IM-2420-1. Transactions Between Members and Non-Members*

(1) "Member"

Rule 0120(i) defines a "member" as any individual, partnership, corporation or other legal entity admitted to membership in the Association. All other persons, firms or corporations, whether or not they are brokers or dealers, are therefore to be regarded as non-members of the Association.

(2) Expelled Dealer

A dealer who has been expelled from the Association by order either of the Commission or the Association becomes a non-member of the Association from the effective date of such order.

(3) Suspended Dealer

A dealer who has been suspended from membership in the Association by order either of the Commission or the Association is to be treated as a non-member of the Association from the effective date of such order and during the period of such suspension. At the termination of the suspension period, such dealer is automatically reinstated to membership in the Association.

(4) Broker or Dealer Registration Revoked by SEC

Revocation by the Commission of an Association member's registration as a broker or dealer automatically terminates the membership of such broker or dealer in the Association as of the effective date of such order. Under Article III, Section 4 of the By-Laws of the Corporation, a firm whose registration as a broker or dealer is revoked is thereby disqualified for membership in the Association, and from the effective date of such order, the membership of such broker or dealer in the Association is discontinued. Thereafter such broker or dealer is a non-member of the Association.

(5) Membership Resigned or Canceled

The membership of a broker or dealer in the Association is automatically terminated when the Association accepts the resignation of such member or cancels its membership in the Association under the provisions of Article III, Section 3; Article IV, Section 5; or Article XIII, Section 1, of the By-Laws. After the date of acceptance by the Association of the resignation of such member or the date of cancellation of membership by the Association, such broker or dealer is a non-member of the Association.

(1) An Association member may pay a commission to a member of a national securities exchange for executing an order upon an exchange even though the exchange member is not a member of the Association. Rule 2420 does not apply to transactions upon an exchange and, therefore, does not prohibit such transactions.

(2) Where an Association member is also a member of an exchange, an order of the Commission or of the Association expelling or suspending the firm from membership in the Association will not directly affect the business of the firm as a member of an exchange because Rule 2420 does not apply to transactions on the floor of an exchange. While an order of suspension or expulsion is in effect, the firm may continue to conduct its normal business on an exchange and participate in special offerings on an exchange without involving any violation by an Association member of Rule 2420.

(1) Participation in Underwriting or Selling Groups

An Association member may not enter into a joint account, underwriting or selling group, or join a syndicate or group, with any non-member broker or dealer or with a member of a national securities exchange, who is not also a member of the Association, for the purpose of acquiring and distributing an issue of securities. Rule 2420, paragraphs (a) and (b) would be applicable and such exchange member would be a "non-member broker or dealer" within the definition of paragraph (d) of that Rule.

(2) Sale to Bank or Trust Company

An Association member, participating in the distribution of an issue of securities as an underwriter or in a selling group, may not allow any selling concession, discount or other allowance in connection with the sale of such securities to any bank or trust company. Under Article I, paragraphs (e) and (h), of the By-Laws a bank or trust company is excluded from the definition of a broker or dealer and therefore may not receive selling concessions, discounts or other allowances from an Association member under Rule 2740.

(3) Suspended or Expelled Dealer — Group Contemplating Distribution

An Association member may not join any underwriting or selling group with a dealer who has been and is suspended from membership in the Association by order of the Commission or of the Association if at the time such group was organized, it was contemplating the distribution of an issue of securities to the public. A dealer who has been suspended from membership in the Association is to be treated as a non-member during the suspension period and Rule 2420(b)(2) prohibits members from joining with non-members in a group "contemplating the distribution to the public of any issue of securities." Even though the suspension period had terminated before the time when the securities were to be distributed, the Rule prohibits a member from joining with a non-member in a group which is contemplating the distribution of an issue of securities at a future time.

(4) Dealer Suspended or Expelled After Underwriting Group Formed

Where a dealer is suspended or expelled from membership in the Association by an order of the Commission or of the Association which became effective after such dealer had joined an underwriting group under which each underwriter had severally purchased securities from the issuer, such dealer could thereafter during the period of suspension or expulsion accept delivery from the issuer of the securities which it had underwritten prior to the effective date of such order and pay to the issuer its commitment therefor without involving any violation of the Rules by members. After the effective date of such order and during the period of suspension or expulsion, Association members could only buy the securities from or sell the securities to the dealer, who was suspended or expelled, at the public offering price, regardless of whether the Association members were also members of the underwriting or selling group for the particular issue. Rule 2420 prohibits an Association member from dealing with any non-member broker or dealer except at the same prices, for the same commissions or fees, and on the same terms and conditions as the member would deal with a member of the general public at the same time. Delivery of the securities by the issuer to the particular dealer suspended or expelled and payment therefor by such dealer would not involve a violation of Rule 2420 in this situation.

(5) Dealer Suspended or Expelled After Selling Group Formed

Where a dealer is suspended or expelled from the Association by an order of the Commission or of the Association which became effective after such dealer had joined a selling group, members of the Association, including the underwriters and other selling group members, would be prohibited by Rule 2420 from selling the securities to, or buying the securities from, such dealer at any price different from the public offering price. Members would not violate Rule 2420 by accepting from such dealer, during the period such order of suspension or expulsion was in effect, payment of the full public offering price for the securities allotted to such dealer. After the effective date of such order, Rule 2420 prohibits Association members from granting or allowing to the dealer suspended or expelled any selling concession, discount or other allowance for the securities distributed by such dealer. While such order is in effect, Association members could only deal with such dealer at the same prices, for the same commissions, fees, concessions, discounts or other allowances as the Association members would deal at the time of the transaction with a member of the general public.

(6) Commissions in Over-the-Counter Transactions with Non-Members

An Association member may not pay a commission to any non-member broker or dealer for executing a brokerage order for the Association member in the over-the-counter market. Rule 2420 requires an Association member to deal with non-members only on the same terms and conditions as are accorded by such Association member to members of the general public. On the other hand, Rule 2420 does not prohibit an Association member from executing over-the-counter an order for a non-member and charging such non-member a commission therefore. Rule 2420 merely requires that in transactions with a non-member, such non-member must be dealt with at the same prices, for the same commissions or fees and on the same terms and conditions as are by such member accorded to the general public.

(7) Members of a National Securities Exchange

In over-the-counter transactions in either listed or unlisted securities an Association member may not buy from or sell to a member of a national securities exchange who is not also a member of the Association at different prices or on different terms or conditions that are accorded by such Association member to members of the general public. Such exchange member, with respect to such over-the-counter transactions, comes within the definition of a "non-member broker or dealer" in Rule 2420(d), and Rule 2420 is therefore applicable. For the same reason an Association member may not pay a commission to an exchange member, who is not also a member of the Association, for executing a brokerage order over-the-counter.

When a dealer has been and is suspended or expelled from membership in the Association by order of the Commission or of the Association, under Rule 2420, during the period of such suspension or expulsion, an Association member may only deal with such dealer at the same prices, for the same commissions, fees, concessions, discounts or other allowances as the Association member would deal at the time of the transaction with a member of the general public.

(8) Investment Advisory Fee

When an Association member has rendered an investment advisory service for a fee to other members and thereafter is suspended or expelled from membership in the Association by order of the Commission or of the Association, another Association member may continue to pay the fee to such investment adviser provided that over-the-counter transactions in securities with such investment adviser are made only at the same price and on the same terms as the member would deal with the public and the fee for acting as investment adviser is not used as a method of avoiding the provisions of Rule 2420.