IM-2830-2. Maintaining the Public Offering Price

Rule 2420(a) states that:

No member shall deal 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 are by such member accorded to the general public.

Section 22(d) of the Investment Company Act of 1940 states in part that:

. . . and, if such class of security (i.e., shares of open-end investment companies) is being currently offered to the public by or through an underwriter, no principal underwriter of such security and no dealer shall sell any such security to any person except a dealer, a principal underwriter or the issuer, except at a current public offering price described in the prospectus. . . . (emphasis added).

It is apparent from this section of the statute that, in principal transactions between dealers and customers in shares of such open-end investment companies, the current public offering price must, by law, be maintained.

This section of the statute taken together with Rule 2420 has been construed by the Board of Governors to mean that members of this Association must maintain the public offering price — not only to customers as required by law — but also to non-member brokers and dealers, inasmuch as members must deal with non-member brokers and dealers at the same prices, for the same commissions or fees, and on the same terms and conditions as such members accord to the general public.

The following types of transactions illustrate these principles: (All sales in the examples below are assumed to be at less than the public offering price stated in the prospectus and are assumed not to raise any questions under Rule 2830.)

(a) One member sells to another member:

This is a proper transaction under Section 22(d) and under Rule 2420.

(b) One member sells through a non-member to another member:

This is a proper transaction under Section 22(d); but the selling member is violating Rule 2420.

(c) A member sells to a customer:

This is a violation of Section 22(d).

(d) A member sells to a non-member:

This is a proper transaction under Section 22(d); but it is a violation of Rule 2420, because the member may not treat a non-member in any manner other than he would treat the general public and to the general public he must, under Section 22(d), maintain the public offering price.

(e) One member sells to another member who acts as agent for a non-member:

This is a proper transaction under Section 22(d); but both members may be violating Rule 2420, as in example (d).

(f) One member sells through another member (his agent) to a non-member:

This is a proper transaction under Section 22(d); but both members are violating Rule 2420.

(g) One member sells to another member who acts as agent for a customer:

This transaction violates Section 22(d).

(h) One member sells through another member (his agent) to a customer:

This is a violation of Section 22(d) by the first member and his agent may also be in violation of Section 22(d).

(i) A customer sells to another customer through a member who acts as agent for either or for both customers:

This is a proper transaction under Section 22(d) and under Rule 2420.

Violation of law or any Rules of the Association is also deemed to constitute a violation of Rule 2110.