covering the shares in question." While applicants assert that the amendment became effective on October 3, 1962, our files shows that the effective date was actually September 28, 1962." Accordingly, we set aside the finding that there was a net capital deficiency on September 30, 1962, since inclusion of those shares among the firm's assets eliminates the deficiency.

11 Securities Exchange Act Release No. 7220, p. 5 (January 10, 1964).

12 See also Samuel B. Franklin & Company, 38 S.E.C. 908, 911-12 (1959), aff'd 290 F. 2d 719 (C.A. 9, 1961), cert. denied 368 U.S. 889; J. A. Winston & Co., Inc., Securities Exchange Act Release No. 7334, p. 11 (June 5, 1964).

13 NASD Manual, G-3-G-5.

14 The record shows that the transactions ranged as high as $3.150, that 59 exceeded $300 and 22 exceeded $500, and that in the case of those over $500 the mark-ups were with one exception 50% or more.

15 See Mitchell Securities, Inc., 37 S.E.C. 178 (1956); Samuel B. Franklin & Company, 16 17 CFR 240.15c3-1.

17 The computed deficiencies were $4,862, $4,775, $7,104 and $9,427 on the respective month-ends.

18 Under subsection (c) (2) (B) of the net capital rule, net worth is adjusted by deducting "assets which cannot be readily converted into cash (less any indebtedness secured thereby)."

19 Cf. Whitney-Phoenix Company, Inc., 39 S.E.C. 245, 249, n. 14 (1959); Midwest Planned Investments, Inc., Securities Exchange Act Release No. 7564, p. 3 (March 26, 1965).

20 John W. Yeaman, Inc., Securities Exchange Act Release No. 7527, pp. 5-6 (February 10, 1965).

Cf. Madison Management Corp., Securities Exchange Act Release No. 7453, p. 2 (October 30, 1964). Applicants' further argument that value was assigned to the stock for tax purposes is obviously irrelevant to the question of whether the stock was readily convertible into cash.

The shares were sold by the firm in October 1962 at $3.50 per share.

27-845-69-16

We also find no merit in applicants' objection to the NASD's exclusion of the accounts receivable item from the firm's assets. An account which remains unpaid after almost two years does not possess the necessary liquidity for inclusion as an asset for net capital purposes. With respect to the accounts payable item, applicants assert that during the period under consideration there were discussions between Benson and counsel with respect to an appropriate time for "settling up the account" and it was agreed that a settlement would be reached at a time when payment was convenient, and that, shortly after September 30, the account was settled for $5,000. There could be no assurance, however, that this obligation would in fact be settled at a lower figure and the amount at which it appeared on the firm's books during the period under consideration represented the best evidence of the extent of the obligation at that time.

Applicants claim that they had a right "to be secure in their belief" that the firm was in compliance with the net capital rule, because the NASD, which was furnished monthly balance sheets as of the dates in question, raised no question until it instituted this disciplinary proceeding in March 1963, and because an investigator on our staff inspected the firm's books and records in October 1962, and, according to an affidavit by Alm, advised the latter that there appeared to be no net capital violation. There is no merit in this contention. In the first place, the balance sheets submitted to the NASD did not indicate that there was any restriction on the sale of the Skyways stock or that $6,006 of the firm's accounts receivable represented a long overdue debt. Moreover, the inspection by our investigator could not operate as an estoppel against the NASD or this Commission or cure the net capital violations, and any element of reliance is entirely lacking here since the inspection occurred subsequent to the period of net capital deficiency.

24

Accordingly, we find that as of the June, July and August 1962 dates applicants violated the net capital rule and thereby violated Section 1 of Article III of the NASD's Rules.

III

The NASD found that at a time when Benson was vice-president, a director and principal stockholder of Home Makers Savings Corporation ("HMS”), the firm used two misleading circulars in connection with the sale of HMS common stock, in contravention of the NASD's interpretation then in effect with respect to sales literature.25

The first circular related to a vitamin tablet distributed by HMS under the name "Vita-all," and was used by the firm from about July 1962 until the NASD complaint was filed in March 1963. It stated that the management of HMS was confident that Vita-all would "rank along side other popular vitamins in the drug store" and felt that, on the basis of market tests in one area, Vita-all's "chances for success are excellent." On the same page it listed the sales, earnings and dividends of six "vitamin vendors" whose recent annual sales ranged from $2.6 million to $46.7 million. It also contained numerous optimistic statements regarding the prospects of the vitamin industry generally and the merits of Vita-all. The circular was misleading in its implication that HMS, which was a new company with new products and a weak financial position," would become as successful as the other companies listed. The circular was also false in that it stated that the formula for Vita-all "was purchased by HMS from the supplier," whereas HMS was merely the distributor of the manufactured product as agent for the concern which had formulated it, and, although HMS did have an exclusive sales contract with that company, it had no proprietary right in the formula, which was unpatentable.

23 Cf. Bennett-Manning Company, 40 S.E.C. 879. n. 4 (1961).
24 See John W. Yeaman, Inc., supra, at p. 9 and cases there cited.

25 The interpretation specified that the use of sales literature which employed "come-on" techniques or statements which were flamboyant, misleading or tended to mislead would be deemed conduct inconsistent with just and equitable principles of trade and violative of Section 1 of Article III of the Rules of Fair Practice. Explanatory material accompany ing the interpretation stated, among other things, that "exaggerated or sensational statements or claims, the implications of which may mislead, are prohibited," and that "no material fact or qualification may be omitted if the omission, in the light of the context of the material presented, would cause the . . . sales literature to be misleading." 26 HMS, which had been organized in 1961, had net sales of $4.308 for the calendar year 1962, on which it sustained a net loss of $100,060. As of December 31, 1962, it had a total deficit of $117,300.

Cf. C. A. Benson & Co., Inc., Securities Exchange Act Release No. 7346, p. 5 (June 13. 1964) G. J. Mitchell, Jr., Co., 40 S.E.C. 409, 412-13 (1960); The Whitehall Corporation, 38 S.E.C. 259, 266-67 (1958); American Republic Investors, Inc., 37 S.E.C. 287, 290–91 (1956).